Elements of Financial Management

Question: Discuss about the Elements of Financial Management. Answer: Some of the measures to Minimize the Opportunities for Fraud and Abuse are as follows:- Development of a corporate culture- A little amount of fraud is inevitable for every organization. However, a major concern is the fraud in which the top management is involved which may result in an overall damage to the business reputation and operations as well. The early detection of fraud and its prevention at every level brings a sense of satisfaction and trust among the customers, employees, vendors and stakeholders. The exposure of a serious fraud may cause long term adverse effects on the business. For a sound ethical environment and culture, BOD should consider formulating a mission statement which defines the expected culture, the policy statements which defines certain anti-fraud activities which needs to be maintained, a channel which is able to identify a fraud when it penetrates within the system and a board who will be responsible to oversee the maintenance of such policies.(CIMA, 2009) Separation of Authority and Responsibility- This is the major issue which needs consideration. The authority responsibility relation within the organization should be adequate. When an individual gets more authority compared to its responsibilities in the organization he is expected to commit some fraud. Such frauds should be prevented. There should be chain system of authority which provides a proof of correctness of each and every level. Such system should inculcate a culture of cross checking and allocating authority to different individuals or rotating authorities. Implementation of continuous Auditing and monitoring- A proper control mechanism plays a very important role in early detection of fraud and their continuous monitoring. The implementation of continuous and independent auditing can test the efficiency of business decisions. This process initiates by setting up standards of working, then testing the actual work against the standards and monitor the deviations. This process helps in maintaining a continuous check on the working of the enterprise.(Millar, 2010) Whistleblower Hotline(AICPA, 2016)- The whistleblower Hotline is made effective by the Sarbanes Oxley Act, 2002. This hotline provides continuous and trending tips on detection of organizational risk by effective control measures. Further, the knowledge of application of such hotline by the organization may inculcate a sense of fear among the staff and clients that their actions are under continuous check by the directors. Such hotline encourages the working staff to deliberately come forward a pin point an existing fraud which is very favorable for the business going concern policy. Hiring of Certified Professionals- Certified professionals like Certified Public Accountants, Certified Fraud Examiners and Certified Financial Forensics can play an important role in fraud detection and prevention. They can establish certain anti fraud policies and provide a number of services which assists in effective internal and external audit procedures.(Reed, 2014) Practice of Exception Reporting- Exception reporting means highlighting those transactions which are different from the regular nature of transactions. They help in identifying the events which does not fall within the set parameters or standards. Different individuals may be assigned the responsibility of reporting such exceptions to the audit committee so that appropriate audit plan can be made to check the operating effectiveness of the business.(Intranet, n.d.) Computation of comparative Ratios of performance of Quick Sell Electronics Limited for two years:- Gross Profit Percentage- The gross profit percentage is calculated to measure the trading efficiency and the basic profit generating capacity of the business. The higher side of this ratio indicates that the business is able to cover the trading costs and has a visible margin. This is also known as Margin Ratio.(Agrawal, 2017). Gross Profit Percentage = Gross Profit X 100 Net Revenue from Operations = Sales-COGS X100 Sales Inventory Turnover- The Inventory Turnover shows that how many times the inventory in the form of finished goods has been converted into the sales. This reveals whether the inventory lying with the business is under the limit. Higher the ratio is the better since it indicates that less inventory is required to earn more revenue reflecting the earning efficiency of the business.(Agrawal, 2017) Inventory Turnover = Cost of Revenue from Operations (COGS) Average Inventory at cost Accounts Receivable Turnover- Receivable Turnover ratio shows how many times the average receivables have been converted into sales. It shows the liquidity of the receivable i.e. how quickly they can convert into cash. The higher ratio is an indication of collection efficiency and increased liquidity position of the business. (Agrawal, 2017) Accounts Receivable Turnover = Net Credit Revenue from Operations (Sales) Average Trade Receivables The given table represents three ratios of Quick Sell Electronics Limited according to the information provided- Quick Sell Electronics Limited Ratio Year2015 Year2014 Gross Profit Ratio (%) 34.00 33.11 Inventory Turnover (times) 4.50 4.00 Average Receivable Turnover (times) 5.00 6.10 Interpretation of Ratios- The ratios computed above indicate that the performance of the company in terms of its operating activities has enhanced in one year. The company has been able to improve its trading activities by 0.89%. Further, the Inventory Turnover has also increased by 0.50 times which shows that companys effectiveness has increased. The operating efficiency is positive according to these two ratios. However, the declining receivable ratio is an indicator of accepting longer credit duration to the debtors. Thus, the liquidity has declined over one year but working efficiency has enhanced. Bibliography Agrawal, M., 2017. Ratio Analysis. In: S. Computers, ed. Elements of Financial Management. Jaipur: Garima Publications, p. 794. AICPA, 2016. Managing the business risk of fraud: A Practical Guide. [Online] Available at: https://www.acfe.com/uploadedFiles/ACFE_Website/Content/documents/managing-business-risk.pdf [Accessed 12 February 2017]. CIMA, 2009. Fraud risk management- a good practice. [Online] Available at: https://www.cimaglobal.com/Documents/ImportedDocuments/cid_techguide_fraud_risk_management_feb09.pdf.pdf [Accessed 12 February 2017]. Intranet, G.-t. B., n.d. Exception Reporting. [Online] Available at: https://webarchive.nationalarchives.gov.uk/20140122145147/https:/www.levesoninquiry.org.uk/wp-content/uploads/2012/11/Exhibit-BBC166.pdf [Accessed 14 February 2017]. Millar, P., 2010. 7 STEPS TO JUMP START YOUR ANTI-FRAUD PROGRAM. [Online] Available at: https://www.corporatecomplianceinsights.com/7-steps-preventing-detecting-fraud/ [Accessed 14 February 2017]. Reed, S., 2014. Six strategies for fraud prevention in your business. [Online] Available at: https://www.cgteam.com/blog/six-strategies-for-fraud-prevention-in-your-business [Accessed 14 February 2017].