Internal financial control

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All tangible and intangible resources of an organisation carry reasonable value. These resources are utilized and processed in order to produce goods or services. This means, waste of resource costs money to organisation. However, there is no only one way to produce and deliver specific good or services. The product, process and resources mix is the key for generating value to organisation and its stakeholders. Finally, when a set of defined procedure and resources are identified organisations need to minimise waste tied into the process. Waste can take exist in different forms like negligence, mistake, idle time, fraud and errors. To control these evils organisation implement financial control systems.

Internal control vs internal check

“Internal check is best regarded as indicating checks on the day-to-day transactions which operate continuously as a part of the routine systems whereby work of one person is proved independently or is complementary to the work of another, the object being the prevention of or early detection of errors and frauds” – The council of the Institute of chartered accountants of England and Wales. It is a part of internal control system.

Internal control is routine and scheduled tasks or random surveillance conducted by individuals/machines. Internal control activities are represented by mnemonic ACCAMAPS. (Authorisation, Comparison, Computer control, Account reconciliation, Maintaining trial balance and control accounts, Arithmetic control, Physical control, Segregation of duties) Internal control system facilitates proper operation of business. It ensures legal compliance, reliable financial reporting and safeguard of assets against damage, loss and theft.

Organisation structure, power structure, culture and management style determine control environment. Control environment ensure that control procedure are properly followed. Control environment sets the tone of an organisation, influencing the control consciousness of its people. It is the foundation for all other components of internal control, providing discipline and structure. Control environment factor include the integrity, ethical values and competency of the entity's people management's philosophy and operating style.

Internal Control

Micro economics

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Micro- economics is concerned not with total output, total employment or total spending, but with the output of particular goods and services by single firms or industries and with the spending on particular goods and services by single households or by households in single market. - Edward Shapiro

In the competitive environment decrease in 'unit price' (Eg. $1) can boost sales to an unexpected level and increase in 'unit price' can leave firm far behind its competitor. Change in selling price directly affects cost, profit, investment, and dividend decision. So, to know this behaviour and react according to market position understanding of managerial micro-economic is important.

Managerial process for a single product or a typical project involves planning, decision-making and monitoring and control. Microeconomics provide sufficient ground to base the structure of managerial process. Analysis of elasticity of demand, production theory, pricing technique and investment decisions equip managers with necessary mathematical and statistical tools required for handling complex managerial issues.

Managerial problems like product price, production level, make or buy, production technique, stock level, labor hiring, investment, financing etc. are dealt with estimation, forecasting and analyzing payoff using probability, co-relation, trends analysis and risk analysis etc.

Microeconomics Applied to Operational issues: Operational issues of firms are of internal nature. Internal issues including all those problems, which arise within the business organization and fall within the circle and control of the management. Some of the basic issues are:

Ø  Choice of business and the nature of products - what to produce

Ø  Choice of size of the firm - how much to produce,

Ø  Choice of technology - within market leading technology

Ø  Choice of price - how to price commodity - cost plus or margin on sale

Ø  How to promote - use of media or relationship

Ø  How to face price competition - use of discount or offer

Ø  How to decide on new investment - make vs. buy

Ø  How to manage profit and capital - retention and dividend

Ø  How to manage inventory - JIT or bulk purchase

Thus, cost/managerial accounting, financial accounting and investment decision are all integral part of micro-economic and macro-economic study.

ACCA Article: Introduction to microeconomics

Macro Economics

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Macro economic factors that influence level of business activities:

Fiscal policy: looks at the balance between government income and expenditure. It refers to government's budgetary policy. The components of fiscal policy are government expenditure, debt management (borrowing) and tax policy. Fiscal policy mobilizes economic resources, improves equitable distribution of income and economic growth through full employment.

Monetary Policy - Through monetary policy government and central bank controls availability and cost of money. Monetary policy influence cost of finance, which influence investment and expenditure. It affects interest rate, inflation, exchange rates and reserve requirement for financial institutions.

Public policy: Public policy is important vehicle of bringing changes in the overall economic environment. Government plays an important role in formulating and implementing public policies. Some examples related to public policies are defense system, justice, education system, infrastructure (public utility) development, currency stability, market monitor, environmental regulations and competition policy.

Unemployment: Economic growth is intertwined with the level of employment. Employment over 95% is regarded as full employment because voluntary unemployment exists in the economy. Increasing unemployment limits economic growth. 

There are various types of unemployment. Cyclical unemployment is defined as workers losing jobs because of changes in economic business cycle (growth, recession, depression and recovery).

Frictional unemployment is period in between jobs.  

Structural and technological unemployment arises because of technical changes such as automation and innovation of new process.

Macroeconomic Problems

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Macroeconomic Problems: Inflation and Recession

Inflation: - Inflation diminishes value of money or decrease in purchase power of money or money can exchange less quantity of product then it used to. There are different types of inflation.

Ø  Demand pull inflation- Inflation created by increased in aggregate demand for the product is demand pull inflation. It is generally caused by increasing government purchase and increase money supply, tax reduction and increasing export.

Ø  Cost push inflation - Inflation created by increased cost (wage, price of raw material) resulting decrease in product supply is called cost push inflation. It is caused by increasing wage, profit margin and increasing price of imported raw material.

Ø  Imported inflation - Inflation due to increase in price of imports (oil, raw materials, components and products).

Ø  Monetary inflation - Inflation caused by government issuing too much of currencies and increasing money supply in the economy.

Speed of inflation: Creeping (1%-3%), Walking (3%-6%), Running (6%-10%) and Galloping (10%+)

Recession: - A period of general economic decline (lower GDP as compared to previous quarters). It is declining phase in trade cycle when falling economic activities spread across the economy. It is callused by over-pessimist behaviour in economy. Recession  increases production cost, lowers profit margin, decreases investments and employment and negatively affects money and credit market.

Ø  Boom and Bust Recession - This type of recession occurs after an economic boom. This type of recession tend to have short life.

Ø  Balance Sheet Recession - A balance sheet recession occurs when financial institutions see large decline in balance sheet due to falling asset prices and bad loans. Because of large losses, they need to restrict bank lending - leading to a fall in investment spending and economic growth. This type of recession last for long time.

Disclaimer statement: Discussion and written presentation are adjusted to personal understanding and hereby take no account for any misunderstanding by the users of this article.

Keynesianism and Monetarism

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Keynesianism: believe that prices and wages are not flexible and are sticky, especially downward (i.e. defined basic pay). The central assumption is economy often operate at less than full employment and market system does not self-adjust to changes. The stickiness of prices and wages in downward direction prevents the economy's resources from being fully employed and thereby prevents economy from returning to natural level of GDP. Keynesian theory is a rejection of Say's Law and the notion that economy is self-regulating. It supports government intervention (through fiscal policies) to regulate the market and stabilize the business cycle. According to Keynes, 'demand creates its own supply'. Under Keynes if economy faces recession government increase spending, lower tax and interest rate and where, economy faces inflationary gap government spends less increase tax and interest rate.

Monetarism: Focus on monetary policy i.e. supply of money. The monetarist view begins with an classical concept of demand for money. Money serve three ways, (1) medium of exchange, (2) holding wealth as cash i.e. store of value and (3) used to measure the value of good. The demand of money to hold is inversely relate to 'velocity of money' (number of times average dollar is spent in a year). The velocity of money is controlled by central bank's influence in interest rates and supply of money through purchase and sales of treasury bills. The demand for money depends on inflation as well. The demand will rise if price rises, quantity produced rises, interest rate falls and people expect for low rate of inflation and vice-versa. The central bank plays important role in imposing monetary policies in the market through financial institutions to control the supply of money in the economy.

The Basic Theory of Monetarism

Disclaimer statement: Discussion topic and written presentation are adjusted to personal understanding and hereby takes no account for any misunderstanding by the users of this article.