Effective Management

Effective Management
How to make effective use of time and resources to make you and your business more effective
EFFECTIVE MANAGEMENT
Published and distributed by: Study House Ltd Tel 01539 724622
Study House Ltd 2002 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the permission of the publisher. The authors believe the contents of this book to be accurate and correct, and all possible care has been taken in producing this work, no guarantee can be given. You should take professional advice prior to making any decisions. This workbook should, however, provide you with good background information.
Study House 2003
Effective Management Contents

Section
1 2 3 4 5 6 Introduction The Managers Role Managing Yourself Managing People Managing Information Managing Finance
Page
7 11 17 39 47 53
Study House 2003
Study House 2003
Aims The aims of this course are to help owners and managers to develop the skills to plan, use and control resources effectively.
Objectives By the end of this course you will be able to: Understand the managers role Define a managers responsibilities Manage yourself more effectively Make better decisions Use time more productively Lead, motivate and develop staff Understand the importance of managing information Understand the importance of managing finance
Study House 2003
Study House 2003
Section 1 Introduction
Whether an owner manager or an employee in an organisation, we all need to be effective at managing our time and resources to ensure that there is proper control. Without control, any job or role can lead to a variety of situations which can have disastrous consequences on the organisation, on our personal lives and even on our health. Although people may excel at some aspect of the business function, unless we can manage the resources at our disposal, the danger is that the business will suffer and the result can include: lost time missed deadlines lost customers bad production poor cash flow lack of motivation absence staff turnover stress bankruptcy
In fact the list is endless but the message is clear. Any business lacking in management will run out of control and eventually falter. On the other hand, there are great benefits and rewards to be had from employing some basic management principles, not least of which are a better business, happier more productive staff, and peace of mind. Even the sole trader needs to be a good manager (perhaps especially so) because however good you may be at what you do, the business still requires managing.
Study House 2003
Exercise 1 Consider the case of Jim Smith. He is the owner of a corner shop selling newspapers, confectionery and tobacco. His shop is open six days a week and he employs three part time staff to help with running the shop. Not a difficult task? It sounds idyllic your own boss, just a few staff to worry about, ordering stock once a week but not much else to worry about. Or is it? What types of tasks must Jim perform in order to manage his business?
To be successful Jim must spend a lot of his time managing if the business is to be successful. Tasks include: Planning Motivating Delegating Time management Staff training Marketing Stock control work rotas, holiday cover, displays, stock staff to provide good service the decisions required when he is not there to ensure that the business does not take all his time so that staff can operate the tills and know the products and prices to increase his customers to ensure that the shop is well stocked but also that there is no wastage
Study House 2003
Financial control
to ensure there is cash to pay staff, suppliers and keep the business running
These are just some quick examples which demonstrate the need for good management. In this course we will examine in turn a series of skills and techniques which can have a major impact on the smooth running of any business. These are the same whether you are running a newsagent or are a department manager in a large organisation. The only difference is that the smaller the business the quicker the effect of poor management can be, because there are fewer people around to compensate. There are of course, many books courses and journals which teach management skills, many of which are excellent. Many of these are also very detailed and often difficult to digest without devoting considerable time and effort. The emphasis in this course is on practical help on a broad range of management skills. If you wish to learn more about specific techniques, you will find a list of sources of information at the end of the course and may wish to refer to them later. However, for the time being let us start by considering what the managers role involves.
Study House 2003
Exercise 2 As a manager in your organisation, give five examples of possible outcomes of situations where you have failed to manage effectively.
Exercise 3 Now consider five possible outcomes for your business if you became a more effective manager.
Study House 2003
10
Section 2 The Managers Role

At its simplest, the managers role can be said to be to ensure the smooth running of a business, department or section so that the objectives are met with minimum cost and maximum efficiency. This statement sounds all very straightforward but if we examine the definition a little further we can see that there are some clear clues about the nature of the role. Some of the implications of the definition are: Objectives: knowing what is required and what the purpose is. This includes having a good understanding of the tasks performed and what the planned outcome is. The objectives may be purely financial or linked to production targets and service levels, but without a clear understanding of what these objectives are, how do we manage effectively? Minimum cost: ensuring that whatever tasks are performed in the business or department, these are carried out within known financial constraints and organised in such a way as to minimise the cost. Maximum efficiency: organising people and other resources so that there is a smooth flow of work, and planned structure to the tasks which minimises wastage of effort. To do this we will need to be good at organising, delegating, motivating, training, and using time effectively. Smooth running: minimising problems and hiccoughs so that customers expectations are met and staff feel that they are making a worthwhile contribution to the business. We could go into great detail here about the role of the manager but the message is that he or she must be able to control events by organising resources effectively. The resources will include: People Information Finance Yourself
Study House 2003
11
YOU
FINANCE
YOUR BUSINESS
INFORMATION The range of skills involved will include: Planning Budgeting Recruiting Training Organising Delegating Leading Team building Objective setting Communicating Reviewing Changing Decision making Influencing
PEOPLE
Most people enter management because they have first become proficient (and usually succeeded) at performing some task or occupation. Engineers, scientists, carers, chefs, computer programmers; whatever a persons occupation, the actual task involved requires some technical or vocational
Study House 2003
12
skill. The managers role, however, requires a series of skills which are generic, or not specific to one job or organisation. Consequently, becoming effective at managing needs to be considered as a separate discipline. However good you may be at your chosen occupation, managing often requires different skills and a different approach in order to be successful. This is why it is important to understand the role clearly before we look at some of the specific skills listed above. Another way of looking at managing is to define it through being responsible and accountable. Any manager, whether self-employed or part of a bigger organisation, will be responsible for ensuring that certain tasks are fulfilled to designated standards and to pre-determined timescales. You will also be accountable to your manager, your shareholders, your fellow directors or perhaps your bank manager for ensuring that task are carried out, evaluated and reported.
Lets consider Jim the shopkeeper again for a moment. He is responsible to his business for the operation of the shop, the employment of staff, safety of customers, financial control and a long list of other things as well. He is also accountable to his bank manager, suppliers and any partners for reviewing the business and reporting on its success. In his case, defining the managers role is quite straightforward he is solely responsible and accountable for everything which goes on. In most cases however, any one manager will need to understand what they are responsible and accountable for, and the limit of their authority. Before looking at specific management skills lets examine your role as a manager.
Study House 2003
13
Exercise 4
Consider your own role and complete the following table Q1 What targets and standards or outcomes are you responsible for?
Q2
To whom are you accountable and how is you accountability measured?
Q3
What are your limits of authority (what resources do you have available to fulfil your responsibilities)?
Defining responsibility, accountability and authority is an extremely important exercise because it helps to concentrate the mind on which managerial tasks and skills will be most important. It also completes the first crucial task of understanding the framework and limits within which we all work. Now lets go on to examine how to manage our responsibilities by looking in turn at various elements of the process; starting with managing yourself.
Study House 2003
14
Exercise 5 What are your objectives as a manager in your organisation?
Exercise 6 What specific tools do you have at your disposal to manage effectively?
Exercise 7 Being a good manager involves a number of different skills. Which are your strongest skills, and which are your weakest?
Exercise 8 How could you ensure that your weaker skills do not adversely affect your performance as a manager?
Study House 2003
15
Study House 2003
16
Section 3 Managing Yourself

For many managers the first essential task is to learn to manage themselves. All too often, the temptation to do everything themselves is too great and the result can be chaos, stress and an imbalance between work and home life. Their own time is one of the most valuable resources at their disposal yet this is often very badly organised and not properly managed. Take the test yourself and answer the following questions honestly.
Exercise 9
Is your working life chaotic? Do you miss deadlines regularly? Are you always behind, no matter how hard you work? Is your day a constant stream of interruptions? Are you always short of time? Do you take your job home with you on a regular basis? Most managers will answer yes to many of these questions, which is an indication that there is a need to change and to practice managing themselves more. The importance of creating time to think, and of being in control cannot be stressed too highly. Yet, more often than not, managers are controlled by events and rarely create the opportunity to think about priorities. The result can be chaos and a business which is not under proper control. The effect on staff and family can be harmful too. So the first job for any manager must be to take control.
Study House 2003
17
This means ensuring that your time and energy are devoted to priorities which you have defined and not letting events dictate what you do. How often do managers take home a bulging briefcase because home is the only place that they can catch up on things? The answer is too many. The result is a reduction in much needed time with the family, relaxation and recreation. It often results in reduced effectiveness at work and so a vicious spiral starts which can end in greater chaos, more stress and a business which runs out of control. The first step to avoiding this is to make time to think, because often just thinking about the problems and pressures, setting priorities and organising resources can have a dramatic effect on you as a manager, on your staff and on your business. Lets try that now by stopping to think about the questions below.
Exercise 10
Take a few minutes to think about a typical working week. How many hours do you spend on work related activities? How often do you take work home? How many times are you interrupted from doing something important? How often are deadlines missed? How often are you trying to do more than one thing at once? How often do you reject family and relaxation in favour of doing more work? Whilst it is inevitable that events will arise which are beyond your control, these will be relatively few. For the most part as a manager you can control events and therefore if your job is not under control and you dont have a good balance between work and leisure it is time to take action. Before looking at how this can be achieved though look back at you answers to Exercise 4 and this time write down what you would like to see in an ideal world.
Study House 2003
18
No doubt you ideal and the current situation show some differences. We would all like to spend more time on leisure, miss fewer deadlines and be in control of events more often. So how is that achieved? The answer lies in using a range of skills which include: Setting objectives Planning Decision making Delegating Motivating Organising Time management
By applying these skills to your job and role it is possible to become better organised and much more effective than without them. The result will be that you are better managed, and therefore the job you do and the business you run will be more effective and more successful. Successful businesses succeed by Knowing what they are doing Knowing where they are going Knowing what their strengths and weaknesses are Knowing how to use their strengths and remedy their weaknesses
Effective managers succeed by Deciding where they want to go (planning) Deciding how to get there (organising) Checking how they are getting on (controlling)
The purpose of the effective manager is to assist the organisation in achieving its objectives so let us start by looking at how this is done.
Study House 2003
19
Setting Objectives
Having objectives is about knowing what you want to achieve. It is as simple as that. Yet all too often people (especially managers) embark on activities which are ill-defined and very vague in terms of what they contribute to the objective. Without an objective it is very difficult to lay plans for how you will succeed and to measure progress.
Therefore the keystone to being an effective manager is to have clearly defined objectives. These may be in terms of profitability, meeting production targets, achieving levels of service. In fact any aspect of business life can be defined by its objective. For the most part what we do is driven by an objective but often these are vague or in response to a situation. Your objective may be to clear a pile of paperwork, to complete an order or to get home in time for a television programme. These are all objectives but they are all short term or routine objectives. What is needed as a manager is an overall purpose which guides what we do and how we do it. If you have a job description for the role you carry out this will usually start with defining the purpose of the job. If you run your own business you will similarly need to define the role in relation to the business purpose. You must have an objective, and one which is SMART:
Study House 2003
20
Specific Measurable Achievable Relevant Timed
Specific
Detailed enough to give precise direction to the job you do. It is not sufficient to say that you want the business to make a profit. You should be clear about the level of profit you are aiming at.
Measurable
Your objective must be written in terms detailed enough for it to be measured. This is crucial for enabling you to gauge whether you are on target or not.
Achievable
Your objective must be achievable i.e. capable of being completed. This may sound obvious but an objective to have zero customer complaints might be a good business objective but in reality is it achievable?
Relevant
By this we mean that the objective must be one for which you have control. If your objectives depend on the success of other departments or other businesses you should state the objective in terms of what your own contribution should be. That way you will be able to measure your own progress, independently of any external influences.
Timed
Every objective should relate to a time period or date otherwise how will you know if you are on schedule as you measure your progress periodically?
Study House 2003
21
SMART objectives give a clear definition to a business and to a job. The fewer objectives and the SMARTer they are the better. A corner shop may have as its objective to increase sales by 25% in six months. A Production Manager may have an objective to manufacture 500 items per week with 2% defects. In both cases the objectives are clear and easily measured. Do you have SMART objectives?
Exercise 11
State your objectives below:
Are they SMART? If not how can you express your objectives better in SMART terms?
Planning
Planning is something we all like to think that we are good at, but in practice it is not often the case. If plans are often scrapped, revised or torn up then this is a sign that the planning exercise was inadequate. Planning helps us set out how we are going to achieve our objective. In business it requires careful consideration of the steps required to be successful, and provides us with the means to measure progress and check if we are on target. Planning can be likened to running your job in fast-forward in your mind so that you get a clear picture of What should be happening? When it should have happened? Who should be doing it? How much is it costing? How are resources being used? What contingencies need to be allowed for? Which other people does it depend on?
Study House 2003
22
With your objective firmly in mind it will be possible set out a plan which answers these questions in relation to the 5 Ms Manpower what human resources are available for achieving the objective? Materials what materials will be required? Machinery what equipment is needed? Money what budget are we working to? Markets who are the customers? Your plan should start with the same timescale as was defined in your objective. By doing this you will have a plan which is linked to your objective. However, the planning process should continue, breaking the timescale down into short periods which can be measured and monitored easily. Your plan may therefore cover daily, weekly, monthly and annual periods. When planning, pay particular attention to the 5 Ms above. Ensure that your plan is realistic and uses all the resources at your disposal. Conversely, make sure that if you are planning to use resources, you do have control over them. There are also a number of things to avoid when planning: Vague ideas. Dont be vague be specific and clear about what should happen, and when. Use facts, figures and timescales wherever possible rather than words. These are much easier to measure and can be represented in graphs and charts which depict progress very visually. Wishful thinking. Be sure that you plans are based on what can be achieved and not just what you hope you can achieve. Overestimating. It is very easy to overestimate what can be achieved. Allow for contingencies and some element of the unplanned. If planning were a precise science we would all be very good at it. In every business situation unforeseen events arise and you will need to be able to deal with these without losing sight of your plan.
Study House 2003
23
Underestimating. This applies particularly to costs. Implementing plans always cost more than you think. There will always be some unforeseen or hidden cost because it is very difficult to think of everything and it is human nature to want to underestimate the cost of doing something. By being realistic and clear about your goals, the planning exercise can provide an invaluable tool for getting the job done, and measuring progress. Measuring and monitoring is a critical part of planning because rarely will a plan unfold exactly as you had predicted. One of the main benefits of a plan is to be able to check progress and revise you plan or objective as it is implemented. Dont be afraid to revise your plan because by doing so you will learn more about what is achievable and be able to plan more accurately next time around. The final thing to consider when planning is to ensure that you include all of your objectives, both business and personal. Planning how to achieve your profit target is fine but if that is the only element of planning you will be tempted to ask more and more of yourself and your other resources when things begin to slip. As a consequence, your free time and leisure activities may suffer. If, however, you include your personal and leisure objectives in your plan it will be easier to keep control of all of the things which are important to you.
Decision Making
Managing yourself so that you are properly able to fulfil your role of controlling events requires managers to be effective at making decisions. We all make decisions routinely, several thousands per day. Many of these are made or taken subliminally and come through years of experience of using tried and tested decision making techniques. When out shopping, for instance, you will plan your route, visit a range of shops, time your journey etc. without much thought. But if you analyse the process of shopping, you will have no doubt applied quite a rigorous discipline, perhaps without even noticing it. As a manager you will need to be more aware of the process of decision making so as to take more effective decisions for which the solutions may not be so obvious and for which the outcomes may be more serious.
Study House 2003
24
The decision making process involves a number of steps:
Defining the Objective

Be clear about what decision you are taking. What specific outcome are you looking for and what are the consequences of making a bad decision.
Collecting Information
Before looking for solutions, collect all the relevant facts and information. The more informed you are the easier the decision will be to make and the better the outcome.
Involving Others
Dont take the decision on your own, especially if others are affected by your decision. Involve work colleagues, bank manager, family and friends because their experience and opinion will often be invaluable and they may be able to view any problem from a different perspective.
Evaluating the Alternatives

Consider all of the alternatives. Rarely will there be only one or two solutions. Make time to think carefully about all the possible solutions and dont discard any until each has been evaluated properly using your facts and information.
Making the Decision

Once you have gathered information, sought advice and considered the alternatives you can take the decision. Be clear about the course you are going to follow and once taken, procrastinate no longer; get on with implementing it!
Study House 2003
25
Communicating the Decision

Tell everyone who is affected by the decision so that they are aware of it and can evaluate for themselves what the impact will be. Business decisions rarely affect just you and if others have plans these may need to be changed if you have altered the planning framework.
Following Up
Ensure that people who carry out your decision are doing so, and that they have fully understood what is required. Measure the impact of your decision and evaluate it. By doing this you will learn about the decision making process and make better decisions in future.
Delegating
There is a temptation for any manager to want to be closely involved in every decision and to do everything. Whilst this gives a sense of control over your destiny, this can also create an unmanageable burden on individuals. If you are part of a team it also means that others will often regard you as interfering in what should be their role. For the small business, it is natural to want to have a close hands-on involvement but the downside is that it can lead to chaos e.g. Working too many hours Taking too many decisions Conflicting priorities Ill-motivated staff Missing deadlines
and ultimately to losing customers or even the business itself. As a manger, even of a small business, a major part of your role is to set the objectives and monitor how well they are being met. If you are also involved in every aspect of ensuring the objectives are met it will be more difficult to see the wood for the trees, and separate out the managing from the doing aspects of the business. Even for the sole trader it is necessary to devote some
Study House 2003
26
time each week to managing the business which is time clearly separated from the day to day function of your company. If you were to analyse your job requirements in detail it is likely that you would conclude that there is much more to be done during the working week than is good and healthy for one individual. This is often because the job of managing is never done. Rarely, if ever, can you leave your work at the end of the day and confidently say that everything is up to date and nothing needs to be done. There will always be more than can be done to ensure that targets are being met and long-term plans are going to be met. Even where a business is running smoothly, all orders have been dispatched, invoicing done etc, there is always time required to plan the next marketing campaign, a VAT return to complete, stock to order and a host of other things requiring attention too. In this situation it is often tempting to get into a spiral of doing more, spending more hours at the job, getting less relaxation and making poorer decisions as a result because insufficient time has been devoted to them. What can be done about this? The answer lies in discipline and delegation. Discipline applies because every manager must make a decision about how many hours to put in and how to maintain a healthy balance between work and recreation. As we discussed earlier, this is crucial. Delegation applies because this is the means of spreading the workload and ensuring that tasks get done without necessarily involving you in everything.
What is delegation?
It is not just giving a job to someone else. Whilst asking a friend to help with stocktaking will help with peak workloads, it still leaves you organising everything and being involved in everything. Delegating is all about giving away responsibility to others for the completion of an aspect of the job.
Study House 2003
27
So, for instance, asking an accountant to look after your invoicing, credit control, preparation of accounts and payment of VAT is one example of delegation. In this case you are passing the responsibility for these tasks to someone else and you should then be able to let him or her just get on with it. Of course you still need to check that the job is being done, and you still need to review the finances periodically to check how well you are doing against your plan. But the important thing is that you are relieved of the responsibility of these day to day activities and can concentrate your efforts on other things. If you are part of a team there will be many opportunities to delegate thus enabling you to get on with the job of managing. However, when delegating it is easy to just give away responsibility and assume that things will get done as you would wish them to be so it is important when delegating to follow the ground rules below:
Responsibility and Authority

As we have said, delegating means giving responsibility. This means permitting the person to whom you have delegated the responsibility to take decisions which enable them to fulfil the task. If you delegate responsibility for ensuring that the office has an adequate supply of stationery, that should include the authority to re-order materials. Every responsibility requires appropriate authority otherwise you will still be closely involved in that task. Of course, giving away authority also requires trust and many managers fail to show staff that they have their managers trust, resulting in a poor working relationship.
Accountability
With responsibility goes accountability. This means ensuring that the person to whom you have delegated knows when and how they are accountable for their actions. In the example above this may mean providing a weekly report of stationery stocks, and ensuring that the office never runs out of envelopes etc. If problems arise the person responsible should be accountable. This can also be viewed the other way round in that as a manager, your organisation has delegated the responsibility for managing to you and you are accountable for its success.
Study House 2003
28
Standards
When delegating it is crucial to set and agree standards of performance. This means ensuring that the person with delegated authority has clearly defined standards to work to which you both agree are appropriate to the job. Without this there can be confusion, and acrimony when you and they disagree about how the job should be done and evaluated. Again, using our office stationery as an example, it may be appropriate to agree the maximum stock levels and minimum re-order levels so that the job holder has some parameters within which to work.
Monitoring
Delegating a task and forgetting about it is easily done. The temptation to assume that a delegated job is being done to your standards and satisfaction is great. However, to avoid surprises and nasty shocks for both parties, monitoring and review are essential. When delegating, always agree how success should be measured and how and when it should be reviewed. The office stationery stock might be monitored by a weekly report for example. If the above guidelines are followed, delegation can be a managers most effective tool, reducing the burden of involvement in day to day activities, and providing much needed thinking time.
Leading and Motivating

Leadership is another key aspect of managing which can make all the difference between success and failure. Leadership can be described as getting people to go the way you want them to enthusiastically. In other words, leading is about setting direction, but it is rarely of much value unless those who are being led do so with motivation. So, having a goal is fine, sharing it with your staff is extremely important, but gaining their enthusiastic participation in achieving that goal is the key to success. For many, the qualities of leadership ignore the motivational aspect, so it is important to establish what leadership IS and IS NOT about.
Study House 2003
29
Leadership is about: Respect Reliability Straight talking Commitment Communication Enthusiasm Example Saying thank you Saying well done
Leadership is NOT about: Proving yourself to be better Being pompous Domination Aggression Conceit Contempt Saying because I told you so
Look at the diagram:
A leader is half in and half out of each circle, working a very delicate balancing act between meeting the organisations objectives, organising the team and managing individual contributions.
Study House 2003
30
Leadership Styles
There is no one way in which to achieve the balance between task, team and individual but several styles which can be adopted to good effect: Autocratic The manager takes the decision and dictates Persuasive The manager takes the decision and sells it to staff Consultative The manager discusses the decision before taking it Democratic The decision is taken with participation from those affected by it In any job there will be times when each of these styles may be appropriate. The important aspect is to recognise the styles and when they may be appropriate. Consultation and democracy may well give staff involved a welcome feeling of participation and should ensure that they are committed to the course of action. However, some decisions may best be taken by the manager alone because of expediency and because sometimes you are the only one who can see the whole picture. Lets consider some examples. 1. A decision to discipline someone for being consistently late is best taken by the manager and an autocratic style may be appropriate. 2. A decision to plan holiday cover over Christmas may be best taken in consultation so that it can take account of peoples preferences. 3. A decision to introduce a no smoking policy may be an appropriate opportunity for a democratic decision to gain peoples commitment (although the manger still needs to ensure that Health & Safety guidelines are followed). So, it is possible to adopt different styles in different situations but that is not an excuse for sticking to one style. A manager who is always autocratic may alienate staff. A manager who is always democratic may be seen as 'soft'. As
Study House 2003
31
a manager you should examine you own natural style and always be aware of opportunities to practice different styles with your team. They will welcome involvement and you will, over time, develop your leadership skills. Whichever style you adopt, the motivation of the team to follow a plan is obviously critical. Motivation means being committed and enthusiastic; sharing a common goal. Most people will prefer to be well motivated. People like to like their job and usually only become de-motivated because they are not valued. To maintain and gain motivation there are three things which managers should do: 1. Let team members know that what they do is worthwhile. This gives confidence in the value of their job. 2. Let team members know that they are making a worthwhile contribution. This gives confidence in their value as individuals. 3. Let team members know that they are not alone, isolated. This gives confidence in their value as a team. To achieve these things it is important to: Communicate decisions, plans and expectations Define what each team member should contribute and how it fits in with achieving the team objective Set an example which team members can respect and emulate Provide a positive attitude Provide feedback of how they are doing Provide encouragement by rewarding success Show concern for their welfare and well being
By following these simple rules, team members will respect and value the team of which they are a part and their own personal contribution will be enhanced. The payoff will be that you as a manager enjoy well motivated and committed staff leaving you free of the need to spend a great deal of your time ensuring that the job gets done and worrying about it when it doesnt.
Study House 2003
32
Managing Your Time

The final aspect of managing yourself is that of managing time. Time is the enemy is an often quoted expression and most managers will say that they dont have enough of time, the most valued commodity. Time, however is a commodity which is not in short supply: we know exactly how much there is in any one day and like any other resource it is there to be managed. By managing time effectively, the rewards can be great and will result in you being: Better organised Better planned Better at delegation Better at controlling stress More relaxed More effective A better manager
These are imperative reasons to want to manage time more effectively.
Exercise 12
Consider the statements below and rate each one on a score of 1 5 i.e. 1 2 3 4 5 Never Sometimes Always Do you have more work than days? Do you feel there is not enough time in the day? Do you think time is money? Do you put things off? Do you use time worrying about problems? Do you have too much paperwork? ____ ____ ____ ____ ____ ____
Study House 2003
33
Do you find it difficult to delegate? Do you feel that others control you? Do you find that you are always chasing deadlines? Would you like to spend more time with family and friends? Could you do with more time for relaxing and recreation?
____ ____ ____ ____ ____
Now total up your score Analysis: 0 11 points 12 18 points 19 26 points 27 39 points 40 49 points 50 55 points You are perfect and have complete control impossible! You are in control. Just keep fine tuning. You need to manage time better Take action now before you waste more valuable time You are on the brink of disaster, wasting a lot of time Your time management is out of control
Five Steps to Controlling Your Time Step 1. Set Your Objectives
Be clear about your objectives. Remember that objectives should be smart, and this includes being realistic and achievable. Dont set objectives which are unattainable and which dont include some element of unplanned events. (You wouldnt, for example, plan a journey to the airport which assumes you could travel at 70 mph all the way would you? if you do, the first hold up will defeat your objective).
Step 2.
Diary / Organiser
Devise or invest in a tool which will help you plan your time. A diary / organiser is fine for this or you can devise your own recording method. Most computers now have diary/planners which would help. Use your diary to plan your time and include:
Study House 2003
34
All meetings and commitments Adequate time for breaks Adequate time for travel Time for thinking Time for catching up on paperwork Time for talking to staff and colleagues Time for reviewing progress Each day (and this is best done just before you finish), plan the following days activities in detail. List all the things which you wish to do and to achieve Prioritise the list into must do, should do and could do Allocate time to each task Allow for some slippage Concentrate first on the must dos dont leave them until it is too late in the day
Get to understand when you are at your best. Some people are 'morning people' who find it difficult to concentrate in the afternoon. In this case try to ensure that important tasks which require your concentration are scheduled into your mornings. Start your day by giving yourself time to get organised, review your priorities and get into the frame of mind for productive work. It is all too easy to dive straight into something interesting-but-not-important which consumes half of the morning and leaves you playing catch up for the rest of the day.
Step 3.
Planning
Plan carefully how you are going to achieve your objectives. Start with a yearly plan then break this down into monthly and weekly targets. Record your targets and review regularly to see where and why targets are not being met.
Study House 2003
35
Step 4.
Prioritising
Prioritise your targets and task. Ensure that what you plan to do contributes effectively to achieving your plan. Dont let other things crop up and divert you. If something does arise which is not in your plan, re-think your plan and timescale so that the plan you are working towards remains achievable. Remember that plans are an estimate of what you expect to achieve. If you cannot achieve what you expect, think about why that has happened and learn what you can about your forecasting methods. You may be able to come up with a more accurate, more achievable plan next time.
Step 5.
Time Wasting
Remove time wasters form your schedule. These are many and various in form, and can consume large amounts of your available time. Dont procrastinate. Use decision making techniques to take a decision then move on to something else. Keep a tidy desk. Untidiness breeds time wasting, confusion and loss of concentration. By filing papers properly and removing papers not required at the time, you will remove a lot of clutter from your mind as well. To summarise Plan. Once you have written a plan, keep planning. Delegate. If a job can be done by someone else, let them do it. Concentrate your efforts on the things you are good at. Say NO. Be prepared to say no when you are asked for something which isnt in your plan or your schedule. Dont over-control. Establish control measures which tell you what you need to know. Dont spend all of your time controlling what others can do quite adequately on their own. Meetings. Make sure that meetings are necessary and built into your schedule. Dont succumb to the temptation of putting unscheduled meetings
Study House 2003
36
into your diary. Make sure that ALL meetings have an agenda, start on time and set a time for finishing. Meetings which dont have an end time established at the start tend to drift and will continue until someone has to leave. In addition there are many time wasters which are imposed by others. Watch out for them and be prepared to weed them out ruthlessly if necessary! Meetings Visitors Telephone interruptions Physical interruptions Poor communication Unwanted mail Unwanted reports Delays Under skilled staff Undirected staff Mistakes by others Disorganised staff
Conclusion
The above section of this course has covered a range of management techniques which, if applied, can greatly assist you in becoming more effective. All of the techniques are skills which can be learned, and practiced and, over time, perfected. As with any skill however, it takes determination and application to improve. Now lets turn our attention to other important aspects of managing: people, information and finance.
Study House 2003
37
Exercise 13 Look back to the objectives that you listed in Exercise 5. How will you plan to achieve these goals in relation to the '5 Ms'?
Exercise 14 When planning to carry out your stated objectives, explain some of the actual 'pitfalls' that you should be careful to avoid.
Exercise 15 Describe a couple of areas where you could delegate responsibility. Would this would help you to be more effective? If not, why not?
Exercise 16 Do you think you are a good leader? Why? Which areas of leadership are you least competent in?
Exercise 17 How could you improve your time management? Give five examples.
Study House 2003
38
Section 4 Section 4 Managing People

Whether you are a manager in an organisation or owner of a small business, effective management of people is a skill that must be acquired. It is rare indeed these days for any business, however small, to exist in a vacuum where an individual can operate alone. Wherever you encounter other people, be it contractors, staff or volunteers who assist you, making effective use of their talents is a must for business success. In this section we will examine aspects of ensuring that staff, both direct and indirect, can make a full contribution to meeting your business objectives. Of course, there is a clear legal framework which regulates the recruitment, reward and dismissal of staff and this is covered in detail in the course 'Employing People'. In this course we are concerned only with an examination of managing people and their effectiveness rather than employment legislation. Before employing people however, you should become fully acquainted with your obligations as an employer.
Employee Relationships
Before looking in detail at the effective management of people, it is important to consider the overall structure of relationships which exist in todays businesses. It used to be the case that as firms grew, so did the 'workforce' - to be able to cope with the growing work demands and the increasing range of skills required. Whilst this is still true so some extent, many organisations have come to realise that there are a number of ways in which to 'employ'
Study House 2003
39
additional labour. There is a good case for sticking to doing what you are good at and so instead of employing staff directly to do the finance, marketing, personnel management, security and catering etc, these skills are often 'bought in' or subcontracted. Outsourcing, as it is often referred to, offers a number of benefits and when additional staff are required this offers an attractive alternative to direct employment. Benefits of 'outsourcing' Specific skills can be employed which are outside the scope of your normal business Staff can be hired on short term and fixed term contracts Compliance with employment legislation becomes the contractors responsibility The cost of acquiring additional skills is fixed at the outset Payroll management and administration is the contractors responsibility If it doesnt work out you can change contractors If your workload changes you can increase or decrease the amount of help you buy in
Given these benefits it is easy to see why many organisations choose this option. Small businesses often go down this route to acquire help with marketing, clerical support, book-keeping and financial accounting etc. many large organisations too outsource their IT support, security, catering, cleaning and other functions leaving them free to concentrate on what they are good at. Direct employment does, however, still prove an attractive option in most cases because of the better working relationship and loyalty which usually exists with your own employees. Although taking on staff brings with it considerable obligations, it will often be the better option provided that the need for their skills is long term (justifying the investment in recruitment and training) and that you have the skills to manage the activities which you wish staff to undertake.
Study House 2003
40
Whichever route you choose when recruiting help, achievement of your business objectives will suffer without proper attention being paid to the effective management of staff. This should include recruitment, reviewing progress, development, and team working.
Recruiting Staff
As mentioned above, employment legislation is a subject in its own right and is covered in detail in another course. In this section we will examine the process of ensuring you recruit the right person. The starting point for recruitment, whether it is a part time clerk or full time financial accountant, is to be clear about the job you wish to be done. This involves writing a job description which lists in detail the purpose of the job, the tasks to be performed, the standards expected and how success will be measured. Without this it will be difficult for you and prospective recruits to be clear about the nature of the work to be undertaken and the relationship which will exist. From the job description it will be possible to draw up a Personnel Specification which details the skills required, the experience acquired and qualifications obtained by any person who will be capable of doing the job. When selecting people, the methods used should be designed to test their skills, knowledge and general suitability in a fair manner. Some of the information you will require can be gleaned from an application form but generally speaking the selection process should include relevant opportunities for both parties to understand the job requirements and the candidate's suitability. This might include an interview, assessment test, job trial etc. Great care needs to be taken here to ensure that employment legislation is complied with, primarily to avoid any discrimination on the grounds of gender, race, disability (and possibly age). Before offering a post be sure that there is not only a good match of skills but also a clear understanding of the jobs hours, conditions and benefits. The person employed will be a valuable asset to your organisation if suited to the post but could be an expensive mistake if they are not suited to the job for any reason.
Study House 2003
41
The recruitment process should include the induction of staff which means a well thought out programme of familiarisation with the job so that the new recruit has a good understanding of: The company and its objectives The company organisation structure Hours of work and working conditions Health and Safety issues Pay scales, holiday entitlements and pension arrangements Procedures for sickness, grievance and discipline Canteen or break facilities Training policies
Reviewing Progress
A crucial aspect of employing people is the need to review progress, provide feedback and generally ensure that things are running smoothly. Very often this is taken for granted and problems only dealt with because a member of staff decides to leave, or when performance becomes a real problem. A formal system of reviewing performance annually is adopted by many organisations. This gives a structure to a discussion between manager and staff member aimed at: Reviewing achievement of objectives Providing feedback on performance Identifying problem areas Identifying training and development needs Setting targets and goals for the year ahead
The benefit of adopting such a process is that at least once a year each member of staff has an opportunity in a formal setting to receive feedback and air any problem areas. In addition it is an ideal opportunity to review training needs and identify skills which may need to be developed further.
Study House 2003
42
However, relying only on a once a year appraisal means that problems can go unnoticed or not discussed for a lengthy period, and the formal appraisal process needs to be complemented with more regular reviews which may be less formal in nature. Every three months or so it is a good idea to arrange a discussion with staff individually to identify if any problems are being experienced, to ensure that targets are clearly understood, and to check that training plans are being implemented. By reviewing performance and progress regularly it is much easier for both parties to maintain a good working relationship and for fostering the kind of dialogue where both manager and staff member can discuss progress and problems freely. Although this requires an investment of time the rewards can be considerable by ensuring that each persons contribution stays focussed on the objective and that they remain skilled and motivated to play their part in its achievement. Staff appraisal and managing performance do require a rigorous approach to planning and implementing more so than can be covered here. However, the course ' Performance Management' covers these subjects in detail.
Developing Staff
Once recruited it is all too easy to assume that staff will continue to be able to do their job well without any further training. In practice however, this is far from the truth because attention to staff training and development needs is crucial for the continued success of the relationship. Training needs may arise from a variety of causes including: Additional tasks required in the role Changes of company policy Changes in health and safety legislation New working practices New equipment or computer software Maintaining job knowledge A requirement for professional qualifications
Study House 2003
43
Training needs should be discussed as part of the formal and informal review process outlined above and should aim at keeping employees fully informed and skilled to maintain an effective contribution. The review process will enable an organisation or department to compile an annual training plan which like any other plan should be formally written up, costed, monitored and evaluated. For many people training means going on a course and there is a reluctance to do this because it may be expensive and staff are lost for the duration of the programme. In practice there are many forms of training which can be very effective and careful consideration is required to ensure that the training provided is both suitable and effective. Some examples of training methods are: Attendance on courses usually away form the job enabling staff to concentrate solely on developing a skill Work-based learning training which takes place alongside the job usually involving a tutor/assessor to provide guidance Distance learning a training programme which can be undertaken at home or in planned periods in the workplace. It can involve studying prepared materials which are text, computer or Internet based Coaching providing the learner with an experienced member of staff who will provide advice and guidance on developing a skill Planned reading reading relevant documents, journals and articles to build up a broader knowledge and understanding of a topic Job rotation arranging for two or more staff to experience different roles and jobs
Study House 2003
44
Company seminars a company event designed to provide information and an opportunity to discuss the impact of new polices and practices etc. Company newsletters a way of providing information about the company and keeping employees informed Mentoring assigning a more experienced person to coach and guide a member of staff. The choice of method will depend very much on what outcome is required, how many staff it is appropriate to, when the training is required and other operational factors. However, careful choice of method will ensure that training can improve performance and contribute to the success of the business.
Team Working
In any business, those who contribute to its success (be they employees, contractors, family and friends) need to feel that they are part of a team. From the company point of view a team spirit is essential to a group of people who need to be working together and making their individual contributions. There are many examples in sport where a group of talented individuals fail to succeed because they do not feel not part of a team. What is a team? There are many definitions but generally speaking a successful team is any group of individuals who share common goals and are committed to its success by contributing in a way which maximises their contribution. To achieve team spirit and team success there needs therefore to be: A common goal Commitment Shared understanding of individual roles Individual contributions
This is only achieved where there is a conscious effort to build the team identity and spirit.
Study House 2003
45
Again effective team working is a subject in its own right and is covered in detail in the course 'Managing Performance'. However, listed below are a number of guidelines which will assist in understanding the nature of team building. Establish a common goal one which all the team members understand and are committed to. If possible, involve team members in setting the goals. Establish individual roles define the role which each team member will play and be sure that each can see clearly how their contribution will help in achieving the goal. Every team needs people with different skills so there will be plenty of opportunity for people to different types of people to contribute. Make sure you have Someone creative Someone to evaluate suggestions Someone to bring practical ideas Someone to ensure the task is completed on time Someone to investigate ideas from outside the groups expertise Someone who challenges ineffectiveness and keeps an eye on the objectives Someone who fosters and builds team spirit
Appoint a leader every team needs an individual who is leading the team and monitoring its performance. This will usually be the manager. Review the teams performance set time aside for checking how well the team is performing as well as checking the task.
Exercise 18 How does 'outsourcing' benefit your organisation? Or how might it benefit? Exercise 19 How can you 'develop' yourself and/or members of your workforce?
Study House 2003
46
Section 5 Managing Information

Information is increasingly important to any organisation and businesses which succeed and prosper often do so because they have good, well managed information. Businesses need information for: Planning future activities using for example financial forecasting and market research Analysing past activities using for example financial indicators, customer analysis, production records Controlling current activities using for example stock control, manpower utilisation and customer databases. These are just a few examples but it does demonstrate that information is a valuable resource which needs to be managed just as any other resource does. The processes of analysing, controlling and planning are critical to any businesses and are better accomplished with access to good quality information. This is especially so since information can now be obtained, analysed and manipulated much more easily using Information Technology than ever it could in the past. Every person and every business is part of an information network which is accessible to you and your competitors so if you do not harness the power which information provides, your competitors surely will. Even within an organisation it is important to recognise that different members of the team and other departments rely on a constant flow of information with which to ensure that objectives can be met effectively and efficiently. The problem is often that we have too much information, usually badly organised, we therefore either do not make good use of it or spend more time
Study House 2003
47
than we should trying to make sense of it. So let us examine in turn methods of collecting, organising and communicating information.
Collecting Information
The most important aspect of collecting information is to decide what information is required and what is the best source. Getting hold of information is not usually a problem, but what we need is good quality information from the right sources. In your role you may require information from a number of sources in order to be effective. These can include: Customers Suppliers Work colleagues Your own records Competitors Potential customers Other departments
and probably many others too. Consequently you should list the sources which will help you to do your job and then consider what information it is that you require. In doing this you should be as precise as possible because this is a crucial step to setting up the processes for collecting and organising your information. Here are a few examples: Sales figures will you want to analyse these weekly, monthly etc; do you want to analyse each customer, each product, frequency of purchase, average size of purchase etc. Customers you will need names, addresses, phone numbers etc. but what other details would help you?
Study House 2003
48
Finance what figures and ratios will you need to monitor and at what frequency? Stock levels will you need to review stock levels daily, weekly, monthly and how will you forecast what stock to order? The list can be a very long one and the better your analysis of your requirements the better your information systems can be designed. The second element of planning your information needs is to consider where exactly the information is going to come from and how the data will be stored. Quantitative data (facts and figures) can usually be obtained by observation or by recording. For examples, sales, stock, and cash figures are simply obtained by analysis of work records, provided that your work records are arranged in a manner which enables you to collect the data you require. Qualitative data (peoples views and opinions) require more thought but are no less important to running a successful business or department. Measuring team spirit, customer satisfaction or bank managers confidence are not things which you can do without seeking the views of staff, customers and your bank manager! Accessing this information will require you to ask opinions but this can be especially prone to misinterpretation unless you collect views in a systematic manner. Before asking opinions, consider what information you require and therefore which questions you need to ask; then consider how you will ask those questions. Popular methods of gaining qualitative data are: One to one interviews these usually provide good quality information and interviewees will often provide you with an understanding of why they hold their views which may be invaluable. However these can be very time consuming if you need to ask a lot of people. Group interviews (often referred to as focus groups) these enable you to gather information from whole groups at a time but can be difficult to arrange and people will tend not be as honest in a group as they might be individually.
Study House 2003
49
Questionnaires asking people to complete a questionnaire can be an efficient way to seek opinions from large numbers. Do take time to design the questionnaire carefully and test it out with a small number first. Many people will interpret your questions differently to how you had intended and you may get nonsense answers. If questionnaires are circulated (say to customers) without their agreement, the response rate will be low so it may be worth considering an incentive such as a prize draw or discount voucher to encourage people to respond. Questionnaires can be of the free text answer type or tick box type. Tick box questionnaires tend to be completed more readily by people because they will need to spend less time thinking about their answers. However, be sure to include all possible responses in your questions otherwise the information you receive back will be of low quality and little value.
Organising Information
Once you have decided how you will obtain your information you must consider how you will store it. The key question to ask yourself is how will I want to retrieve this information? There is no use in just recording information by the most convenient method if it is then difficult to analyse. Think carefully about how you wish to produce reports, and how often you wish to produce them; this will guide you when designing information-keeping systems. Whether you use paper based records or computer based records you need to ensure that when you want to refer to it, it is easily to hand. There is nothing worse than trying to write a monthly report when the information is kept in many paper files which cause you to rummage through various cabinets to collect the data. Think also about how many uses each item of information has and try to organise your records to minimise or avoid duplication.
Study House 2003
50
If, for example you keep customer records for sales analysis, producing dispatch notes, invoicing, credit control etc, devise your record keeping so that you only need to maintain one list of customer details. Again there is nothing less efficient and more frustrating than gaining a new customer and then having to update four or five record keeping systems. Modern computers provide very efficient methods for storing and retrieving information and often offer too much choice. Review what software is available and take advice before choosing and then before constructing databases and spreadsheets. A little thought beforehand can ensure that reports and analysis can be undertaken easily. One golden rule to observe is that the more complex the record system the more chance of error and the less valuable the records will be.
Communicating Information
If the information you gather is for your own use, you will be able to decide relatively easily when and in what format it is going to be required. Very often however, some or all of your information is required by other people to enable them to perform their part of a task. It is very tempting to produce all the information possible when asked a question but in order for it to be of optimum use you should consider carefully a number of points, and where possible discuss and agree these with the recipient of the data. The audience be clear about who the information is being given to. By knowing the recipient you will be better able to understand the purpose of providing the information. What information be clear about PRECISELY what information is needed. If someone requests weekly sales figures for the last two months, give them exactly that. Resist the temptation to give six months figures because you already have them in that format. Giving more information than requested often leads to frustration and confusion. When be clear about when the information is required. A brief overview or analysis provided in time for a meeting is much better than a comprehensive analysis which arrives the day after the meeting. Remember
Study House 2003
51
that your information may be a contribution to a broader report based on a number of contributions and there is nothing more frustrating than having only a part of the picture. If someone provides a deadline, meet it or negotiate it! Method be sure about the method of communication. Does the recipient want a report, table, list, meeting, discussion? By following these simple guidelines you will be able to ensure that the information you provide will be appropriate and valuable. If you are requesting information from others, be sure to explain clearly the need, audience, timing and method. This can reduce time wasted on producing unwanted figures, and save you time on analysing information produced in the wrong format.
Exercise 20 What types of information are critical to your organisation and why?
Exercise 21 Think about and describe how you organise information at the moment. Suggest any improvements which could be made.
Study House 2003
52
Section 6 Managing Finance

Every manager needs to be able to manage finance as part of their role whether that is a departmental budget or a full set of business accounts. Whilst your job may or may not be directly involved in the business finances, the impact of you and your teams activities will have a direct bearing on the business finances and therefore you will need to play a part in planning, controlling and forecasting financial performance. This section gives a brief overview of general financial issues for managers. If your role requires specialist financial analysis you should obviously investigate the subject further. Other courses do cover different aspect of finance and may be of value but for the moment let us concentrate on the general needs for effective management.
Cost Analysis and Control

One of the most important tools for any manager is the ability to analyse and control costs. There will always be pressure to reduce cost as it directly affects profit. To do this prudently, we need to appreciate how costs are allocated and how they behave. First, consider the allocation of costs. There are two basic types of cost: Direct costs (or prime costs). Costs directly related to the production or the provision of service. Usually the costs of materials, labour and other specific expenses. For example, a new car exhaust system (materials), the time it takes to fit (labour) and the costs of cleaning overalls (expenses). Indirect costs (or overheads). These cannot be directly traced to the production of specific products or the provision of specific services. They include overheads like salaries and wages of support staff (e.g. management, sales, distribution etc) and lighting, heating, rent, etc.
Study House 2003
53
How do we allocate these costs in ways which enable us to control them? Identify the cost unit. What is the measurable unit of production or service to which we can attribute costs? In production, it might be a unit of product. In service, it could be the chargeable person hour or the particular service provided. Absorption costing. This is the method by which all direct and indirect costs are allocated to cost units. There are different ways of apportioning indirect costs to cost units. For example, the total of all indirect costs could be allocated proportionally to the area occupied by that activity. If total indirect costs were 500 for one period and the cost unit took 75% of floor space then 375 is charged to it. Instead for example, heating could be allocated depending on the number of radiators! Lighting by the number of light fittings or wattage? Rental by the area? Wages according to the amount of time spent on that cost unit?
While absorption costing enables us to identify where money goes, it can only take us so far. For example, the unit with the highest cost may, or may not, be the unit which is contributing most to the organisation. This is information we need! Also, we cannot easily predict the effect on sales of raising or dropping costs. Secondly, therefore, it is important to examine how costs behave. To do this, we distinguish them as follows: Variable costs. These are costs which vary in direct proportion to the level of activity. For example, a furniture maker who requires double the amount of wood to make double the quantity of chairs. Also, a supermarket will require the number of checkout operators to increase as the number of customers increases. Fixed costs. These costs remain the same however much the level of activity changes. For example, the rental of the furniture maker's workshop and the lighting in the supermarket. Neither of these will be affected by numbers of chairs or customers. Two types of fixed cost are committed cost and managed
Study House 2003
54
cost. The first is hard to influence (for example, salaries, depreciation charges), the second we can influence, for example, advertising and training. Semi-variable costs. These costs incorporate an element of fixed and variable cost. For example, a telephone bill includes the cost of rental (fixed) and the cost of calls (variable). Step costs. If a certain level of activity is reached, then there is significant step up in cost. For example, as activity rises another supervisor may be required, as there is a maximum number of employees anyone person can oversee. We can now analyse activities in the business and take into account their contribution as well as how much they cost. This will help us decide on the right balance of products and services. By analysing costs in this way, we can start to predict the sales which will bring the best return. We can either reduce or increase production to achieve the best sales mix of products and services. Key points to include: Examine how costs are allocated in your organisation Challenge the mix of variable and fixed costs Ensure costs enable the maximum profit. For example, staff contracts. Are staff full-time or part-time (fixed cost)? Or are they on contract or temporary (variable cost)? Does the company own vehicles or equipment (fixed cost) or hire them (variable)?
Financial Information
In order to measure how well a company is running financially there are a number of sources of information which should be consulted. Whilst there are many ratios and financial controls in common use, the purpose here is to concentrate on three documents which are vital to running any business.
Study House 2003
55
The balance sheet A balance sheet is a statement of a companys assets and the claims which people have on the company. These two figures always balance each other exactly and the relationship can be expressed as: Assets = Claims Assets include land, buildings, plant and equipment, stock, investments and finished goods; indeed anything which has a physical and measurable value. Claims can take two forms: liabilities and equity. Liabilities are debts to banks, suppliers and creditors whilst equity is the capital invested by the owner or shareholders plus the accumulated money which is owned by the shareholders. Both assets and claims are usually broken down into current and fixed (or long term in the case of liabilities). This shows quickly the position related to assets and claims which are immediate in nature and help to indicate whether in the short term a company has enough current assets to meet its current liabilities. The purpose of the balance sheet is primarily to indicate where the assets and liabilities of a company lie, and allow a quick judgement to be made on its solvency i.e. its ability to meet claims from its assets. It is, however, just a snapshot and can only give an indication of the position on the day on which the balance sheet was drawn up. An example of a balance sheet is shown below.
Study House 2003
56
Acme Engineering Balance Sheet 31st March 200X Fixed Assets Current Assets Stock Prepayments Trade debtors Cash Long term liabilities Current liabilities Trade creditors Accruals Tax payable NET ASSETS Share capital Retained profit TOTAL EQUITY 5000 1700 6700 6500 800 400 500 200 1900 (0) (700) (400) (600) (1700) 6700
The Profit and Loss Account

The balance sheet, as you have seen, records a company's situation at a particular moment in time. The profit and loss account records the operations of the company for a period of time, usually for a whole year. A profit and loss account contains the following information: Sales revenue - the money due from selling goods and services Cost of sales - any costs and expenses, such as the cost of raw materials, which can be directly assigned to goods and services that are sold Gross profit - the figure obtained by subtracting the cost of sales from the sales revenue
Study House 2003
57
Operating expenses - any expenses that have been incurred in the operation of the business and cannot be directly assigned to the sales of goods and services. Examples could include administration and advertising Operating profit - the figure obtained by deducting the operating expenses from the gross profit Loan interest payable - this figure needs to be deducted because it reduces the amount of profit that the company has made for tax purposes Profit before tax - the figure obtained by deducting any loan interest from the operating profit Tax payable - the amount the Inland Revenue will expect to receive Profit after tax - the figure obtained by deducting the tax payable from the profit before tax Dividend payable - the amount that is paid to shareholders to reward them for their investment in the company Retained profit - the amount left after deducting dividends from profit after tax that is available to be reinvested in the company
As you will see the profit and loss account is only concerned with the trading activities over a fixed period and excludes the buying or selling of assets. Consequently the profit and loss account give a good indication of the trading position of a company. A typical profit and loss account may look like the following.
Study House 2003
58
Acme Engineering P & L Account Sales Cost of sales Raw materials Labour Gross profit Operating expenses Administration Marketing Operating profit Interest payable Profit before tax Tax payable Profit after tax Dividend payable Retained profit The Cash Flow Statement It is the role of the cash flow statement to explain the change in a company's cash situation. One way in which this could be done would be to list all the transactions that affect cash and look at their impact. In practice, the cash flow statement adopts a slightly different approach. The cash flow statement takes the figure for operating profit, as given on the profit and loss account, and explains why this is different from the change in the amount of cash that a (4600) (5400) (10000) 27000 (500) 26500 (6125) 20375 (5000) 15375 (15000) (8000) (23000) 37000 60000
Study House 2003
59
company has. The information on a cash flow statement is organised under several headings. We will go through them and explain what they all cover. Operating Activities Operating profit - as given in the profit and loss account. This is the base figure that the statement will reconcile with the change in the cash flow Depreciation - this will have been included as an operating expense in the profit and loss account, but will not have affected the company's cash. Depreciation is added back Increase in trade debtors - these are the people who owe the company money. Their payments will have been counted towards sales, but will not have increased the cash that the company holds. This figure is deducted Increase in stock - any stock that has not been sold will not affect profit, but it will have required cash to be spent. The amount is deducted from the operating profit figure. If stock was bought on credit, not cash, this adjustment is still made, along with a compensating entry that we will describe in a moment Increase in prepayments - these affect cash, but not profits. The amount is deducted Increase in trade creditors - these are people to whom the company owes money. The profit has been worked out as if payments to these creditors have been made, although they have not yet had their impact on the cash flow. This figure is added to the operating profit Increase in accruals - these are other payments connected with the operating activities that have been counted as an expense but not yet paid. They are treated in the same way as the increase in trade creditors and added back.
Study House 2003
60
A typical cashflow statement is shown below. Acme Engineering Cashflow Statement Operating Activities Operating profit Depreciation Increase in debtors Increase in stock Increase in creditors Investment activities Purchase of fixed assets Financing Directors loan Net change in cash balance 1500 0 0 (500) 600 1600 (2500) 2000 1100 (900)
Budgeting
Another important aspect of controlling and managing finance is the budget. The prime purpose of the budget is to provide a forecast against which actual events can be measured and compared. In turn, this enables organisations to plan their cash flow and spending plans, identify any likely problems and take corrective action before a serious problem arises. Budgets enable you to examine your organisations strategy and translate that into a financial picture, taking account of any limiting factors. Such limiting factors may include: The amount of capital available The rate of return expected The size of your market The capacity of equipment The available workforce The availability of raw materials Contractual and legal obligations
Study House 2003
61
Once these factors have been determined it will be possible to calculate the amount of product and service you can provide, the income it will generate and the costs of doing so. This will also enable you to plan how much is going to be spent on indirect costs so that there is a satisfactory planned surplus of income over expenditure. To compile a budget therefore requires a knowledge of what is coming in, what is going out and when. Many organisations produce budgets on a historical or incremental basis. This simply means reviewing last years events and amending the budget to allow for inflation and any growth in income and costs. This is fine for a mature stable business but it does carry forward any poor decisions from the previous planning period. Zero based budgets are another method and this enables you to start from scratch and build a budget from the beginning. Whilst usually more time consuming, it does force you to think carefully about every aspect of the budget and may therefore arguably be a more reliable and informative process. Once a budget is completed (and we shall examine an example shortly) the value of the process is to be able to monitor what actually happens and account for variances. This is a critical management process which enables the organisation to monitor its plans and amend them as necessary to take account of any unforeseen circumstances. If, for example, sales are below forecast the impact may go undetected until there is a cash flow problem. By using the budget model to measure actual sales against forecast you will immediately be able to see the effect and take any measures necessary to ensure that the books continue to balance.
Study House 2003
62
Below is an example of a simple budget method. Acme Engineering Profit Budget for Month of XXXXXXX Estimated Sales Income Direct Costs Labour Materials Indirect Costs Salaries Rent, rates, insurance Fuel and power Advertising Transport Stationery and postage Total Costs Profit 52000 16000 12000 6000 2000 800 500 500 300 38000 14000 Actual 46000 14000 11000 6000 2000 800 800 500 300 35400 10600 Variance - 6000 -2000 -1000 0 0 0 +300 0 0 -2700 -3400
This very simple analysis shows very quickly where variations have occurred and helps to direct attention to areas where some action may be required. For instance, in this case we should examine why sales have not met expectations and why marketing costs are higher than planned. The budgeting process can be applied readily to a business, department or organisation, and should start with a forecast for the whole planning period (usually a year) and then be broken down into quarters, months or weeks to enable regular monitoring to take place. Of course a budget is only as good as the information fed into it and you should take great care to ensure that calculations are accurate, reliable and upto-date. You should also take account of events which cannot yet be calculated so that you get a full picture. Work in progress but not yet
Study House 2003
63
invoiced, orders received but not dispatched and costs incurred but not yet paid for are all examples of adjustments which need to be made in order that a full picture emerges. Budgeting and forecasting techniques can be extended to provide a very accurate picture of the ongoing process of a business, and to help build the cash flow forecast, profit and loss forecast and balance sheet. The subject is covered in more depth in the courses on Management Accounting but for this course the above introduction should enable you to apply budgeting techniques in a straightforward manner.
Exercise 22 Summarise the areas for which you have financial control in your organisation. Suggest ways in which you could manage these finances more effectively.
Study House 2003
64

Effective Management

Uploaded by

Copyright:

Available Formats

Effective Management

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Effective Management

Uploaded by

Copyright:

Available Formats

What are the main topics covered in the document?

What are the main topics covered in the document?

What are some benefits of effective management according to the text?

What are some benefits of effective management according to the text?

Effective Management

Study House 2003