Diploma Of Leadership and Management

Learner Guide

BSBFIM501

MANAGE BUDGETS AND

FINANCIAL PLANS

This learner guide is copyright protected and belongs to:

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TABLE OF CONTENTS

TABLE OF CONTENTS………………………………………………………………………………………………………………. 0

COURSE INTRODUCTION ………………………………………………………………………………………………………… 2

ABOUT THIS GUIDE …………………………………………………………………………………………………………………………………………………. 2 ABOUT THIS RESOURCE ………………………………………………………………………………………………………………………………….. 2 ABOUT ASSESSMENT ………………………………………………………………………………………………………………………………………… 3

ELEMENTS AND PERFORMANCE CRITERIA ………………………………………………………………………….. 5

EVIDENCE REQUIREMENTS ……………………………………………………………………………………………………. 7

KNOWLEDGE EVIDENCE ……………………………………………………………………………………………………………………………………….. 7 PERFORMANCE EVIDENCE …………………………………………………………………………………………………………………………………….. 7

ASSESSMENT CONDITIONS ……………………………………………………………………………………………………… 8

PRE-REQUISITES ………………………………………………………………………………………………………………………. 8

TOPIC 1 – PLAN FINANCIAL MANAGEMENT APPROACHES …………………………………………………… 9

ACCESS BUDGET/FINANCIAL PLANS FOR THE WORK TEAM ……………………………………………….. 9

WHAT IS A BUDGET? ……………………………………………………………………………………………………………………………………………….. 9

CLARIFY BUDGET/FINANCIAL PLANS WITH RELEVANT PERSONNEL WITHIN THE

ORGANISATION TO ENSURE THAT DOCUMENTED OUTCOMES ARE ACHIEVABLE,

ACCURATE AND COMPREHENSIBLE AND NEGOTIATE ANY CHANGES REQUIRED TO BE

MADE TO BUDGET/FINANCIAL PLANS WITH RELEVANT PERSONNEL WITHIN THE

ORGANISATION ……………………………………………………………………………………………………………………….. 10

STAFF BUDGETS ……………………………………………………………………………………………………………………………………………………. 11 PREPARING A BUDGET ………………………………………………………………………………………………………………………………………….. 12 TYPES OF BUDGETS ………………………………………………………………………………………………………………………………………………. 13 PLANNING BUDGETS…………………………………………………………………………………………………………………………………………….. 14 FINANCIAL STATEMENTS – THE FUNDAMENTALS ……………………………………………………………………………………………….. 17 BALANCE SHEET …………………………………………………………………………………………………………………………………………………… 17 PROFIT AND LOSS STATEMENTS …………………………………………………………………………………………………………………………… 18 CASH FLOW STATEMENTS …………………………………………………………………………………………………………………………………….. 19 DEVELOPING BUDGETS ……………………………………………………………………………………………………………………………………….. 21 ACCOUNTING PRINCIPLES ……………………………………………………………………………………………………………………………………. 23 BUDGETING APPROACHES ……………………………………………………………………………………………………………………………………. 24

PREPARE CONTINGENCY PLANS IN THE EVENT THAT INITIAL PLANS NEED TO BE

VARIED ……………………………………………………………………………………………………………………………………. 26

INITIATIVES TO SUPPORT WORKFORCE PLANNING OBJECTIVES ………………………………………………………………………… 28

TOPIC 2 – IMPLEMENT FINANCIAL MANAGEMENT APPROACHES ……………………………………… 30

DISSEMINATE RELEVANT DETAILS OF THE AGREED BUDGET/FINANCIAL PLANS TO

TEAM MEMBERS ……………………………………………………………………………………………………………………… 30

COMMUNICATE THE BENEFITS OF COST CONTROL ………………………………………………………………………………………………. 30 INSPIRE INDIVIDUAL ACCOUNTABILITY ……………………………………………………………………………………………………………….. 31

PROVIDE SUPPORT TO ENSURE THAT TEAM MEMBERS CAN COMPETENTLY

PERFORM REQUIRED ROLES ASSOCIATED WITH THE MANAGEMENT OF FINANCES …….. 32

DEVELOP FEEDBACK MECHANISMS TO ACTION RECOMMENDATIONS ………………………………………………………………… 32

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DETERMINE AND ACCESS RESOURCES AND SYSTEMS TO MANAGE FINANCIAL

MANAGEMENT PROCESSES WITHIN THE WORK TEAM ………………………………………………………. 33

HUMAN RESOURCES ………………………………………………………………………………………………………………………………………………. 33 PHYSICAL RESOURCES …………………………………………………………………………………………………………………………………………… 33 TIME ……………………………………………………………………………………………………………………………………………………………………… 34

TOPIC 3 – MONITOR AND CONTROL FINANCES …………………………………………………………………… 35

IMPLEMENT PROCESSES TO MONITOR ACTUAL EXPENDITURE AND TO CONTROL COSTS

ACROSS THE WORK TEAM ……………………………………………………………………………………………………… 35

COMPUTERISED SYSTEMS ……………………………………………………………………………………………………………………………………… 35 PRINCIPLES OF SPREADSHEET USE ………………………………………………………………………………………………………………………… 36 MONITOR SALES, REVENUE AND EXPENDITURE DATA ………………………………………………………………………………………… 37 CASH FLOW …………………………………………………………………………………………………………………………………………………………… 38

MONITOR EXPENDITURE AND COSTS ON AN AGREED CYCLICAL BASIS TO IDENTIFY

COST VARIATIONS AND EXPENDITURE OVERRUNS ……………………………………………………………. 43

IMPLEMENT, MONITOR AND MODIFY CONTINGENCY PLANS AS REQUIRED TO MAINTAIN

FINANCIAL OBJECTIVES AND REPORT ON BUDGET AND EXPENDITURE IN ACCORDANCE

WITH ORGANISATIONAL PROTOCOLS ………………………………………………………………………………….. 46

CONTINGENCIES……………………………………………………………………………………………………………………………………………………. 46 RISK MANAGEMENT ……………………………………………………………………………………………………………………………………………… 46 MEASURING PERFORMANCE …………………………………………………………………………………………………………………………………. 46 REPORT BUDGET PERFORMANCE ………………………………………………………………………………………………………………………….. 47

TOPIC 4 – REVIEW AND EVALUATE FINANCIAL MANAGEMENT PROCESSES …………………….. 49

COLLECT AND COLLATE FOR ANALYSIS, DATA AND INFORMATION ON THE

EFFECTIVENESS OF FINANCIAL MANAGEMENT PROCESSES WITHIN THE WORK TEAM

AND ANALYSE DATA AND INFORMATION ON THE EFFECTIVENESS OF FINANCIAL

MANAGEMENT PROCESSES WITHIN THE WORK TEAM AND IDENTIFY, DOCUMENT AND

RECOMMEND ANY IMPROVEMENTS TO EXISTING PROCESSES …………………………………………. 49

LIQUIDITY RATIOS ………………………………………………………………………………………………………………………………………………… 50 ACTIVITY RATIOS ………………………………………………………………………………………………………………………………………………….. 51 LEVERAGE RATIOS ……………………………………………………………………………………………………………………………………………….. 52 PROFITABILITY RATIOS …………………………………………………………………………………………………………………………………………. 53 MARKET-RELATED OR PERFORMANCE RELATED RATIOS (PROFITABILITY) ……………………………………………………….. 54 ANALYSIS OF FINANCIAL STATEMENTS – ANALYSING AND PREPARING A FINANCIAL REPORT …………………………. 55

IMPLEMENT AND MONITOR AGREED IMPROVEMENTS IN LINE WITH FINANCIAL

OBJECTIVES OF THE WORK TEAM AND THE ORGANISATION ……………………………………………. 56

ENSURE BUDGET COMPLIANCE …………………………………………………………………………………………………………………………….. 56

ADDITIONAL INFORMATION – GST ……………………………………………………………………………………….. 58

TYPES OF SUPPLY …………………………………………………………………………………………………………………………………………………… 58 TAXABLE SUPPLIES ………………………………………………………………………………………………………………………………………………… 58 CREDITABLE ACQUISITIONS ………………………………………………………………………………………………………………………………….. 59 GST-FREE SUPPLIES ………………………………………………………………………………………………………………………………………………. 60 INPUT TAXED SUPPLIES …………………………………………………………………………………………………………………………………………. 60 TRANSACTIONS THAT ARE ‘OUTSIDE THE SYSTEM’ ……………………………………………………………………………………………….. 61

REQUIREMENTS FOR FINANCIAL RECORD KEEPING …………………………………………………………. 62

BUSINESS RECORDS YOU NEED TO KEEP ………………………………………………………………………………………………………………. 62

SUMMARY ………………………………………………………………………………………………………………………………… 63

GLOSSARY OF TERMS ……………………………………………………………………………………………………………… 63

REFERENCES ………………………………………………………………………………………………………………………….. 66

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COURSE INTRODUCTION

ABOUT THIS GUIDE

This learner guide covers one unit of competency that is part of the business services training

package:

 BSBFIM501 – Manage budgets and financial plans

This unit describes the skills and knowledge required to undertake financial management within a

work team in an organisation. It includes planning and implementing financial management

approaches, supporting team members whose role involves aspects of financial operations,

monitoring and controlling finances and reviewing and evaluating effectiveness of financial

management processes.

It applies to managers in a wide range of organisations and sectors who have responsibility for

ensuring that work team financial resources are used effectively and are managed in line with

financial objectives of the team and organisation.

No licensing, legislative or certification requirements apply to this unit at the time of publication.

ABOUT THIS RESOURCE

This resource brings together information to develop your knowledge about this unit. The

information is designed to reflect the requirements of the unit and uses headings to makes it

easier to follow.

Read through this resource to develop your knowledge in preparation for your assessment. You

will be required to complete the assessment tools that are included in your program. At the back

of the resource are a list of references you may find useful to review.

As a student it is important to extend your learning and to search out text books, internet sites,

talk to people at work and read newspaper articles and journals which can provide additional

learning material.

Your trainer may include additional information and provide activities. slide presentations and

assessments in class to support your learning.

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ABOUT ASSESSMENT

Throughout your training we are committed to your learning by providing a training and

assessment framework that ensures the knowledge gained through training is translated into

practical on the job improvements.

You are going to be assessed for:

 Your skills and knowledge using written and observation activities that apply to your

workplace.

 Your ability to apply your learning.

 Your ability to recognise common principles and actively use these on the job.

You will receive an overall result of Competent or Not Yet Competent for the assessment of this

unit. The assessment is a competency based assessment, which has no pass or fail. You are either

competent or not yet competent. Not Yet Competent means that you still are in the process of

understanding and acquiring the skills and knowledge required to be marked competent. The

assessment process is made up of a number of assessment methods. You are required to achieve

a satisfactory result in each of these to be deemed competent overall.

All of your assessment and training is provided as a positive learning tool. Your assessor will

guide your learning and provide feedback on your responses to the assessment. For valid and

reliable assessment of this unit, a range of assessment methods will be used to assess practical

skills and knowledge.

Your assessment may be conducted through a combination of the following methods:

 Written Activity

 Case Study

 Observation

 Questions

 Third Party Report

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The assessment tool for this unit should be completed within the specified time period following

the delivery of the unit. If you feel you are not yet ready for assessment, discuss this with your

trainer and assessor.

To be successful in this unit you will need to relate your learning to your workplace. You may be

required to demonstrate your skills and be observed by your assessor in your workplace

environment. Some units provide for a simulated work environment and your trainer and

assessor will outline the requirements in these instances.

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ELEMENTS AND PERFORMANCE CRITERIA

1 Plan financial management

approaches

1.1 Access budget/financial plans for the work team

1.2 Clarify budget/financial plans with relevant personnel within

the organisation to ensure that documented outcomes are

achievable, accurate and comprehensible

1.3 Negotiate any changes required to be made to

budget/financial plans with relevant personnel within the

organisation

1.4 Prepare contingency plans in the event that initial plans need

to be varied

2 Implement financial

management approaches

2.1 Disseminate relevant details of the agreed budget/financial

plans to team members

2.2 Provide support to ensure that team members can

competently perform required roles associated with the

management of finances

2.3 Determine and access resources and systems to manage

financial management processes within the work team

3 Monitor and control finances 3.1 Implement processes to monitor actual expenditure and to

control costs across the work team

3.2 Monitor expenditure and costs on an agreed cyclical basis to

identify cost variations and expenditure overruns

3.3 Implement, monitor and modify contingency plans as

required to maintain financial objectives

3.4 Report on budget and expenditure in accordance with

organisational protocols

4 Review and evaluate financial

management processes

4.1 Collect and collate for analysis, data and information on the

effectiveness of financial management processes within the work

team

4.2 Analyse data and information on the effectiveness of

financial management processes within the work team and

identify, document and recommend any improvements to

existing processes

4.3 Implement and monitor agreed improvements in line with

financial objectives of the work team and the organisation

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EVIDENCE REQUIREMENT S

This describes the essential requirements and their level required for this unit.

KNOWLEDGE EVIDENCE

To complete the unit requirements safely and effectively, the individual must:

 Describe basic accounting principles

 Identify and explain the relevant legislation and current requirements of the

Australian Taxation Office, including the Goods and Services Tax (GST)

 Explain the key requirements for financial record keeping and auditing

 Describe the principles and techniques involved in managing:

o budgeting

o cash flows

o electronic spreadsheets

o GST

o ledgers and financial statements

o profit and loss statements

PERFORMANCE EVIDENCE

Evidence of the ability to:

 Use financial skills to work with and interpret budgets, ageing summaries, cash flow,

petty cash, Goods and Services Tax (GST), and profit and loss statements

 Communicate with relevant people to clarify budget/financial plans, negotiate

changes and disseminate information

 Prepare, implement and modify financial contingency plans

 Monitor expenditure and control costs

 Support and monitor team members

 Report on budget and expenditure

 Review and make recommendations for improvements to financial processes

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 Meet record keeping requirements for the Australian Taxation Office (ATO) and for

auditing purposes

Note: If a specific volume or frequency is not stated, then evidence must be provided at least

once.

ASSESSMENT CONDITION S

Assessment must be conducted in a safe environment where evidence gathered demonstrates

consistent performance of typical activities experienced in the financial management field of

work and include access to:

 Resources and documentation used in the workplace

 Workplace policies and procedures

 Workplace budgets and financial plans

 Business technology

 Case studies and, where available, real situations

Assessors must satisfy NVR/AQTF assessor requirements.

PRE-REQUISITES

This unit must be assessed after the following pre-requisite unit:

There are no pre-requisites for this unit.

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TOPIC 1 – PLAN FINANCIAL MANAGEMENT APPROACHE S

ACCESS BUDGET/FINANCIAL PLANS FOR THE WORK TEAM

WHAT IS A BUDGET?

A budget is a financial document used to project future income and expenses. The budgeting

process may be carried out by individuals or by companies to estimate whether the

person/company can continue to operate with its projected income and expenses.

There are many types of budget and financial plans that you could access for information on

planning financial management approaches.

Every business should have a mission which defines the purpose for its existence. This mission

becomes the framework in which the business is set up, operates and evolves. It binds the

owners to the business on a level not related to finance and initially is the driving force which

motivates the owners to push themselves and the business forward. As time progresses, this

mission should guide management in deciding its scope of activities through the development of

strategic, tactical and operational plans.

Strategic Plans are developed by senior management to achieve a high-level objective based on

the opportunities available, avoiding the potential threats and playing to the businesses strengths.

It is the overall directional plan of the business and usually is defined with measurable outcomes

and timeframes (such as a market share of 30% within 5 years). Strategic plans are made up of

four key stages. Each stage is vital to the process and has the same importance. These stages

are;

 Review and understand the past.

o Identify, record, monitor and understand past performance including trends

and variances in revenue and expenditure with the view of increasing controls

and enhancing expected behaviour.

 Set Strategies and Plans.

o Ensure financial plans align with human resource and asset management

planning to ensure there is no conflict in goals or direction within the

business. In order to do this, it is vital to engage all stakeholders in the

strategic financial planning process.

 Forecast the future.

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o Based on the past performance, strategies and plans, estimate reasonable

levels of revenue and expenses. Incorporate the organisations policies,

initiatives and priorities into forecasts. Identify, understand and develop

contingencies to limit the effect of likely barriers to forecast performance.

 Set Annual Budgets.

o Budgets need to be developed with a complete understanding of the financial

and strategic plans and involve the key budget managers and stakeholders in

the process. It is vital that all budgets, including short-term budgets, do not

undermine the long-term objectives of the business.

Tactical Plans identify and implement the steps or processes needed to occur in order to

achieve and support the Strategic Plan. This may include the purchase of new equipment, a

marketing campaign, etc.

Operational Plans are the fully detailed specifications of actions aimed at achieving the

operational goals of a business. Budgets form part of the operational plans. Budgets need to

conform to a number of key points;

 They need to relate to a known and agreed plan with targets which are reasonable and

achievable

 The budgets need to focus on the future and represent a known period

 Have all variances between actual and budgeted figures, outside of expected ranges,

investigated and acted upon

 Identify key personnel responsible for achieving budgets and clear understanding of

what needs to be achieved

Effective Accounting and Financial Management systems provide accurate records in a

systematic, logical and meaningful way for key interested parties. These parties are not limited to,

the owner/s, management, financial institutions, creditors, investors and regulatory bodies.

CLARIFY BUDGET/FINANCIAL PLANS WITH RELEVANT

PERSONNEL WITHIN THE ORGANISATION TO ENSURE THAT

DOCUMENTED OUTCOMES ARE ACHIEVABLE, ACCURATE

AND COMPREHENSIBLE AND NEGOTIATE ANY CHANGES

REQUIRED TO BE MADE TO BUDGET/FINANCIAL PLANS

WITH RELEVANT PERSONNEL WITHIN THE ORGANISATION

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STAFF BUDGETS

It may be useful to see staff budgets in the context of the total budgetary framework.

Budgets express the plans of the company in numbers. They can provide the following benefits:

 Provide clear goals to assist in the achievement of the business strategy

 Monitor and control business performance

 Provide a focus for employees in the conduct of business

 Define areas of responsibility and authority

Budgets and the budget process do have limitations, including:

 Budgeting consumes large amounts of time and cost

 Budgets are built on history, assumptions and forecasts all of which can be inaccurate

and even misleading depending on the source of information

 Budgets are often regarded as sacrosanct and, therefore, unchangeable. This can lead

to “missed” opportunities or opportunity costs

The business strategy will be set within a framework that acknowledges the basic economic

parameters. These will include the state of the economy, the inflation rate, interest rates and the

exchange rate where imports are involved.

The process of setting budgets is often perceived within a negative framework. It is seen to be

about cost cutting and the reduction of expenses. No doubt this is part of the process and often

is the major focus. However, cost cutting and the reduction of expenses can only achieve

sustainable results if the reduction is about waste. The continuous reduction of expenses beyond

this level will not be sustainable as its impact on the revenue stream becomes counterproductive.

This is particularly true in respect to cutting labour. It can often lead to a skills shortage.

The key is to be able to find the right balance. Budgeting can be a creative process. A company

will have a finite amount of resources available to it in order to conduct business. The creative

challenge is how to best spend these resources to achieve the best outcome.

People who see themselves as “victims” in the budget process often fail to see the creative

opportunity to do business under a different model.

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This model continues to ask one question. How is this expense adding to the building of revenue

and the contributing to the enhancement of brand value?

The development of the business plan and its related labour strategy leads into a review of the

staff budgets. Staff budgets will account for the direct cost of labour and it’s associated on costs.

Staffs budgets will need to accommodate different costs in periods of expansion and contraction

in economic activity. When a business is in a growth cycle, there is likely to be a shortage of

skilled labour. The labour budgets need to be able to meet additional costs on recruitment,

training and staff development.

In periods of contraction, additional costs will be incurred in providing appropriate levels of staff

redundancy, job placement and counselling services.

Businesses that have developed over time, a more flexible workplace structure are more capable

of dealing with sharp expansion or contraction in economic activity. It would be a gross

overstatement to suggest companies can totally insulate themselves by having a flexible and

“balanced” workforce in the current economic crisis. They are, however, better placed to deal

with the crisis and are more likely to emerge out of the crisis in a stronger competitive position

than companies who have not adopted a flexible labour structure.

A budget is a financial plan or map written in plain language of money or numbers. It is used to

prepare a business for the future by predicting expected behaviour in revenue and expenses. A

budget is the forecasting of financial results for a defined period. This can also be used to plan

for activity, a means of communicating goals of the business and a means of measuring the

business against those goals. Once an understanding has been obtained of what is to be achieved

and the results compared against the forecast, the business can start to develop the means to

potentially control the results: the greater the level of understanding, the greater the ability to

limit or control the effects.

PREPARING A BUDGET

When preparing budgets, it is important to fully understand the business plans so that the

following questions can be incorporated into the budgets;

 Where does the business want to be at the end of the period?

 How does the business expect to achieve that goal?

 What needs to be done (spent/received) to achieve this?

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 How is the business placed to achieve these results?

 What key performance indicators are required to determine the business progress

towards these goals?

An effective budget explains the organisational goals, considers the organisational capabilities,

defines the support required to achieve the goals, sets realistic goals and defines responsibilities

within that budget framework.

TYPES OF BUDGETS

Just as there are different types of businesses operating in different industries with different

objectives, so too are there different types of budgets. Below is a brief explanation of the most

common types of budgets;

 Financial Budgets and Statements

Are prepared in relation to the financial status of the business and are required for governance

and annual reporting to responsible authorities such as the Australian Taxation Office.

 Fixed (or Static) Budgets

These budgets are designed to identify performance at one level of activity. They are utilised as

the primary means to determine performance against budgets and the determination of variances.

It is from these budgets that the greatest understanding of the business can occur as a result of

clarifying the occurrence of the variances.

 Flexible Budgets

Are prepared to identify the performance at more than one level of activity so that the business

can determine what goals it needs to set to retain or receive enough revenue to cover expected

expenses. It is also known as a comparison budget.

 Budgeted Balance Sheet

Predicts the future ‘snapshot’ of the overall position of the business based on assumptions made

in the budgeting process after a specific duration of time.

 Budgeted Revenue Statement

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Identifies the total revenue expected to be received based on specific sales/revenue assumptions.

This is the first budget prepared as sales predicted have a direct relationship to many of the

expenses incurred by a business. This budget, other than assisting in predicting many of the

expenses, provides the key information in ascertaining whether the business is likely to be viable.

This budget incorporates the revenue received from; sales, grants, rent, investments, interest,

fundraising, etc.

 Cash Budget/Budgeted Cash flow

Specifically monitors the cash flow in and out of the bank. Every transaction which affects the

cash at the bank must be predicted and recorded. This is vital for the ongoing operation and

solvency of the business. It predicts the level of cash held by the business at the end of each

period.

 Expenditure Budgets

Predicts the expected expenses to be incurred by the business.

PLANNING BUDGETS

As with any process within a business, involving the right people can often make the difference

between success and failure. This is certainly the case with the preparation and management of

budgets. Depending on the organisational structure and delegation within the business, different

parties may be required. However as a general rule the following personal should be, if not

involved, then certainly considered;

 Financial or accounting areas of the business

 Business unit members who have the responsibility to meet the objectives outlined

within the budgets

 Executive managers involved in setting expectations and formulating the direction of

the business

 Other Key stakeholders

Depending on the business, the industry and the environment the business operates, budgets

may be developed for a number of reasons. Budgets may be produced to provide the following

information;

 The day to day operating of the business (liquidity)

 Details pertaining to the growth of the business

 Projections and progress of specific projects

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 To control expenditure

 To target performance

 To provide information to financiers (i.e. banks when seeking business loans)

 To provide information to investors

 To understand the revenue, cost and profit forecast position of the business

 To compare the performance of the business to prior years, competitors, industry

standards, etc.

Even within the above budgets, specific budgets may differ depending on the type of business or

the industry it operates in. Service, Retail and Manufacturing businesses differ in the information

they utilise and as a result, differ in how they report.

Service Businesses utilise the follow budgets;

 Fees or revenue budget

 Operating expenses budget

 Budgeted income statement (budgeted profit & loss)

 Budgeted balance sheet

 Cash flow statement

Retail Businesses utilise the follow budgets;

 Sales budget

 Purchases budget

 Cost of goods sold budget

 Operating expenses budget

 Inventory budget

 Budgeted income statement

 Budgeted balance sheet

 Cash flow statement

Manufacturing Businesses utilise the follow budgets;

 Sales budget

 Production budget

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 Direct material purchases budget

 Direct material usage budget

 Direct labour budget

 Factory overhead budget

 Cost of goods sold budget

 Operating expense budget

 Inventory budget

 Budgeted income statement

 Budgeted balance sheet

 Capital expenditure budget

 Cash flow statement

Irrespective of the industry, business structure or management style, budgets must meet the

requirements of the accounting code of practice, reflect management accountabilities, the

decision making structures and processes that support these arrangements? Budgets for

managers should be grouped to reflect the reporting arrangements to a more senior manager.

Budgets also need to identify those managers responsible for non-operational budgets.

The financial management process contains the detail of the planned allocation within the

organisation in order to achieve the objectives. It needs to be analysed and reported to the target

audience and key stakeholders. Ensuring that the process is effective is critical to providing

individuals and the business with useful information to control the direction and profitability of

the business.

Whilst budgets focus largely on the financial projections and results it is vital to be aware and

factor into the process the non-financial elements. Non-financial elements are those factors

which at face value have tangible cost to the business, however, can affect the profit and loss.

The most commonly understood non-financial elements are staff morale and reputation. In both

instances, there is no definable expense which can be allocated however the deterioration of

these elements can have a major effect on the business. The increase or decrease of moral on

staff can affect production numbers, quality issues, sales performance, and handling of customer

complaints to mention a few. Publicity, both positive and negative, effects the reputation of a

business.

Qantas once upon a time was the only airline in the world not to have had an airplane accident or

issue; however a cutting of the maintenance budget in attempt to reduce costs has resulted in this

safety record being destroyed. How much was this worth to the company? Was it really worth

the cost cutting savings made in maintenance?

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FINANCIAL STATEMENTS – THE FUNDAMENTALS

Irrespective of the type of business, industry or management structure there are three budgets

that are essential for a business to report on its financial position. Each one of these budgets is

required for annual reporting and governance of the finances by responsible authorities.

These budgets are:

 Balance Sheet

 Profit and Loss Statement

 Cash Flow Statement

BALANCE SHEET

The Balance Sheet (or is also known as Statement of Financial Position) is a statement at one

point in time, which shows all the resources controlled by the business and all the obligations due

by the business.

The purpose of the balance sheet is to communicate information about the financial position of a

business at a point in time. It provides information of both the assets and liabilities of the

business.

It is important to understand that balance sheets are prepared at least once a year and are at a

‘point in time’. This means that they are only good for that one point in time.

The accounting convention dictates that a normal accounting period is a year, and tax laws and

other legislation are set upon that basis. In many businesses it may be necessary to report for

different periods based on the location of the business and the location of the businesses head

office.

The balance sheet is essentially made up of three categories;

 Assets

 Liabilities

 Proprietorship/Capital/Owners Equity

Example 1:

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How Many More Budgets To Go! Pty Ltd

Budgeted Balance Sheet as at 31 March 2010

These categories are defined in the definitions section.

PROFIT AND LOSS STATEMENTS

Where the balance sheet shows the financial position of a business at a point in time, the profit

and loss statement shows the position for a period of time. For regulatory purposes, this is

usually a year, but for internal purposes this can be quarterly, monthly, weekly and on occasion

even daily. The shorter periods provide management with the ability to measure how the

business is performing against a previous period or budgeted figures.

It is not uncommon for banks and other lending institutions to request the profit and loss

statement as a means of determining the businesses ability to pay back any money lent. The

purpose of the profit and loss statement is to measure the profit or loss for a period. It does this

by summarising the revenues for the period, and subtracting the expenses from the revenue.

Where the revenues are greater than the expenses, profit results, where the expenses are greater,

a loss.

ASSETS $ $ LIABILITIES $ $

Current Assets Current Liabilities

Bank 10000 Creditors 25000

Debtors 15000 Tax Payable 100000

Stock 28000 Accrued Rent 1500 126500

Prepaid

Insurance

45000 57500

Deferred Liabilities

Fixed Assets Mortgage on Premises 100000

Premises 200000

Vehicles 50000 Owners’ Equity

Machinery 100000 Capital 175000

Loan to AB Ltd 10000 360000 Undistributed profits 16000 191000

Total Assets 417500 Total Liabilities and Owners

Equity

417500

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Tom and Jerry’s Cheese Factory

Budgeted Profit and Loss Statement

for the year to end 31 December 20X5

Budgeted Sales 400000

less Cost of Goods Sold

Budgeted Stock (1 January 20X5) 50000

Budgeted Purchases 250000

300000

Budgeted Stock (31 December 20X5) 40000 260000

Budgeted Gross Profit 140000

less Budgeted Operating Expenses

Selling and Distribution Expenses 70000

Administration Expenses 40000

Financial Expenses 10000 120000

Budgeted Net Profit 20000

CASH FLOW STATEMENTS

Cash is the lifeblood of every company and is not sales. The cash flow statement is produced to

provide management with the information on the liquidity of the business; it shows the

businesses incoming and outgoing money (sources of cash) during a time period. . The

statement should identify any potential cash shortfalls which would require corrective action or

identify any excess cash requirements which could be better utilised within the business (or

invested to earn more income). A statement is an analytical tool used in determining the short-

term viability of a company, in particular, the businesses ability to pay its expenses. The analysis

can be broken down into three core areas;

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 Operating

 Investing

 Financing

Operating Activities include the production, sales and delivery of the businesses products (or

services) as well as collecting payment from its customers and making payment to its suppliers.

Operating cash flows can include;

 Cash receipts from the sale of goods and services

 Cash receipts from the sale of loans, debt or equity instruments

 Interest received from loans issued by the business (may be considered an investing

activity depending on the type of business)

 Tax payments

 Payments to suppliers for goods and services

 Payments to employees (or on behalf of employees)

Investing Activities focus on the purchase of the long-term assets a business needs in order to

make and sell its products.

Investing cash flows include;

 Interest received from loans issued by the business

 Collections on loan principle and sales of other business’s debt instruments

 Receipts from purchase of plant and equipment

 Expenditure for purchase of plant and equipment

Financial Activities include the inflow of cash from investors such as banks and shareholders as

well as the outflow of cash to shareholders as dividends as the business generates income.

Financial cash flows include;

 Proceeds from issuing shares

 Proceeds from issuing short or long term debt

 Payments of dividends

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 Payments for repurchase of company shares

 Repayment of debt principal, including capital leases

The Cash Flow Statement only deals with items which affect the bank account. If it doesn’t

affect the bank account, it does not affect this statement. There are a number of expenses which

specifically fall into this account. The three main non-cash expenses are;

 Doubtful debts

 Discount allowed

 Depreciation

Be mindful when preparing the Cash Flow Statements that these items are not included.

As cash is the lifeblood of the business, it is vital that sufficient controls exist. Businesses control

cash by;

 Setting up controls over payments – irrespective of the size of business procedures

and policies need to be set up to ensure that correct payments are made to the right

suppliers in a timely manner which suits the business

 Using electronic systems – there are many systems available, most of which are a

form of EFTPOS (Electronic Funds Transfer Point Of Sale) and electronic banking

systems. These facilitate the receipt of payments from customers and payments to

suppliers. These have the advantage of reducing the amount of physical cash, theft

and the reduction of bank transaction costs. It is important to ensure that

appropriate audit and fraud controls exist

 Setting up policies and controls over receipts – the collection of money owed to any

business, whether big or small requires systems and controls to ensure the correct,

timely and efficient receipt of money occurs

 Actively managing all of the elements of the operating cycle – the amount of funds

invested in raw materials and inventory, and how quickly this can be turned back into

‘cash.’

DEVELOPING BUDGETS

The process of developing budgets comprises ultimately of four key stages;

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 Preparing budgets & other financial plans

 Collecting actual operating data & information

 Analysing & reporting deviations or variances

 Taking corrective action including revising plans as appropriate

The effectiveness of this process relies on each stage being conducted, reviewed and reported on.

Identifying and understanding why variances have occurred does not assist the business unless

the information has been shared with those in the business who can affect the results going

forward.

Collecting actual operating data and information of a business firstly assumes that the activities of

a business are recorded. In most businesses, this is the case through Point Of Sale (POS)

dockets, invoices, credit card receipts, contracts, quotations, job costing, purchase orders, time

sheets, payroll and other systems. The systems for recording need to meet the requirements for

producing data for meaningful reporting and conform to audit and legal obligations. With any

system, accuracy needs to be paramount and maintaining these systems needs to occur regularly

to ensure all information is gathered and available. All businesses are required to produce reports

in some manner. For some, it is a combination of both internal and external reports, others it is

just the external reporting for legal and professional requirements. Both kinds of reporting assist

in controlling the processes within a business.

Analysing and reporting deviations or variances need to occur in a timely manner to ensure that

corrective action can occur promptly. Depending on the requirements of the business, different

reports will be disseminated to different levels of the business. Generally the higher up the

report goes in an organisation, the more summarised the version is. The most detailed reports

are sent to the departmental managers to act on.

Budgets are only as effective as the information used to prepare them and the people involved in

monitoring the results. Without the final stage of review preparing budgets is merely an exercise

in plotting numbers. The process of reviewing the budget numbers requires the actual numbers

to be plotted against the budget and any variances identified. A variance is any amount which

arises between the budget and actual figures. Once a variance has been identified, it is necessary

to understand why a variance has occurred. Is it due to poor planning in the budget preparation

stage? Did something occur in the environment which resulted in the difference? Was there

over/under spending? Sales, how did they perform, did the marketing work?

Given so many items contained within budgets and many of them likely to result in a variance,

many businesses determine an acceptable variance amount. This is the material amount or

percentage that identifies which specific items will be investigated. It is important to remember

however that there are rules around this, it is not appropriate to not investigate sensitive figures

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merely because the results are unfavourable. The most fundamental rule is; all variances

exceeding 5% or $1000 must be investigated. NOTE: these amounts are examples; a business

will determine what is appropriate as each business is different. Coles would not bother about a

variance of $1000. However, a small retail store may be concerned with a variance of over $500.

The main message however that is once the rule has been determined it applies to all results and

any item which falls outside of the rule must be investigated and reported on.

Reporting variances is vital to the budgeting process. It is through understanding the differences,

clarification on the operation of the business can occur. The projections initially planned, have

they been realised as expected? If not, why not? If they have, was it through good planning or

luck. Understanding why you have succeeded is just as important as understanding why things

have not occurred as expected. By reviewing the actual figures compared to budget regularly,

management is provided with an early warning system should the results start deviating from the

expected. Should this occur, changes may be needed to the original budget. Contingency plans

may need to be developed, or if already developed, implemented.

ACCOUNTING PRINCIPLES

Accounting has been around for many years and over that time a number of Accounting

Principles have been developed as a standard by which all accounting is applied. These principles

are essential for the preparation of budgets and must be adhered to for regulatory purposes.

Below is a list of the most commonly accepted principles and their definitions.

 Business Entity

The accounts are accurate records of the business activity – for accounting purposes, each

individual business organisation is an isolated entity, separate from owners, employees, managers

and other business entities.

 Historical Cost Concept

All transactions are recorded at original cost (not the value of the item today). Accounting

reflects past and historical events.

 Going Concern

Assumes the business is ongoing and not being ‘wound up’ – the business will continue

indefinitely.

 The Accounting Period

Financial statements cover certain fixed periods, i.e. weekly, monthly, quarterly, annually.

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 Objectivity

Transactions are recorded on the basis of objective and verifiable evidence.

 Conservatism

Use the figure that will result in a lower end profit.

 Consistency

Using the same methods of accounting over different periods.

 Materiality

Items reported have a material impact on the accounts. (The exclusion of cents in the accounts

is not considered ‘material’).

BUDGETING APPROACHES

There are a number of different approaches to budgeting, and as with budgeting as a whole, it

depends on the type of business, the industry and the management style. The approaches listed

below detail the most common utilised in business, these may be used at differing stages of a

business’s life.

 Unit Cost budgeting

o Linkage of financial information to activity levels

o Identify all of the costs associated with a delivery of a unit of service or

product.

o Enables comparison across areas or products/services.

 Bottom Up budgeting

o Identifies the different resources tied up in delivery and attaches a value to

each.

o Need to identify every detail.

o Complex and time consuming to perform.

 Top Down budgeting

o All relevant expenditure is assembled and divided by units of activity.

o Difficult to ensure consistency in definitions when comparing areas across an

organisation.

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o Difficult to ensure all areas of expenditure have been identified.

 Zero Based budgeting

o Common approach in current economic crisis

o Managers create budgets from scratch

o Identify every single line of expenditure and scrutinise it – regardless of

previous history or performance.

o Requires a lot of time and effort.

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PREPARE CONTINGENCY PLANS IN THE EVENT THAT

INITIAL PLANS NEED TO BE VARIED

When making plans, in any situation, it is vital to be aware of and prepare a contingency plan.

Contingency plans deal with the ‘what if’ scenarios. With no crystal balls handy, it can be

difficult to prepare for every scenario, however, understanding what can go wrong assists in the

planning process.

In recent times, there has been a number of ‘extreme situations’ affecting businesses, many of

which, at the time, there were no contingencies in place. Now with the benefit of hindsight,

plans and processes can exist to limit the effect or increase the recovery that some of these

‘extreme situations’ can cause.

Some examples of these situations include but are not limited to;

 The world Economic Crisis

 9/11

 Natural Disasters

o Victorian Bush Fires

o Hurricane Katrina

o Flu Pandemics

 Climate Change

 Mining Boom in Western Australia and Queensland

Many businesses fail to make contingency plans as it is seen as ‘counter’ cyclical to all the other

initiatives in the business’ which are predicted on the ‘status quo’. Essentially meaning that all

other plans are based on what has occurred in the past.

Contingency planning competes for the same resources in the business, time and money without

any visible return on that investment, unless something goes wrong and it can be executed.

However, pending disasters do occur and an organisation without a contingency plan is far more

likely to suffer greater damage and take longer to recover than one with a well thought out plan.

There are costs associated with a ‘no response’ plan and the opposite an ‘over responsive’ plan.

The key is to get the risk assessment right and balance the investment in the recovery plan

against the potential cost and likelihood of the disaster

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A good example of both was the responses to the Y2K (Year 2000) issue. This issue was a

potential programming problem in worldwide computer software which was sensitive to the “00-

99” fields in date sensitive programs.

Businesses response to this potential disaster covered the whole spectrum. Many businesses and

some countries (China) largely ignored the issue. Other business and some countries (USA and

Australia) became obsessed with the issue. This overreaction was mainly in the area of legal

compliance in the event of a major supply chain failure.

Both responses proved to be wrong. The ‘disaster ‘did not eventuate but some companies did

experience problems which could have been avoided. On balance, it is arguable that the whole

Y2K issue did little to support the argument for organisations to develop contingency plans for

extreme situations. No doubt 9/11 and Katrina had the exact opposite effect.

So where do these events place contingency planning within the business environment? Simply

put a contingency plan prepares the business to respond coherently to an unplanned event. It can

also be seen as the Plan B when expected results fail to materialise

The process of developing a plan involves the convening of a team representing all areas of the

organisation. The task of this cross-functional team is to identify;

 The nature of the extreme situation

 The potential risk involved

 The likely impact on the business

 The costs associated with the plans implementation

 A recovery plan

The process of developing a contingency plan will require, as do all business projects, its own

budget and a critical path with defined milestones. Such a critical path will;

 List all the activities of the plan

 Establish the interdependencies of each activity

 Determine the resources and time required by each activity

 Determine the sequences of each activity

 Track and test the progress of the plans development.

The Contingency Planning team should not only involve all areas of the business but be driven

by representation for the senior management team. The team should also have a good cross

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section of ‘diverse’ thinkers. The need for a ‘whole’ brain approach is critical to the development

of a successful plan.

The nature of the plan will be to test the business plan assumptions and this will involve the

testing of the labour market strategy which underpins the business plan.

More often than not the contingency plan will be about external factors but not always. A

contingency plan is just as valid for unplanned events within the business. One of these events

could be rapid unplanned growth. Labour strategies should be able to address both

contingencies. i.e. rapid growth or rapid contraction. The development of a flexible labour

structure is a good platform on which to build a responsive contingency to either of these events.

INITIATIVES TO SUPPORT WORKFORCE PLANNING OBJECTIVES

“People hate change, but without change there would be no progress.”

Anon circa 1800.

Despite 200 years of progress, this maxim still holds true today. Structural change in any

organisation will be opposed and resisted in some quarters. The key is to develop a sense of

ownership for the proposed change. The first task in achieving ownership is the WIIFM

test…..what’s in it for me.

People need to know what the change is. Why it is being made. How it will impact on them.

Failure to cover off on these issues will spell failure in the WIIFM test.

Managing effective change requires the following steps.

 A clear vision

 The ability to model the way

 The pressure for change

 The capacity for change

 Actionable first steps

 Reinforcement and consolidation

Without each of these steps, the effort to effect sustainable change will fail.

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TOPIC 2 – IMPLEMENT FINANCIAL MANAGEMENT APPROACHE S

DISSEMINATE RELEVANT DETAILS OF THE AGREED

BUDGET/FINANCIAL PLANS TO TEAM MEMBERS

COMMUNICATE THE BENEFITS OF COST CONTROL

Engaging staff members on the benefits of cost control depends highly upon the existing rapport

and camaraderie of teams and the nature of the measures of cost control themselves.

Cost control measures that are perceived as inconvenient, unnecessary or petty are likely to be

more negatively received by staff particularly if they have not been consulted throughout the

process of developing potential avenues for cost control. When this occurs, staff members

commonly feel disregarded and taken advantage of.

Businesses that effectively implement cost control measures consider their teams both during the

development phase of measures and when deciding upon the most appropriate measures to

implement.

They ensure:

 Staff are part of the stakeholder group consulted when developing cost control

strategies

 They have a voice in deciding which cost control measures are most appropriate and

most achievable in their context

 They are part of the discussion setting cost control targets and timeframes

Taking this approach significantly increases the likelihood of uncovering concerns and resistance

prior to launching a cost control strategy and increases the likelihood of engagement and

commitment to the goals.

Staff members who have been part of the process are invested in the outcomes and are more

commonly positive about any additional discretionary effort that may be required to achieve the

desired outcomes. The win is then theirs and becomes an increase in team cohesiveness.

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INSPIRE INDIVIDUAL ACCOUNTABILITY

All change occurs in the individual first. It is for this reason that winning the hearts and minds of

individual staff is necessary when attempting to inspire any change in behaviour is teams.

Ideally, managers should be aware of the relative enthusiasm and influence of their individual

team members and take steps to involve and inspire those individuals that are naturally highly

influential over other team members.

Their involvement, endorsement, support and enthusiasm for any initiative, particularly ones that

may be perceived as slightly undesirable or inconvenient will do far to ensuring comprehensive

team buy-in.

It is possible to get creative and implement motivational strategies such as individual and team

incentives that act as drivers of change. Remembering most cost control measures require a

change in some form from individuals and teams, incentives may be beneficial is resistance is

high.

However, it is always preferred to engage the hearts and minds of people through inspiration

rather than reward as the use of a reward increases the likelihood of the new desired behaviour

being anchored to reward, when the reward is removed as it will be over time the behaviour goes

back to normal.

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PROVIDE SUPPORT TO ENSURE THAT TEAM MEMBERS CAN

COMPETENTLY PERFORM REQUIRED ROLES ASSOCIATED

WITH THE MANAGEMENT OF FINANCES

DEVELOP FEEDBACK MECHANISMS TO ACTION RECOMMENDATIONS

When consulting with teams to work on the development of cost control measures it is necessary

to embed methods of feedback to action recommendations for improvement.

When significant cost cutting measures are required or the business runs multiple locations,

consultation can occur over geography and time. Ensuring key suggestions and

recommendations get back to the key decision makers allows businesses to take advantage of and

endorse cost control opportunities that may differ across the business.

It is important that each is considered, modified as required, and endorsed in a timely fashion so

teams can implement their ideas while the momentum is still with them.

Having a long drawn out approval process can result in teams losing their excitement and

enthusiasm for initiatives they have devised and the opportunity to maximise cost control via that

means may be diminished.

Businesses can ensure a streamlined feedback mechanism by creating a formal ideas process that

outlines the format ideas should be communicated in and the lines of communication they

should follow.

To illustrate,

A large business with multiple sites may implement a cost control initiative and canvas teams for

ideas.

They may stipulate that ideas must be shared with direct management outlining the idea, how it is

to be implemented and any potential barriers by a given date.

The process need not be complex. However, it must be clear and include a description of how

recommendations will be considered and feedback forwarded to those making the

recommendations.

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DETERMINE AND ACCESS RESOURCES AND SYSTEMS TO

MANAGE FINANCIAL MANAGEMENT PROCESSES WITHIN

THE WORK TEAM

Financial management deals with the planning and overseeing of an organisation’s financial

resources. This includes planning, organising, directing and monitoring, of finances in ways that

are beneficial to the company in order to reach the company’s resources in efficient and

productive ways to achieve organisational objectives. To do this, the organisation must ensure

employees have access to the necessary resources, to perform their functions efficiently and

effectively.

The budget recognises resources and systems available, which include sufficient qualified staff,

electronic management systems, secure record-keeping procedures, well-maintained equipment,

adequate available funds and adequate time to meet deadlines. Management needs to ensure the

availability of these resources, and that they are used efficiently in order to manage the

organisation’s financial processes.

As well as the management of the budget, management also needs to oversee the responsibilities

and financial activities of team members such as purchasing, payroll and banking.

HUMAN RESOURCES

There needs to adequate staff numbers in order to cope with the numerous financial tasks and

responsibilities within your team such as, debt collection, handling the petty cash system,

purchasing and so on, as well as the other team-specific tasks such as sales, marketing,

administration and so on. Additional staff may be necessary if you believe understaffing is an

issue. Staff numbers required should be identified when planning the team’s budget. Outsourcing

and contracting of extra staff may be necessary in order to meet your budget, or look more

closely at the structure of the team and monitor the effectiveness of full-time, part-time and

casual employees.

Team members also need the appropriate training to carry out their duties effectively. The

efficiency with which team members perform should be regularly monitored identify any skills or

knowledge deficiencies and plans structured to address them as appropriate. Poorly trained staff

can make meeting team and organisational goals within the allocated budget difficult.

PHYSICAL RESOURCES

Managing finances effectively means that a manager needs to make sure their team has the

physical resources required to work efficiently and productively. This may include office or

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useable space, office supplies, furniture, storage, computers and machinery, all of which must be

maintained and in good working order.

Identification of appropriate and cost-effective physical resources is an integral component of

budget planning, so ensure the needs of the team have been determined precisely. It may be that

leasing or hiring equipment is more economically feasible, or purchasing second-hand goods are

more cost-effective than new. Organisational purchasing or procurement policies should be

followed, practices and procedures monitored, and report on physical resources and asset life

expectancy. This ensures that finances allocated to these items are well managed. Poorly managed

equipment may lead to increased breakdowns and loss of time and money.

TIME

Time management an essential skill used to ensure that time is used effectively and not wasted on

performing irrelevant tasks which could be delegated to others. Delegation of tasks to the wrong

person can be excessively time-consuming. As a manager, one needs to set deadlines, delegate

authority, streamline procedures and communicate expectations and requirements through

appropriate channels in a time efficient manner. Following up on deliverables from others and

training your staff to carry out their responsibilities efficiently are vital. Make sure staff tell you if

timelines are not being met as this impacts on your budget, and contingency plans may need to

be implemented in order to restore designated time frames.

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TOPIC 3 – MONITOR AND CONTROL FINANCES

IMPLEMENT PROCESSES TO MONITOR ACTUAL

EXPENDITURE AND TO CONTROL COSTS ACROSS THE

WORK TEAM

Businesses need to ensure there are effective means of monitoring and reporting of budgets. In

order for this to occur the following needs to take place;

 Develop and implement a budget timetable. This timetable needs to include the

monitoring of budgets and strict controls in place to ensure it is met. This system

needs to ensure that financial and activity data be current, accurate and available to

management in a timely manner. The timetable also needs to enable regular reports

to be produced and acted upon.

 As a minimum, these reports need to be developed and circulated monthly, although

more regular timeframes often exist. In order to do this, it is necessary to implement

an efficient approach to the closure of accounts and incorporating essential

information such as outstanding accounts receivable and payable into the next period.

This will ensure that accurate information exists for early monitoring.

 Whilst reporting arrangements need to be ‘bottom up’, the response to monitoring

information needs to be from the ‘top down’ (see an explanation of these terms

previously mentioned in the notes). Budget holders need to be seen as the persons

accountable for taking action whilst it may actually be performed by less senior

managers within the business.

 The monitoring of reports needs to include statements of actual expenditure and

forecasts of expenditure to the year-end arising from known commitments and

expected changes in terms of new commitments and the termination of product or

services.

COMPUTERISED SYSTEMS

The introduction of computers into businesses has opened up the ability to generate meaningful

reports, in many cases, at a touch of a button. Computers are in many regards far more accurate

in recording and collating information than humans. However they are still fallible and steps

need to be taken to ensure they remain accurate and a useful tool to businesses.

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Apart from this, the following information is desirable in the businesses computerised financial

system;

 Record financial commitments when a plan is authorised or amended

 Record actual expenditure and income

 Automate as far as possible the processing of payments to creditors

 Record costs of services at the individual level, irrespective of whether the sources of

service are an external or internal provider

 Support the financial assessment and billing processes

 Provide financial projections

 Integrate seamlessly financial management systems, including automatic recognition

 Provide appropriate management, audit and exception reports

 Export data to spreadsheets or other data systems

 Enable sharing of information with other agencies and individuals

PRINCIPLES OF SPREADSHEET USE

1. Determine what role spreadsheets play in your business, and plan your spreadsheet

standards and processes accordingly.

2. Adopt a standard for your organisation and stick to it.

3. Ensure that everyone involved in the creation or use of spreadsheets has an

appropriate level of knowledge and competence.

4. Work collaboratively, share ownership, peer review.

5. Designing and building your spreadsheet

6. Before starting, satisfy yourself that a spreadsheet is the appropriate tool for the job.

7. Identify the audience. If a spreadsheet is intended to be understood and used by

others, the design should facilitate this.

8. Include an ‘About’ or ‘Welcome’ sheet to document the spreadsheet.

9. Design for longevity.

10. Focus on the required outputs.

11. Separate and clearly identify inputs, workings and outputs.

12. Be consistent in structure.

13. Be consistent in the use of formulae.

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14. Keep formulae short and simple.

15. Never embed in a formula anything that might change or need to be changed.

16. Perform a calculation once and then refer back to that calculation.

17. Avoid using advanced features where simpler features could achieve the same result.

18. Spreadsheet risks and controls

19. Have a system of backup and version control, which should be applied consistently

within an organisation.

20. Rigorously test the workbook.

21. Build in checks, controls and alerts from the outset and during the course of

spreadsheet design.

22. Protect parts of the workbook that are not supposed to be changed by users.

MONITOR SALES, REVENUE AND EXPENDITURE DATA

Early in the budget cycle the managers should create key financial documents for the coming

budget period.

The required documents are:

 Balance Sheet

 Profit and Loss

 Cash Flow reports

The key financial target areas are cash flow and profitability and they need to be tested to

evaluate whether targets are likely to be met. If results fail to meet targets they must either change

their plans or revise their targets, or both.

Once it appears that the targets will be met, more detailed budgets can be built with plans for

running the business, (such as a category buying plan, a marketing plan, and training plan etc.).

When these three reports are used in this way, they are often called Pro-forma Budget

Statements.

At the end of the budget period, these statements are again prepared, this time comparing actual

performance with the budgeted figures for previous periods.

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The use of proforma budget statements can assist managers in monitoring sales, revenue and

expenditure data throughout the financial period in question. This is important as a frequent

comparison of actual performance against budget targets allows managers to have an up to date

take on the performance of their business relative to targets and a perspective on business that

addresses areas of concern proactively.

CASH FLOW

One of the biggest problems facing small to medium sized businesses is the level of liquidity they

have, or, in other words, their ability to meet their financial obligations when they fall due. Often

these businesses will still be trading and may show a profit on paper but find themselves

insolvent.

The Cash Flow Statement tells how a business uses and generates its most important asset –

cash. Without cash to pay the bills when they are due, a business cannot continue and must go

into liquidation. Consequently, cash management is just as important as being able to generate

profit. Some argue that it is more important, because it is possible to be profitable and still not

have enough cash to continue to operate. However, being profitable does not by itself pay the

bills. If cash is squandered (for example, by building a new office that costs a lot, but does not

produce an increase in revenue) then the business will have to close if it has insufficient cash to

pay its debts and meet its obligations.

The table below shows a basic cash flow from operations report for a retailer in the month of

July. This report includes cash in (receipts), cash out (expenditure) and the cash balance as a

result of the inflows and outflows.

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Fashion Store X

Statement of Cash Flows for March

Receipts

Cash received from previous credit sales $ 7,500

Cash received from cash sales $ 55,000

(1) $ 62,500

Expenditure

Cash paid for labour $ 11,000

Cash paid for rent $ 8,500

Cash paid for marketing services $ 800

Cash paid for stock $ 31,300

Cash paid for Equipment $ 750

(2) $ 52,350

Cash increase during March (1) minus (2) $ 10,150

Cash at start of March $ 17,200

Cash at end of March $ 27,350

As well as the core operations of a business, the Cash Flow Statement considers all other

elements of the cash movement within an organisation. These can be grouped into three separate

sub-headings:

 Cash flow from operations (trading, or carrying out the core business).

 Cash flow from investing (buying and selling non-current assets).

 Cash Flow from financing activities (raising or retiring equity, or long-term debt).

The diagram below illustrates the movement of cash within a retail business. The primary

movement is from ongoing operations; however businesses may have other income and

payments. Where business rely on receiving cash from third parties (accounts receivable), it is

important that this money is paid in a timely fashion. If businesses have to wait a long time to

receive their cash payments, they may find themselves running out of cash and having cash-flow

difficulties.

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In the following spreadsheet we illustrate the peaks and troughs of a trading year and the

importance of working capital to ensure that the business can manage the cash outflow

requirements that come with the seasonality of the retail calendar.

Accounts

payable

Accounts

receivable

Other payments

•Equipment purchases •Loan payments •Taxes •dividends

Other income

•Loans repaid

•Equity payments

•Sale of assets

Stock &

Services

Cash from ongoing

operations

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Sample Cash Flow

July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June

Cash in-flow

(Sales)

$70,00

$60,00

$55,00

$75,0

$95,0

$250,

000

$65,00

$50,00

$55,00

$60,0

$65,0

$60,0

Owners Funds

Injection

Total Cash In-

Flow

$70,00

$60,00

$55,00

$75,

000

$95,0

$250,

000

$65,00

$50,0

$45,00

$60,0

$65,0

$60,0

Expense

Payments

Cash Out-

Flow- Stock

$35,00

$30,00

$27,50

$65,0

$110,

000

$30,0

$32,50

$25,00

$27,00

$30,0

$28,0

$30,0

Rent &

Outgoings

$12,91

$12,9

$12,91

$12,9

Power $700 $700 $700 $700 $700 $700 $700 $700 $700 $700 $700 $700

Staff Amenities $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100

Internet $79 $79 $79 $79 $79 $79 $79 $79 $79 $79 $79 $79

Printing and

Stationary $167 $167 $167 $167 $167 $167 $167 $167 $167 $167 $167 $167

Insurance $517 $517 $517 $517 $517 $517 $517 $517 $517 $517 $517 $517

Workcover $333 $333 $333 $333 $333 $333 $333 $333 $333 $333 $333 $333

Accounting

and Legal Fees $186 $186 $186 $186 $186 $186 $186 $186 $186 $186 $186 $186

Local Area

Marketing $760 $760 $760 $760 $760 $760 $760 $760 $760 $760 $760 $760

Bags and

Wrapping $700 $700 $700 $700 $700 $700 $700 $700 $700 $700 $700 $700

Franchise Fee $3,500 $3,000 $2,750 $3,75

$4,75

$12,5

00 $3,250 $2,500 $2,750

$3,00

$3,25

$3,00

Advertising Levy $2,100 $1,800 $1,650 $2,25

$2,85

$7,50

0 $1,950 $1,500 $1,650

$1,80

$1,95

$1,80

Telephone $700 $700 $700 $700 $700 $700 $700 $700 $700 $700 $700 $700

Rates and Taxes $597 $597 $597 $597 $597 $597 $597 $597 $597 $597 $597 $597

Sub-Total

Cash Out-flow

$58,35

$52,55

$49,65

$88,

756

$135,

356

$67,7

$55,45

$46,7

$49,15

$52,5

$50,9

$52,5

GST

GST Paid

(Credits) $5,306 $4,778 $4,514

$8,06

$12,3

$6,16

0 $5,041 $4,251 $4,469

$4,77

$4,63

$4,77

GST Collected $6,364 $5,455 $5,000 $6,81

$8,63

$22,7

27 $5,909 $4,545 $4,091

$5,45

$5,90

$5,45

Net GST $2,221 $11,6

48 $785

$2,63

PLUS:

Other

Payments

Bank charges $662 $662 $662 $662 $662 $662 $662 $662 $662 $662 $662 $662

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If we simplify this table to show just the key lines, we can see the inflow of cash, the outflow of

Stock Purchases, wages and then total cash outflows. If we view the result of all this inflow and

outflow as the cash in the bank at the end of each month, we can see that some months increase

the amount of cash in the bank and some months reduce the amount of cash in the bank.

Salaries, Wages $8,000 $7,000 $7,000 $7,0

$8,00

$18,0

$10,00

$7,00

0 $7,000

$7,00

Staff

Superannuation $720 $630 $630 $630 $720

$1,62

0 $900 $630 $630 $630 $630 $630

Loan

Repayments $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Proprietors

Wages

Total

Other

Payments

$9,382 $8,292 $8,292 $8,2

$9,38

$20,2

$11,56

$8,29

2 $8,292

$8,29

Total

Payments

(outflow)

$67,73

$60,84

$60,16

$97,

048

$144,

738

$99,6

$67,01

$55,0

$58,23

$60,8

$59,2

$63,4

Cash In flow –

Cash Outflow $2,262 -$848

–

$5,169

–

$22,0

–

$49,7

$150,

314

–

$2,018

–

$5,048

–

$13,23

-$848 $5,75

–

$3,47

Cash at Bank

(Month

beginning)

$0 $2,262 $1,414

–

$3,75

–

$25,8

–

$75,5

$74,77

$72,75

$67,70

$54,4

$53,6

$59,3

Cash at Bank

(Month End) $2,262 $1,414

–

$3,755

–

$25,8

–

$75,5

$74,7

$72,75

$67,70

$54,47

$53,6

$59,3

$55,9

July Aug Sept Oct Nov Dec Jan Feb Marc

h April May June

Total

Cash

In-Flow

$70,0

$60,0

$55,0

$75,0

$95,0

$250,

000

$65,0

$50,0

$45,0

$60,0

$65,0

$60,0

Expense

Payments

Cash Out-

Flow-

Stock

$35,0

$30,0

$27,5

$65,0

$110,

000

$30,0

$32,5

$25,0

$27,0

$30,0

$28,0

$30,0

Sub-Total

Cash Out-

flow

$58,3

$52,5

$49,6

$88,7

$135,

356

$67,7

$55,4

$46,7

$49,1

$52,5

$50,9

$52,5

Salaries,

Wages

$8,00

$7,00

$8,00

$18,0

$10,0

$7,00

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This table shows that the business started the year with $0 in the bank and finished the year with

$55,900 so the business did contribute a positive cash flow; however the month by month

performance shows that in the three months leading up to Christmas the business was in a

negative cash position as it funneled money into stock and wages. This illustration highlights the

cash-flow pattern of many Australian retail businesses.

This example illustrates the need for managers to be on top of their cash position and effectively

manage their cash flow in addition to the management of sales revenue and expenditure.

Together they form the basis of effective financial monitoring.

MONITOR EXPENDITURE AND COSTS ON AN AGREED

CYCLICAL BASIS TO IDENTIFY COST VARIATIONS AND

EXPENDITURE OVERRUNS

Organisations monitor and evaluate actual results against approved budgets to guide current and

future decision-making and hold managers accountable for performance.

Key processes to effectively manage approved budgets include:

 Monitoring and reporting against internal budgets on a consistent and regular basis to

assess whether targets are being met, to guide decision-making and enforce

accountabilities

 Revising the internal budget through a controlled and coordinated process that

maintains clear lines of accountability between budget estimates and actual results;

Total

Other

Payments

$9,38

$8,29

$9,38

$20,2

$11,56

$8,29

Total

Payments

(outflow)

$67,7

$60,8

$60,1

$97,0

$144,

738

$99,6

$67,0

$55,0

$58,2

$60,8

$59,2

$63,4

Cash In

flow –

Cash

Outflow

$2,26

2 -$848

–

$5,16

–

$22,0

–

$49,7

$150,

314

–

$2,01

–

$5,04

–

$13,2

-$848 $5,75

–

$3,47

Cash at

Bank

(Month

beginning)

$0 $2,26

$1,41

–

$3,75

–

$25,8

–

$75,5

$74,7

$72,7

$67,7

$54,4

$53,6

$59,3

Cash at

Bank

(Month

End)

$2,26

$1,41

–

$3,75

–

$25,8

–

$75,5

$74,7

$72,7

$67,7

$54,4

$53,6

$59,3

$55,9

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 Forecasting to manage gaps between budget estimates and actual results to quickly

identify and respond to changes in the external environment or internal activities

 Reviewing and improving internal budget processes by monitoring the accuracy and

timeliness of budget setting processes to identify areas for improvement

To monitor your expenditure and costs, you could use a simple cash book to record all your

business expenses and sales. This should be done regularly and compared, month by month,

against your projections. This way you can see if you are on target.

The best way to monitor business expenditure is to have it recorded on your computer. There

are many software programs specifically designed to help monitor money in and money out of

the business. In larger organisations, you will always have a computerised system for monitoring.

Beginners in business often think that it is easiest to record all financial matters in one document

or book. However, if documents are going to provide information and ensure control, you will

need separate documents for each specific type of transaction.

Financial transactions include:

 Cash sales and purchases

 Purchases of business assets

 Petty cash

 Cheque purchases

 Credit card sales and purchases

A Cashflow forecast is the best way to understand and prepare for business expenses over a

twelve month period.

The Cashflow forecast shows the monthly flow of cash into and out of the business over a

twelve month period. It shows when money ought to be paid out, and when you would expect to

receive money into the business.

The Cashflow forecast predicts liquidity, which means having enough cash to pay all bills when

they are due.

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IMPLEMENT, MONITOR AND MODIFY CONTINGENCY PLANS

AS REQUIRED TO MAINTAIN FINANCIAL OBJECTIVES AND

REPORT ON BUDGET AND EXPENDITURE IN ACCORDANCE

WITH ORGANISATIONAL PROTOCOLS

CONTINGENCIES

Many businesses use budgeting as a management tool to plan for future activities, allocate

competing resources and evaluate team performance. Budgets mostly deal with estimates and

projections that management makes based on what is known, as well as projected future

uncertainties. The budget contingencies method purposely incorporates certain risk factors into

the budgeting process to help a business better prepare for potential contingencies. Management

may also use the budget contingencies method to its own advantage for meeting performance

goals.

Once you have contingency plans in place, you may need to monitor and change them as

required.

Be careful not to rely too heavily on contingency plans as they may overstretch a business’s

resources and result in unrealistic projections.

RISK MANAGEMENT

Compared to non-contingency budget methods that do not plan for potential unknowns, the

budget contingency method sets aside additional resources that can be drawn on if the

unexpected happens in future business activities. Using the budget contingency method, a

business has the advantage of carrying out better risk management. Business risks are perceived

future uncertainties based on management past experiences, such as price fluctuations, changes

in cost structure due to product or service modifications or other projection errors and

omissions. Management often is aware of these risk factors, and not including them as part of the

estimates could render a budget potentially unreliable.1

MEASURING PERFORMANCE

1 http://smallbusiness.chron.com/advantages-disadvantages-budget-contingencies-method-41296.html

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In measuring budget performance, organisations monitor how closely budget estimates match

the actual results. This ensures financial control and allows for the identification of necessary

changes. Monitoring budget accuracy is the responsibility of all managers.

Effective monitoring of budget performance requires that managers are provided with relevant,

accurate and timely information appropriate to their level of responsibility. Managers to

providing clear and consistent feedback in a timely manner about underlying causes of variations,

as well as planned actions to manage variations for which they are accountable, are also

imperative for effective budget monitoring.

REPORT BUDGET PERFORMANCE

Internal reporting processes which follow the monthly financial close and may involve the

finance departments preparing or releasing the details of actual results against budget to line

management. These are then evaluated and explained. Results are summarised and provided to

senior management. These assist senior management in decisions at the organisation level.

Importantly, senior management’s review and analysis of budget performance are then

communicated to relevant operational managers.

Budget estimates and actual results are reviewed on a regular basis – monthly for most

organisations. The process needs to be understood across the organisation and is critical to

effective monitoring and reporting of budget performance. Careful designing of financial reports

is necessary for effective review and analysis of budget versus actual information. Financial

reports should be easily relevant, easily understood, and user-friendly.

Effective financial reporting is likely to be enhanced when reports are prepared specifically for

each level of budget accountability and summarised for each level of management as. When

organisational accountabilities and output differ (for example, where a manager has both branch

and output responsibilities), budget-to-actual financial reports should be designed to enable the

accurate budget assessment against both accountabilities.2

The final piece of effective financial management in a business context is the reporting to key

stakeholders of business financials for the period in question.

Whilst commonly we focus upon the dissemination of information to key stakeholders such as:

2 http://www.anao.gov.au/~/media/Uploads/Documents/developing_and_managing_internal_budgets1.p df

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 CEO

 CFO

 Regional manager

 Departmental managers

 Shareholders (via other formalised avenues)

…it is important not to forget those who made it all happen.

Sharing successes with teams is one of the most rewarding parts of business management and

taking the time to celebrate achieving budget is an investment in team camaraderie and

performance in the following period.

It is essential also to share challenges, and in periods when budget has not been achieved an open

discussion with teams as to the reasons behind poorer than expected performance can help heal

wounds, source potential strategies for the future, and regroups with renewed focus for

tomorrow.

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TOPIC 4 – REVIEW AND EVALUATE FINANCIAL MA NAGEMENT

PROCESSES

COLLECT, COLLATE AND ANALYSE DATA AND

INFORMATION ON THE EFFECTIVENESS OF FINANCIAL

MANAGEMENT PROCESSES WITHIN THE WORK TEAM AND

IDENTIFY, DOCUMENT AND RECOMMEND ANY

IMPROVEMENTS TO EXISTING PROCESSES

In order to evaluate the performance of a business, it is necessary to have a set of standards in

which to measure and compare against. This means of measurement should not change from

one year to the next otherwise the effectiveness of the tool is lost. Most businesses analyse their

performance using the ratio analysis method which involves comparing their present results with

one or more of the following:

 Results obtained from previous years activity (this is best used when more than two

years can be obtained to view trends)

 Industry averages

 Competitor’s results

 Absolute standards

A comparison using the above standards enables the business to see its strengths and weaknesses

which may lead to corrective action taken by management. For example, if debtors are allowed

30 day terms, and an evaluation of the time taken to collect from debtors reveals that currently

55 days is being taken, then management should take measures to encourage quicker collections.

This shows that the absolute standard is not being achieved.

One of the most effective means of evaluating a business and in particular, comparing it from

one year to the next, to competitors or to an industry standard is by the use of ratios. Ratio

analysis essentially eliminates the size of the business and brings all results down to its simplest

form. In essence, ratios can be used to compare Cole’s supermarkets with the local corner store

to see which business is performing better. The size of the profit is not necessarily an indicator

of a better performing business.

Profitability ratios enable management to evaluate how profitable the activities of the business

have been during the financial year.

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Financial stability ratios indicate either short term or long term positions. The short term ratios

enable management to evaluate whether the business is likely to have difficulties in meeting

financial commitments in the upcoming twelve months. That is the solvency or cash position of

the business. Long term ratios enable management to determine whether the mix of funding

between equity and debt capital is appropriate to ensure long-term growth and viability in the

long term (greater than 12 months).

The main ratio groups can be classified as follows;

 Liquidity (short term)

 Activity (short term and profitability)

 Leverage ( long term)

 Profitability (profitability)

 Market-related (profitability)

LIQUIDITY RATIOS

Liquidity ratios measure a business’s ability to meet its financial obligations in the short term.

The minimum ratios are the working capital ratio and the quick asset ratio.

Working Capital ratio (current ratio) Current Assets

Current Liabilities

This ratio tells of the businesses ability to cover current liabilities from current assets. In the

event that the creditors called in all the debts, could the business pay them off? If the ratio is less

than one (1), the business may have difficulties paying its debts in the short term. Ideally this

ratio should be 2 or more. Obviously the higher the figure, the better the position of the

business is in (with regard to this ratio). If the ratio is 2, then it means that for every $1 of debt

the business has $2 of current assets to cover the debt.

Quick Asset ratio Current Assets – Stock

Current Liabilities – Overdraft

This ratio relates to the businesses immediate ability to pay debts. Should it be less than 1, the

business will probably be in financial difficulty and could be susceptible to severe cash flow

problems, legal action, wind up.

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ACTIVITY RATIOS

Activity ratios measure the effectiveness of a businesses use of its assets, with a particular focus

on the generating levels of turnover.

Inventory Turnover Cost of Goods Sold

Average inventory

Accounts Receivable Turnover Credit Sales (at market prices)

Average Accounts Receivable

These ratios indicate the number of times a year that inventory and debtors are turned over

(obtained and then disposed of). The more that these are turned over each year or each period,

the better the position of the business is. In both cases, the average is found by adding the

opening and closing values and dividing by two.

Average Collection Period Average Accounts Receivable

Average Daily Credit Sales

Where credit sales are divided by 365 to determine the average daily sales; OR

365

Accounts Receivables Turnover Ratio

This shows the amount of time taken to collect money from debtors in terms of days. Most

businesses request debts to be settled on 30-day terms, this would then be the standard to

compare results to. If debtors are taking 45 days to pay, (this is more than the 30 days provided),

management should take corrective action. To assist management in controlling accounts

receivable, many businesses prepared an Aged Debtor listing to show the outstanding age of the

debt.

Total Asset Turnover Sales

Average Total Assets

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The asset turnover ratio gives the level of sales that has been generated by the average assets for

the period. Average assets are used because a business may not have all assets for the full year,

so sales are based on opening and closing balances. Average Total Assets is obtained using the

following formula;

Total Assets opening balance plus Total Assets closing balance

Fixed Asset Turnover Sales

Average Fixed Assets

The fixed asset turnover ratio estimates the generation of sales from the average fixed assets held

by the business. Ideally more non-current assets should generate more sales.

Average Fixed Assets is obtained using the following formula;

Fixed Asset opening balance plus Fixed Assets closing balance

LEVERAGE RATIOS

Leverage ratios measure the proportion of debt funds in a business’s capital structure to the total

assets. It is possible to determine the proportion of total assets that has been financed by debt

(or capital).

There are a number of ratios which can be used;

Debt to Total Asset Ratio Total Debt * 100

(Gearing ratio) Total Assets 1

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Debt to Equity Ratio Non-Current Debt * 100

Shareholders’ funds 1

Earnings Coverage Ratio Earnings Before Interest and Tax (EBIT)

Interest

This last ratio indicates the number of times a business has the ability to cover the interest

amount from Earnings (profit) before interest and tax.

PROFITABILITY RATIOS

These ratios measure the businesses ability to generate returns to the shareholders from financial

resources. In essence, it shows management’s ability to generate profits which may maximise the

yield to shareholders.

Net Profit Margin Ratio Net Profit after Tax (NPAT) * 100

Sales 1

This ratio specifically looks at the net profit generated from sales.

Return on Shareholders’ Funds Net Profit after Tax * 100

Shareholders’ Funds 1

This shows the return on ownership.

Gross Profit Ratio Gross Profit * 100

Sales 1

This ratio shows the effectiveness of the business in relation the selling and purchasing price of

the product(s). The higher the ratio, the greater the gap between the selling price and the

purchasing price.

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Operating Expense Ratio Operating Expenses * 100

Sales 1

This ratio shows the significance of individual expense groups to the total sales.

Return on Total Assets Net Profit after Tax * 100

Total Assets 1

The return on total assets ratio shows the effectiveness of using the businesses assets to generate

profits.

MARKET-RELATED OR PERFORMANCE RELATED RATIOS

(PROFITABILITY)

These ratios look at how effectively the shareholders investments are performing. They indicate

the returns on their investments by way of profits and dividends.

Earnings per Ordinary Share NPAT – Preference Dividends

No. of Ordinary Shares on Issue

This ratio informs the business (and shareholder) as to the amount of profit which COULD be

distributed to each share.

Price Earnings Ratio Share Market Price

Earnings per Share

This ratio shows the number of times the PER would have to be earned in order to meet the

market value of the share.

Dividend Yield Ratio Dividends per Share

Share Market Price

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This shows the proportion that the dividend represents of the current market share price.

ANALYSIS OF FINANCIAL STATEMENTS – ANALYSING AND PREPARING

A FINANCIAL REPORT

Calculating the ratios for a business is useful for accountants and the actual people calculating the

ratios, but not necessarily good for management. It is often necessary (and generally required) to

produce a report explaining the ratios and providing an overall outlook on the performance,

results and profitability of the business.

To do this, a number of areas need to be covered.

 What is the short term position of the business (is the business in a position to pay its

short-term debts and how has this changed from previous periods)?

 What are the stock levels and how often are they being turned over?

 What is the position of the businesses debtors? How does this compare to the

businesses requirements?

 What relationship do assets have to sales? How is the trend performing?

 Where is finance being sourced from (shareholders or creditors)?

 How is the liquidity of the business? Why is it as it is?

 What major purchases/or sales (if any) have been made by the business?

 What is the likely view from shareholders of the business? Why?

 How is the business profit performance, what is affecting this?

It is also important to provide an overall conclusion on the business including the following

points;

 Is the business solvent (can it continue to operate successfully)

 Areas for improvement and suggestions on how to

 Areas of concern

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IMPLEMENT AND MONITOR AGREED IMPROVEMENTS IN

LINE WITH FINANCIAL OBJECTIVES OF THE WORK TEAM

AND THE ORGANISATION

Implementing and monitoring agreed improvements is vital to ensure compliance with set

budgets. Often the domain of senior management, the enforcement of budget audit mechanisms

is a part of the financial calendar of every business.

Generally conducted by an external third party with approval from the Australian government to

officially audit on behalf of the ATO (Australian Tax Office) annual audits are a requirement of

publicly listed and privately held companies operating in Australia.

Managers at office level need to know what is required of them when an audit takes place and

what information they must provide access to, to ensure the process goes smoothly and

effectively.

Businesses that fear auditing are most often those that have poor financial record keeping and

intentionally lower their recorded revenue in an attempt to pay less tax.

In reality, it is more commonly partnerships or sole traders that do so as the reporting

requirements placed upon them by the ATO are less stringent.

ENSURE BUDGET COMPLIANCE

Budget compliance is another area of financial control that is often the domain of senior

management in CFO or CEO roles.

Budgets must comply with both internal organisational standards and any governing legislation.

Again this is not unusual and is best guaranteed by adhering to guidelines throughout the

budgeting development, approval, and implementation and monitoring process. Doing so will

vastly increase the likelihood of your business or departmental budget being compliant.

It will be your responsibility to ensure that your work teams are working to their strict budgeting

requirements and you will need to monitor this throughout the year at regular intervals.

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ADDITIONAL INFORMATION – GST

TYPES OF SUPPLY

There are three types of supply considered by the Australian GST legislation. These supplies are:

 Taxable supplies – most supplies made in Australia are taxable

 GST-free supplies – includes education, food, health, exports

 Input taxed supplies – residential rental, sales of residential properties, financial

transactions, certain charity fund raising events

There are also a range of transactions that fall outside the GST regime – these are considered

‘out-of-scope’ and include donations, payment of rates and taxes, government appropriations etc.

TAXABLE SUPPLIES

As stated above, GST is payable by an entity that makes a taxable supply. Section 9-5 of the

GST Act outlines when a taxable supply arises:

 There must be a supply. The concept of supply is very broad and includes goods,

services, rights, information, and the entrance into an obligation to do something or

to refrain from doing something. This is an important concept, as many transactions

the University enters will not involve supplies at all – including all donations, and

many grants.

 There must be consideration for the supply. Essentially this means there must be

payment for the supply – again this concept is broad and not restricted to cash. This

includes any payment, act or forbearance and can include other supplies (contra or in-

kind) as well as some journal entries (such as the increase in a loan account).

 The supply must be made in the course or furtherance of an enterprise. A supply

must be related to the business or business-like activity of the entity before it will be a

taxable supply. Supplies made as part of a hobby or other private activity (not a

business) cannot be subject to GST.

 The supply must be connected with Australia. Supplies will be connected with

Australia if they are made wholly within Australia, exported from Australia, imported

into Australia, or made by a business established in Australia.

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 The supplier must be registered for GST (or required to register). Note this means

that an entity must be registered for GST, not simply have an Australian Business

Number (ABN). It is common for small entities to have an ABN and not be

registered for GST.

 The supply must not be a GST-free supply or an input taxed supply. These are

explained in more detail below.

It is important to remember that GST is payable by the entity making the supply. If the price

charged is not adjusted to account for this GST liability, the supplier will wear the GST cost

themselves.

Note that in most instances it is irrelevant who the recipient of the supply is. A taxable supply

will be subject to GST whether the recipient is an individual, a business, a government entity or

even a charity.

CREDITABLE ACQUISITIONS

As most supplies in Australia are taxable supplies, it is clear then that most purchases made

within Australia will therefore include GST in the price. This embedded GST may be recovered

from the ATO as an input tax credit (a refund of the GST) when the purchase is regarded as a

‘creditable acquisition’. A creditable acquisition is defined in section 11-5 of the GST Act:

 You must make an acquisition . The definition of acquisition mirrors the definition

of supply – it is exceptionally broad, and can cover anything of value that may be

received including goods, services, rights, information, and the entrance into

obligations to do or refrain from doing things. Importantly, the acquisition must be

made by the entity seeking to claim the credit.

 The acquisition must have been a taxable supply. This ensures that you can only

claim input tax credits on expenses that were actually subject to GST. You cannot

claim input tax credits on GST-free or input taxed acquisitions, or on transactions

that are out of scope.

 The acquisition must be for a creditable purpose. Essentially this means that the

thing was purchased for the business (or business-like) activities of the entity.

Acquisitions made for private or domestic purposes do not have a creditable purpose.

 A special rule means acquisitions made for the purposes of making input taxed

supplies (outlined below) do not have a creditable purpose.

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 You must provide consideration . This means that an input tax credit may only be

claimed when the entity has actually provided something of value in exchange for the

thing it is acquiring. This is not normally an issue, but complications can arise in

instances where an acquisition is made by one party, and paid by another.

 The acquirer must be registered for GST. By requiring registration the GST Act

ensures that only those entities that enter the tax system are able to claim a refund of

the GST on expenses.

There is additional requirement – any input tax credit claim must be supported by a valid tax

invoice. If the entity does not hold a valid tax invoice on an acquisition, the GST embedded in

the cost cannot be claimed back, and effectively increases the price to the business.

GST-FREE SUPPLIES

A GST-free supply differs from a taxable supply in one critical manner – the supplier of a GST-

free supply does not have any GST liability. This means that there is no need to charge GST to

its customers. The business making a GST-free supply is still entitled to claim the GST back on

costs as an input tax credits.

There are a range of specific supplies that may be GST-free under the GST Act. The following

supplies will be GST-free if they satisfy all of the legislative requirements:

 Health

 Education

 Certain charitable activities

 Exports of goods

 Other supplies made to entities who are outside of Australia

INPUT TAXED SUPPLIES

Much like a GST-free supply, a business making an input taxed supply does not have any GST

liability. Accordingly, there is no need to charge its customers any GST. However unlike a

taxable or GST-free supply, businesses who make input taxed supplies are not entitled to claim

the input tax credits on any of the related acquisitions or costs.

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This means that whilst there is no requirement to charge GST on input taxed supplies, the

increased costs means that there is a pressure to increase prices by small margin.

TRANSACTIONS THAT ARE ‘OUTSIDE THE SYSTEM’

There are a range of transactions that fall outside the GST system. This may be due to the

application of a special rule (such as a government appropriation), or simply because no supply

or acquisition has been made (such as in the case of a donation). These special cases include:

 Donations

 Grants and Appropriations3

3 http://w3.unisa.edu.au/fin/Commercial_Support/Tax/GST/gst_fundamental_concepts.asp

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REQUIREMENTS FOR FINANCIAL RECORD KEEPING

BUSINESS RECORDS YOU NEED TO KEEP

Income tax records

You must keep records of all your sales (income) and expenses to prepare your business activity

statements (BAS) and annual income tax return, and to meet other tax obligations. You also need

to keep year-end and bank records.

Records that all businesses need to keep are listed below.

 Income and sales records – Records of all sales transactions – for example, invoices

including tax invoices, receipt books, cash register tapes and records of cash sales.

 Expense or purchase records – Records of all business expenses, including cash

purchases. Records could include receipts, invoices including tax invoices, cheque

book receipts, credit card vouchers and diaries to record small cash expenses.

Records showing how you worked out any private use of something you purchased.

 Year-end records – These include lists of creditors (that you owe money to) or

debtors (that owe you money), and worksheets to calculate the decreasing value of

your assets, also called ‘depreciating assets’, stocktake sheets and capital gains tax

records.

 Bank records – Documents you receive from the bank such as bank statements, loan

documents and bank deposit books.

 Other records you may need to keep – As well as general records, you may need to

keep other records depending on your tax obligations or the type of expense.

Other records you may need to keep are listed below.

 Goods and services tax (GST) records – The main GST records you need to keep are

tax invoices from your suppliers. Remember, you need a tax invoice to claim GST

credits. You must keep any other document that records any adjustments, a decision

or a calculation made for GST purposes.

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SUMMARY

Now that you have completed this unit, you should have the skills and knowledge required to

undertake financial management within a work team in an organisation.

A large part of the role of a business manager is the preparation, implementation and monitoring

of budgets for sales and expenditure.

Inputs and outputs must be assessed for the defined area of responsibility and attention must be

paid to what can affect productivity and costs.

Depending on the size and type of organisation, you may have paper-based or e-business

accounting and financial management systems. You need to understand your responsibilities in

using these systems to record and report on budgets. You also need systems in place to monitor

the activities of your area in terms of outputs and expenditures to track these against the

predicted amounts. Comparing budgeted to actual amounts shows up variances that can be

analysed to discover where and how discrepancies have arisen. Monitoring should be conducted

regularly so that adjustments can be made to compensate for discrepancies. Budget reports

showing actual figures against budget amounts will need to be generated and shared with key

stakeholders.

If you have any questions about this resource, please ask your trainer. They will be only too

happy to assist you when required.

GLOSSARY OF TERMS

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Within accounting, there can be a number of terms used which mean the same thing. This can

be very confusing. To assist in understanding the terminology definitions of the more commonly

used terms is provided.

Asset – Regarded as service potential or future service potential, controlled by the business.

These include land, buildings, cash at bank, accounts receivable, stock or inventory, motor

vehicles, machinery, etc.

Liabilities – Are the future sacrifices of service potential or future service that the business is

presently obliged t make to other entities. It is the amount owed by the business to others. It

includes utilities, rent, wages, accounts payable, loans, mortgages, bank overdraft, etc.

Current – Likely to change within one year. i.e. Current assets are those assets which are likely to

change within 12 months or are easily transferable into cash in a short amount of time. Cash,

debtors, stock, prepaid rent, etc.

Fixed – Unlikely to change. i.e. Fixed assets are those that are unlikely to change over a number

of years. Buildings, cars, offices, machinery, etc.

Non-Current – Same as Fixed

Capital – Owners contribution into the business.

Proprietorship – Also known as Capital

Equity (Owners’ Equity) – The ownership of the business, also known as Capital

Retained Earnings – The sum of profits/losses from previous years less any dividends paid in

previous years

Addition Capital – Additional funds invested into the business by the owners.

Accumulated Depreciation – The sum of depreciation of the previous year’s relating to a

particular asset

Depreciation – The value associated to the decrease in value of an asset as it is used up, or as it

ages. The assumption is that as an asset gets older (or is used – in the case of machinery) it loses

value. It is the expense associated with the spreading of the cost of a non-current asset over its

useful life.

Prepaid Expense – An expense which has been paid before incurring the cost. i.e. rent,

insurance, etc. (This is a current asset).

Prepaid Revenue – Revenue received prior to goods being delivered or services rendered. i.e.

rent received.(This is a liability).

Accrued Expense – An expense which has been incurred but not yet paid for. i.e. weekly

salaries. (This is a liability).

Accrued Revenue – Revenue owed but goods or services already given. Postpaid mobile. (This

is an asset.)

Debtors/Accounts Receivable – People or businesses who owe the business money, usually

relating to the sale of goods or services on credit. These are current assets.

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Credit Terms – The payment terms set out by the business for those who wish to purchase

goods or services on credit. It usually details the duration of the credit, i.e. 7 days, 30 days, etc.

and may include penalties for non-compliance.

Creditors/Accounts Payable – People or businesses who are owed money by the business,

usually for the purchase of stock/inventory. These are short term loans which have credit terms

which should be adhered to. These are current liabilities

Stock/Inventory – The current assets held with the intention of selling to make a profit.

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REFERENCES

Developing and managing internal budgets. (n.d.) Retrieved on 16-16 from:

http://www.anao.gov.au/~/media/Uploads/Documents/developing_and_managing_internal_

budgets1.pdf

GST fundamental concepts (n.d.) Retrieved on 16-16 from:

http://w3.unisa.edu.au/fin/Commercial_Support/Tax/GST/gst_fundamental_concepts.asp

http://www.anao.gov.au/~/media/Uploads/Documents/developing_and_managing_internal_budgets1.pdf

http://w3.unisa.edu.au/fin/Commercial_Support/Tax/GST/gst_fundamental_concepts.asp

Diploma Of Leadership and Management

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