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:
ď‚· 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:
ď‚· Your skills and knowledge using written and observation activities that apply to your
workplace.
ď‚· Your ability to apply your learning.
ď‚· 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:
ď‚· Written Activity
ď‚· Case Study
ď‚· Observation
ď‚· Questions
ď‚· 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:
ď‚· Describe basic accounting principles
ď‚· Identify and explain the relevant legislation and current requirements of the
Australian Taxation Office, including the Goods and Services Tax (GST)
ď‚· Explain the key requirements for financial record keeping and auditing
ď‚· 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:
ď‚· 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
ď‚· Communicate with relevant people to clarify budget/financial plans, negotiate
changes and disseminate information
ď‚· Prepare, implement and modify financial contingency plans
ď‚· Monitor expenditure and control costs
ď‚· Support and monitor team members
ď‚· Report on budget and expenditure
ď‚· Review and make recommendations for improvements to financial processes
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ď‚· 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:
ď‚· Resources and documentation used in the workplace
ď‚· Workplace policies and procedures
ď‚· Workplace budgets and financial plans
ď‚· Business technology
ď‚· 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;
ď‚· 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.
ď‚· 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.
ď‚· 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.
ď‚· 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;
ď‚· They need to relate to a known and agreed plan with targets which are reasonable and
achievable
ď‚· The budgets need to focus on the future and represent a known period
ď‚· Have all variances between actual and budgeted figures, outside of expected ranges,
investigated and acted upon
ď‚· 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:
ď‚· Provide clear goals to assist in the achievement of the business strategy
ď‚· Monitor and control business performance
ď‚· Provide a focus for employees in the conduct of business
ď‚· Define areas of responsibility and authority
Budgets and the budget process do have limitations, including:
ď‚· Budgeting consumes large amounts of time and cost
ď‚· Budgets are built on history, assumptions and forecasts all of which can be inaccurate
and even misleading depending on the source of information
ď‚· 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;
ď‚· Where does the business want to be at the end of the period?
ď‚· How does the business expect to achieve that goal?
ď‚· What needs to be done (spent/received) to achieve this?
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ď‚· How is the business placed to achieve these results?
ď‚· 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;
ď‚· 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.
ď‚· 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.
ď‚· 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.
ď‚· Budgeted Balance Sheet
Predicts the future â€snapshot’ of the overall position of the business based on assumptions made
in the budgeting process after a specific duration of time.
ď‚· 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.
ď‚· 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.
ď‚· 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;
ď‚· Financial or accounting areas of the business
ď‚· Business unit members who have the responsibility to meet the objectives outlined
within the budgets
ď‚· Executive managers involved in setting expectations and formulating the direction of
the business
ď‚· 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;
ď‚· The day to day operating of the business (liquidity)
ď‚· Details pertaining to the growth of the business
ď‚· Projections and progress of specific projects
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ď‚· To control expenditure
ď‚· To target performance
ď‚· To provide information to financiers (i.e. banks when seeking business loans)
ď‚· To provide information to investors
ď‚· To understand the revenue, cost and profit forecast position of the business
ď‚· 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;
ď‚· Fees or revenue budget
ď‚· Operating expenses budget
ď‚· Budgeted income statement (budgeted profit & loss)
ď‚· Budgeted balance sheet
ď‚· Cash flow statement
Retail Businesses utilise the follow budgets;
ď‚· Sales budget
ď‚· Purchases budget
ď‚· Cost of goods sold budget
ď‚· Operating expenses budget
ď‚· Inventory budget
ď‚· Budgeted income statement
ď‚· Budgeted balance sheet
ď‚· Cash flow statement
Manufacturing Businesses utilise the follow budgets;
ď‚· Sales budget
ď‚· Production budget
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ď‚· Direct material purchases budget
ď‚· Direct material usage budget
ď‚· Direct labour budget
ď‚· Factory overhead budget
ď‚· Cost of goods sold budget
ď‚· Operating expense budget
ď‚· Inventory budget
ď‚· Budgeted income statement
ď‚· Budgeted balance sheet
ď‚· Capital expenditure budget
ď‚· 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:
ď‚· Balance Sheet
ď‚· Profit and Loss Statement
ď‚· 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
â€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;
ď‚· Assets
ď‚· Liabilities
ď‚· 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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ď‚· Operating
ď‚· Investing
ď‚· 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;
ď‚· Cash receipts from the sale of goods and services
ď‚· Cash receipts from the sale of loans, debt or equity instruments
ď‚· Interest received from loans issued by the business (may be considered an investing
activity depending on the type of business)
ď‚· Tax payments
ď‚· Payments to suppliers for goods and services
ď‚· 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;
ď‚· Interest received from loans issued by the business
 Collections on loan principle and sales of other business’s debt instruments
ď‚· Receipts from purchase of plant and equipment
ď‚· 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;
ď‚· Proceeds from issuing shares
ď‚· Proceeds from issuing short or long term debt
ď‚· Payments of dividends
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ď‚· Payments for repurchase of company shares
ď‚· 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;
ď‚· Doubtful debts
ď‚· Discount allowed
ď‚· 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
â€cash.’
DEVELOPING BUDGETS
The process of developing budgets comprises ultimately of four key stages;
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ď‚· Preparing budgets & other financial plans
ď‚· Collecting actual operating data & information
ď‚· Analysing & reporting deviations or variances
ď‚· 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.
ď‚· 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.
ď‚· Historical Cost Concept
All transactions are recorded at original cost (not the value of the item today). Accounting
reflects past and historical events.
ď‚· Going Concern
Assumes the business is ongoing and not being â€wound up’ – the business will continue
indefinitely.
ď‚· The Accounting Period
Financial statements cover certain fixed periods, i.e. weekly, monthly, quarterly, annually.
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ď‚· Objectivity
Transactions are recorded on the basis of objective and verifiable evidence.
ď‚· Conservatism
Use the figure that will result in a lower end profit.
ď‚· Consistency
Using the same methods of accounting over different periods.
ď‚· Materiality
Items reported have a material impact on the accounts. (The exclusion of cents in the accounts
is not considered â€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.
ď‚· 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.
ď‚· 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.
ď‚· 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.
ď‚· 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 â€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 â€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
â€extreme situations’ can cause.
Some examples of these situations include but are not limited to;
ď‚· The world Economic Crisis
ď‚· 9/11
ď‚· Natural Disasters
o Victorian Bush Fires
o Hurricane Katrina
o Flu Pandemics
ď‚· Climate Change
ď‚· Mining Boom in Western Australia and Queensland
Many businesses fail to make contingency plans as it is seen as â€counter’ cyclical to all the other
initiatives in the business’ which are predicted on the â€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 â€no response’ plan and the opposite an â€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 â€disaster â€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;
ď‚· The nature of the extreme situation
ď‚· The potential risk involved
ď‚· The likely impact on the business
ď‚· The costs associated with the plans implementation
ď‚· 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;
ď‚· List all the activities of the plan
ď‚· Establish the interdependencies of each activity
ď‚· Determine the resources and time required by each activity
ď‚· Determine the sequences of each activity
ď‚· 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 â€diverse’ thinkers. The need for a â€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.
ď‚· A clear vision
ď‚· The ability to model the way
ď‚· The pressure for change
ď‚· The capacity for change
ď‚· Actionable first steps
ď‚· 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:
ď‚· Staff are part of the stakeholder group consulted when developing cost control
strategies
ď‚· They have a voice in deciding which cost control measures are most appropriate and
most achievable in their context
ď‚· 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;
ď‚· 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.
ď‚· 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.
ď‚· Whilst reporting arrangements need to be â€bottom up’, the response to monitoring
information needs to be from the â€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.
ď‚· 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;
ď‚· Record financial commitments when a plan is authorised or amended
ď‚· Record actual expenditure and income
ď‚· Automate as far as possible the processing of payments to creditors
ď‚· Record costs of services at the individual level, irrespective of whether the sources of
service are an external or internal provider
ď‚· Support the financial assessment and billing processes
ď‚· Provide financial projections
ď‚· Integrate seamlessly financial management systems, including automatic recognition
ď‚· Provide appropriate management, audit and exception reports
ď‚· Export data to spreadsheets or other data systems
ď‚· 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 â€About’ or â€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:
ď‚· Balance Sheet
ď‚· Profit and Loss
ď‚· 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:
ď‚· Cash flow from operations (trading, or carrying out the core business).
ď‚· Cash flow from investing (buying and selling non-current assets).
ď‚· 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
0
$60,00
0
$55,00
0
$75,0
00
$95,0
00
$250,
000
$65,00
0
$50,00
0
$55,00
0
$60,0
00
$65,0
00
$60,0
00
Owners Funds
Injection
Total Cash In-
Flow
$70,00
0
$60,00
0
$55,00
0
$75,
000
$95,0
00
$250,
000
$65,00
0
$50,0
00
$45,00
0
$60,0
00
$65,0
00
$60,0
00
Expense
Payments
Cash Out-
Flow- Stock
$35,00
0
$30,00
0
$27,50
0
$65,0
00
$110,
000
$30,0
00
$32,50
0
$25,00
0
$27,00
0
$30,0
00
$28,0
00
$30,0
00
Rent &
Outgoings
$12,91
7
$12,91
7
$12,91
7
$12,9
17
$12,9
17
$12,9
17
$12,91
7
$12,91
7
$12,91
7
$12,9
17
$12,9
17
$12,9
17
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
0
$4,75
0
$12,5
00 $3,250 $2,500 $2,750
$3,00
0
$3,25
0
$3,00
0
Advertising Levy $2,100 $1,800 $1,650 $2,25
0
$2,85
0
$7,50
0 $1,950 $1,500 $1,650
$1,80
0
$1,95
0
$1,80
0
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
6
$52,55
6
$49,65
6
$88,
756
$135,
356
$67,7
56
$55,45
6
$46,7
56
$49,15
6
$52,5
56
$50,9
56
$52,5
56
GST
GST Paid
(Credits) $5,306 $4,778 $4,514
$8,06
9
$12,3
06
$6,16
0 $5,041 $4,251 $4,469
$4,77
8
$4,63
2
$4,77
78
GST Collected $6,364 $5,455 $5,000 $6,81
8
$8,63
6
$22,7
27 $5,909 $4,545 $4,091
$5,45
4
$5,90
9
$5,45
5
Net GST $2,221 $11,6
48 $785
$2,63
0
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
00
$8,00
0
$18,0
00
$10,00
0
$7,00
0 $7,000
$7,00
0
$7,00
0
$7,00
0
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
92
$9,38
2
$20,2
82
$11,56
2
$8,29
2 $8,292
$8,29
2
$8,29
2
$8,29
2
Total
Payments
(outflow)
$67,73
8
$60,84
8
$60,16
9
$97,
048
$144,
738
$99,6
86
$67,01
8
$55,0
48
$58,23
3
$60,8
48
$59,2
48
$63,4
78
Cash In flow –
Cash Outflow $2,262 -$848
–
$5,169
–
$22,0
48
–
$49,7
38
$150,
314
–
$2,018
–
$5,048
–
$13,23
3
-$848 $5,75
2
–
$3,47
8
Cash at Bank
(Month
beginning)
$0 $2,262 $1,414
–
$3,75
5
–
$25,8
03
–
$75,5
41
$74,77
3
$72,75
5
$67,70
7
$54,4
74
$53,6
26
$59,3
78
Cash at Bank
(Month End) $2,262 $1,414
–
$3,755
–
$25,8
03
–
$75,5
41
$74,7
73
$72,75
5
$67,70
7
$54,47
4
$53,6
26
$59,3
78
$55,9
00
July Aug Sept Oct Nov Dec Jan Feb Marc
h April May June
Total
Cash
In-Flow
$70,0
00
$60,0
00
$55,0
00
$75,0
00
$95,0
00
$250,
000
$65,0
00
$50,0
00
$45,0
00
$60,0
00
$65,0
00
$60,0
00
Expense
Payments
Cash Out-
Flow-
Stock
$35,0
00
$30,0
00
$27,5
00
$65,0
00
$110,
000
$30,0
00
$32,5
00
$25,0
00
$27,0
00
$30,0
00
$28,0
00
$30,0
00
Sub-Total
Cash Out-
flow
$58,3
56
$52,5
56
$49,6
56
$88,7
56
$135,
356
$67,7
56
$55,4
56
$46,7
56
$49,1
56
$52,5
56
$50,9
56
$52,5
56
Salaries,
Wages
$8,00
0
$7,00
0
$7,00
0
$7,00
0
$8,00
0
$18,0
00
$10,0
00
$7,00
0
$7,00
0
$7,00
0
$7,00
0
$7,00
0
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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:
ď‚· 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
ď‚· 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
2
$8,29
2
$8,29
2
$8,29
2
$9,38
2
$20,2
82
$11,56
2
$8,29
2
$8,29
2
$8,29
2
$8,29
2
$8,29
2
Total
Payments
(outflow)
$67,7
38
$60,8
48
$60,1
69
$97,0
48
$144,
738
$99,6
86
$67,0
18
$55,0
48
$58,2
33
$60,8
48
$59,2
48
$63,4
78
Cash In
flow –
Cash
Outflow
$2,26
2 -$848
–
$5,16
9
–
$22,0
48
–
$49,7
38
$150,
314
–
$2,01
8
–
$5,04
8
–
$13,2
33
-$848 $5,75
2
–
$3,47
8
Cash at
Bank
(Month
beginning)
$0 $2,26
2
$1,41
4
–
$3,75
5
–
$25,8
03
–
$75,5
41
$74,7
73
$72,7
55
$67,7
07
$54,4
74
$53,6
26
$59,3
78
Cash at
Bank
(Month
End)
$2,26
2
$1,41
4
–
$3,75
5
–
$25,8
03
–
$75,5
41
$74,7
73
$72,7
55
$67,7
07
$54,4
74
$53,6
26
$59,3
78
$55,9
00
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ď‚· Forecasting to manage gaps between budget estimates and actual results to quickly
identify and respond to changes in the external environment or internal activities
ď‚· 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:
ď‚· Cash sales and purchases
ď‚· Purchases of business assets
ď‚· Petty cash
ď‚· Cheque purchases
ď‚· 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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ď‚· CEO
ď‚· CFO
ď‚· Regional manager
ď‚· Departmental managers
ď‚· 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:
ď‚· Results obtained from previous years activity (this is best used when more than two
years can be obtained to view trends)
ď‚· Industry averages
 Competitor’s results
ď‚· 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;
ď‚· Liquidity (short term)
ď‚· Activity (short term and profitability)
ď‚· Leverage ( long term)
ď‚· Profitability (profitability)
ď‚· 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
2
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
2
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.
ď‚· 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)?
ď‚· What are the stock levels and how often are they being turned over?
ď‚· What is the position of the businesses debtors? How does this compare to the
businesses requirements?
ď‚· What relationship do assets have to sales? How is the trend performing?
ď‚· Where is finance being sourced from (shareholders or creditors)?
ď‚· How is the liquidity of the business? Why is it as it is?
ď‚· What major purchases/or sales (if any) have been made by the business?
ď‚· What is the likely view from shareholders of the business? Why?
ď‚· 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;
ď‚· Is the business solvent (can it continue to operate successfully)
ď‚· Areas for improvement and suggestions on how to
ď‚· 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:
ď‚· Taxable supplies – most supplies made in Australia are taxable
ď‚· GST-free supplies – includes education, food, health, exports
ď‚· 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:
ď‚· 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.
ď‚· 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).
ď‚· 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.
ď‚· 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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ď‚· 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.
ď‚· 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:
ď‚· 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.
ď‚· 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.
ď‚· 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.
ď‚· 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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ď‚· 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.
ď‚· 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:
ď‚· Health
ď‚· Education
ď‚· Certain charitable activities
ď‚· Exports of goods
ď‚· 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:
ď‚· Donations
ď‚· 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.
ď‚· 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.
ď‚· 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.
ď‚· 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.
ď‚· Bank records – Documents you receive from the bank such as bank statements, loan
documents and bank deposit books.
ď‚· 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.
ď‚· 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
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