BSBFIM601 Manage finances
Your trainer will inform you of the following:
? Where the toilets and fire exits are located, what the emergency procedures are and where the breakout and refreshment areas are.
? Any rules, for example asking that all mobile phones are set to silent and of any security issues they need to be aware of.
? What times the breaks will be held and what the smoking policy is.
? That this is an interactive course and you should ask questions.
? That to get the most out of this workshop, we must all work together, listen to each other, explore new ideas, and make mistakes. After all, that’s how we learn.
? Ground rules for participation:
o Smile o Support and encourage other participants o When someone is contributing, everyone else is quiet o Be patient with others who may not be grasping the ideas o Be on time o Focus discussion on the topic o Speak to the trainer if you have any concerns.
? Know how to plan for financial management
? Understand how to establish budgets and allocate funds
? Explain how to implement budgets
? Show how to report on finances
? Gain the skills and knowledge required for this unit.
1. Plan for financial management
1.1 Review and analyse previous financial data to establish areas which have generated a profit or loss
1.2 Undertake research to review reasons for previous profit and loss
1.3 Review business plan to establish critical dates and initiatives that will require or generate resources in the next financial cycle
1.4 Analyse cash flow trends
1.5 Review statutory requirements for compliance and liabilities for tax
1.6 Review existing software and its suitability for financial management
1.1 – Review and analyse previous financial data to establish areas which have generated a profit or loss
Examining past figures
An important part of managing finances is reviewing previous financial data. Previous financial data, in both the short and long-term, can indicate how well the business is doing and is used to create future projections.
The financial data you can analyse may include:
? Budgets, forecasts and variations
? Cash flow/profit reports
? Financial/operational statements and reports (e.g. expenditures and receipts, profit and loss statements)
? Market valuations.
This data can enable you to identify which areas have made a profit and which areas have made a loss. All of these sources of information can indicate how a department is performing financially.
A budget will include details of the required expenses for a period of time – usually over a one month period, but this can depend upon the needs of the business. These expenses must fall within the allocated income assigned to the budget.
An example budget:
Expenses Amount $ Total $
? Insurance 4000.00
? Telephone/Internet 150.00
? IT support
? Cleaning 500.00
? IT equipment $100.00
Total $ 6920.00
Be aware of any variable expenses that may be encountered month to month, and any surplus amount that you may have left over from the allocated income, as these will need to be accounted for.
It is important to look at look at financial forecasts to help plan ahead on the needs of the business and what money will need to spent within the next financial year. Forecasts can include cash flow forecasts to predetermine money coming in and out, sales forecasts to ascertain what business may be achieved, costs of goods sold, forecasts to look at potential income, and expenses forecasts to gather information on what your business may need to pay out for.
Look at past forecasts and information on your business finances to help understand any trends and variations that may be encountered within the industry of your business. These can include seasonal variations, technology developments and product changes. Past information will also help you to look at the financial progress that has been made to date, and at where your organisation wants to be in the coming year.
? Plan for the worst while also projecting best case scenarios
? Make regular forecasts throughout the year, not just an annual forecast which may not stay true for the whole year
? Make sure customer terms are reviewed and updated so that credit terms cover the needs of the customer and the organisation
? If providing customer discounts, plan these well in advance
? Involve all relevant personnel when forecasting, including your sales team
? Make sure you thoroughly understand your business, and that of your customers
? Look at how your business spends its money on supplies and equipment – ensure only what is needed is bought and avoid unaccounted overspending.
Financial data example
The following example looks at the expenses of an IT services group.
The IT services group shows that:
? Cash flow reports indicate that the income of the IT services group has dropped from $10,000,000 in the 20122013 year-period to $6,000,000 in the 2013-2014 yearperiod; a decrease of 40%.
? Expenditure reports indicate that, in total, $12,000,000 was spent by the IT service group in 2013-2014, which far exceeded the budget of $5,000,000.
This reveals that the IT services group made a loss in 2013-2014 and that income has dropped, whilst expenditure has risen, meaning that the profitability has dropped.
This information is represented in the table below:
2012-2013 2013-2014 Difference on year
Budget for expenditure 5,000,000 5,000,000 -
Actual expenditure 3,500,000 12,000,000 +8,500.000
Difference +1,500,000 -7,000,000 -
Projected income 8,000,000 8,500,000 +500,000
Actual income 10,000,000 6,000,000 -4,000,000
Difference +2,000,000 -2,500,000 -
The table shows that the IT services group’s expenditure was up $8,500,000 in 2013-2014, whilst income was down $4,000,000.
By examining the previous year’s data, we can see that the IT services group has performed very poorly in 2013-2014 and has made a loss.
The standalone 2013-2014 figures are poor, but become much worse when compared with the success of the IT services group in the previous year.
The success of the IT services group in 2012-2013 led to the projected income of the IT services group in 2013-2014 being raised by $500,000, a target that was not even close to being met.
1.2 – Undertake research to review reasons for previous profit and loss
Investigating profit and loss
You may need to understand why your business turned a profit or a loss as a whole, or in certain areas and departments.
In the case of profit, you may want to understand what contributed to the success, such as:
? Purchasing process ? Quality of products/services
? Availability of products/services.
In the case of loss, you may need to focus on similar elements which contributed to the loss:
? Was the price too high?
? Was it presented poorly?
? Is the purchasing process complicated and/or inefficient?
? Is the quality good?
? Were the goods available?
Profit and loss can also be affected by other factors beyond the business’ control:
? A cheaper rival appears on the scene
? The business receives bad publicity or is the subject of a scandal and boycott
? The business premises become unusable; for example, due to fire or flood
? There is a resource shortage
? Economic crisis.
Your organisation will keep lots of different records about different aspects of the business. In order to investigate the reasons for profit and loss, you will need to access relevant records, including:
? Budgets, forecasts and variations:
o to see money allocated, expectations and variances in these totals, such as overspend
? Cash flow/profit reports:
o to see when money is coming in and how much of it is profit
? Financial/operational statements and reports (e.g. expenditures and receipts, profit and loss statements):
o to see money coming in, money spent and how money is spent, as well as periodic results and statements
? Market valuations:
o to value the business, its stock and its assets.
1.3 – Review business plan to establish critical dates and initiatives that will require or generate resources in the next financial cycle
Planning your financial year in detail will allow you to make the most of busy and slow periods and manage your finances accordingly. For example, if a big shopping event is coming up, you may want to invest in extra stock in anticipation of the higher volume of sales.
Critical business dates may be:
? National and worldwide high-volume sale days in retail:
o Black Friday
? a notion adopted from American tradition. This is the Friday after Thanksgiving and participating stores slash the prices of their items online and in-store, leading to an annual shopping frenzy that often lasts the whole weekend.
o end of financial year sales (EOFYS):
? when retail businesses sell off current stock before new stock arrives (around the month of June).
o Boxing Day:
? Boxing Day sales are hugely popular and are part of the January sales, where customers flock to buy discounted items after Christmas.
General sale times: o such as seasonal clothing changes o newly-released items o store-specific events.
The above examples, mainly applicable to retail businesses, will likely require more resources and will likely generate more resources; namely, cash. When busy periods are expected, you should increase stock, resources and staff, as required.
Slow periods are times that your trade is generally quieter and may occur at the same time every year.
? Chocolate manufacturers and retailers: chocolate sales generally increase at Christmas and Easter times and then slow down in the following months, before ramping up again to produce more Christmas and Easter stock.
? Turkey farmers and factories: turkey sales may tend to slump in the period after Christmas, before beginning the process of raising more turkeys for the next season.
? Manufacturers and retailers of winter clothing and supplies: may find that their business is slow in the summer months
? Travel agents: may find they are more busy prior to periods of school and national holidays, as well as when the destinations they sell have prime weather conditions.
If you know when your slow periods are, you can plan for them accordingly in an effort to better manage your finances and resources.
Some management decisions may be to:
? Use temporary staff when there are busy periods, to save money on wages when additional staff are not required
? Encourage permanent staff to take their holidays and other leave during the slower months
? Reduce stock levels
? Reduce resource use
? Reduce opening hours
? Adapt the business:
o for example, if you were the winter clothing retailer from the above example, you could rotate your stock to summer clothing in the warmer months; this would enable you to avoid the slow period.
Failing to plan for slower periods can be expensive, as you could waste money on the above for little or no return.
Managing resource use can be the key to effectively managing finances throughout the financial year. Resources may need to be increased or decreased, depending upon the time of year and upcoming critical dates.
These resources may be:
? Human resources. Staff wages can be a huge drain on business finances, especially when the costs are not justified:
o take more staff on in busy periods o reduce staff numbers or hours during slower periods
o consider the use of flexible staffing, e.g. temporary or casual staff
? Energy. Consider energy use:
o higher when the store is open more and busier and hence justified o lower when the store is open less o cost of heating o cost of air conditioning o cost of lighting
? Materials. Resources used in production:
o if your production process slows, you may want to reduce your order of materials accordingly
? it is a drain on money if resources are ordered and not used
? do you have the storage capacity for excess materials?
? can you afford to purchase surplus materials?
? should you reduce your order to save money that could be spent elsewhere?
? are the materials perishable? A vast amount of money can be wasted on perishable materials that are not used, predominantly foodstuffs
o if business is good, can you order more materials on short notice?
? do you have the storage space for increased amounts of materials?
? do you have enough staff to process the additional materials and meet additional demand?
? Cash management. Cash is a resource and it can be acquired more readily at certain times:
o short-term cash investment (usually up to a timeframe of one year), which allows cash to be liquidated quickly when it is needed
o meet customer demand – if customers are desperate for the latest fashion or gadget, order stock in for them o have a sale to get rid of last year’s/last season’s stock o have the stock available.
You can plan for these busy and quiet periods using your business plan. Your business plan will outline strategies used to manage sales production and finances.
The business plan:
? Will indicate expected busy periods
? Will indicate expected quiet periods
? May have information on unexpected busy periods in the previous year
? May have information on unexpected slow periods in the previous year
? May outline strategies, such as: o when to gather additional materials and stock o when to reduce stock and staff
? May have targets for income and expenditure
? Should contain other advice relevant to this specific business, including current and future objectives.
Remember the Six Ps:
‘Proper Planning and Preparation Prevents Poor Performance!’
1.4 – Analyse cash flow trends
Cash flow is the movement of money in and out of the business. By analysing your cash flow, you can see when and where money comes and goes within your business.
By identifying trends, you can:
? Identify times when income increases significantly, such as an event explained in the previous section
? Identify times when income falls significantly
? Identify steady sales and the average income for these periods
? Identify times of increased expenditure
? Identify times of low expenditure.
Detailed cash flow registers will reveal where money was spent and where money was gained; this can enable you to plan for required periods of expenditure and investigate high levels of expenditure.
Analysing cash flow
When analysing cash flow trends, you will generally focus on three areas:
? Operating activity:
o money gained and spent through the operation of the business:
? business income
? business losses
? Investment activity:
o purchase and return of investments, such as:
? assets ? equipment
? Financing activity:
o money used to finance business activities:
? loans received
? loan payments.
Analysing cash flow can help you to identify where your money is being spent and where any overspending may be occurring. This will enable you to take the steps towards managing the business’ finances in a more efficient and economical way.
If you can identify areas of higher income that occur every year, you can determine the reason for this and focus upon taking advantage of these opportunities.
Example format for a cash flow analysis:
Statement of cash flow – for year end __/__/____
Cash flow from operating activities $
Payments to suppliers
Payments to employees
Net cash flow from operating activities Total of figures above
Cash flow from investing activities $
Purchases of equipment
Purchases of property
Proceeds from sale of equipment
Proceeds from sale of property
Net cash flow from investing activities Total of figures above
Cash flow from financing activities $
Proceeds from borrowing
Payments of borrowings (repayment of principal)
Investments into business
Drawings from business investments
Net cash flow from financing activities Total of figures above
Net increase/decrease in cash held Total of all of the above 3 total figures
Cash at beginning of period
Cash at end of period
1.5 – Review statutory requirements for compliance and liabilities for tax
Australian businesses are subject to a variety of taxes, which are managed and collected by the
Australian Tax Office (ATO). A link to their website is included in the references section at the end of this Learner Guide.
The main taxes applied to businesses are:
? Company tax
? Payroll tax
? Goods and Services Tax (GST)
? Capital Gains Tax (CGT).
Company tax is currently (December 2014) set at a flat rate of 30% and is applied at a corporate level. The ATO website explains company tax in full detail. A link to the relevant page is included in the references section at the end of this Learner Guide.
Payroll tax is paid by employers on their employees’ wages. Payroll tax is based upon the employee’s wages and their location. The Australian Government business website (www.business.gov.au ) explains payroll tax in full detail. A link to the relevant page is included in the references section at the end of this Learner Guide.
Goods and Services Tax (GST) is a national tax applied to many goods and services that are sold in Australia. The rate is currently (December 2014) set at 10%. The ATO website explains company tax in full detail. A link to the relevant page is included in the references section at the end of this Learner Guide.
Capital Gains Tax (CGT) is included within the income tax system and is applied money gained from the sale of an asset. Tax due is added to an individual’s tax bill, as the money gained is considered taxable income. The Australian Government business website (www.business.gov.au ) explains CGT in full detail. A link to the relevant page is included in the references section at the end of this Learner Guide.
Businesses are legally required to account for and pay their taxes.
You must be aware of:
? Which taxes, including additional ones not mentioned here, are applicable to your business
? How taxes vary geographically, including which rates and stipulations are applied to your location.
Other statutory requirements and restrictions
These additional points may or may not apply to your business.
Bilateral or regional trade agreements
Bilateral trade relates to the trading of goods between different countries.
Investopedia defines bilateral trade as:
“…The exchange of goods between two countries. Bilateral trade agreements give preference to certain countries in commercial relationships, facilitating trade and investment between the home country and the foreign country by reducing or eliminating tariffs, import quotas, export restraints and other trade barriers. Bilateral trade agreements can also help minimize trade deficits.”
International Commercial Terms (INCOTERMS) Investopedia defines INCOTERMS as:
“…Trade terms published by the International Chamber of Commerce (ICC) that are commonly used in both international and domestic trade contracts. Incoterms, short for "International Commercial Terms," are used to make international trade easier by helping traders in different countries understand one another. Incoterms were first developed in 1936 and are updated from time to time, in order to conform to current trade practices. Because of these updates, contracts should specify which version of Incoterms they are using (e.g., Incoterms 2010).”
Competition and Consumer Act
The Trade Practices Act 1974 was superseded by the Competition and Consumer Act on January 1st 2011 and is contained within Australian Consumer Law (ACL).
The Consumer Law website offers this overview:
“…Since 1 January 2011, Australia has one national law for fair trading and consumer protection—the Australian Consumer Law. This means that Australian consumers and businesses have the same rights and obligations wherever they are in Australia.
The Australian Consumer Law fulfils key reforms in the Council of Australian Government’s National Partnership Agreement to Deliver a Seamless National Economy, and will help to reduce regulatory complexity and duplication for businesses and consumers.
The ACL includes:
? A national unfair contract terms law covering standard form consumer contracts;
? A national law guaranteeing consumer rights when buying goods and services;
? A national product safety law and enforcement system;
? A national law for unsolicited consumer agreements covering door-to-door sales and telephone sales;
? Simple national rules for lay-by agreements; and
? New penalties, enforcement powers and consumer redress.”
The Warsaw Convention is an aviation treaty that governs liability for the international carriage of people and goods via an aircraft. In Australia, the Montreal Convention has amended some important provisions of the Warsaw Convention.
MONDAQ describes the Montreal Convention as follows:
“The Montreal Convention puts in place a framework for determining the liability of air carriers for injury or death of a passenger, loss or damage to luggage or cargo and damaged caused by or delay in the transport of passengers, luggage or cargo which occurs during the course of international carriage.
The need for the Montreal Convention stems from the inadequacy of the Convention for the Unification of Certain Rules Relating to International Carriage by Air ("Warsaw Convention") which was the Convention that originally determined carriers' liability. The Warsaw Convention, having been first signed in 1929 reflects an era in which the young aviation industry required protection from potentially ruinous compensation claims. The Warsaw Convention also used terminology and language which is now outdated.
In order to update the Warsaw Convention it was amended several times. However, not all signatories to the original Convention ratified all amendments. This created difficulties and uncertainty in determining which version of the Warsaw Convention applied.
The Montreal Convention seeks to address these problems by raising carriers' liability limits, presenting the liability framework in a single consistent Convention and updating the terminology used.”
World Trade Organization (WTO) determinations Agriculture.gov.au defines the WTO as follows:
“The WTO was established in 1995 as a successor to the General Agreement on Tariffs and Trade. There are 160 members of the WTO (as at 1 June 2014), with developing countries accounting for more than two-thirds of the membership.
The WTO sets global rules for trade and provides a forum for trade negotiations and resolving trade disputes between member countries. WTO members as a whole make all major decisions, usually by consensus.
WTO rules cover trade in all goods and many services as well as a very broad range of trade issues, from quarantine and technical trade barriers to taxation, subsidies and intellectual property.
These rules help international trade flow as smoothly, predictably and freely as possible. WTO rules can provide secure trading conditions and reduce some of the risks associated with doing business overseas. Australia, like all other members, is required to abide by the rules.”
Fair trading laws
Fair trading laws are designed to protect consumers and promote fair trading and competition on the part of businesses.
Trade Practices Act – now Competition and Consumer Act 2010
The Competition and Consumer Act 2010 replaced the Trade Practices 1974. It promotes fair trading and competition for businesses, as well as protecting the consumers their products are aimed at.
It covers the following:
? Dealings with suppliers, wholesalers, retailers, customers and competitors
? Industry codes of practices
? Product safety
? Unfair market practices
? Product labelling
? Industry regulation (e.g. gas, electricity, airports, telecommunications).
The Australian Competition and Consumer Commission is in charge of enforcing the Competition and Consumer Act.
Depending upon the industry that your organisation works within, you will need to ensure that the correct licences and permits have been obtained for compliance requirements. These will be specific to the state/territory that your business is within. The Australian Business Licence and Information service enables you to determine the licence needs of your business. These include fair trading and environmental licensing.
Further information on business licences, registration and permits can be found at the Australian Government Business website: http://www.business.gov.au/registration-andlicences/Pages/default.aspx and at the Australian Business Licence and Information Service website: https://ablis.business.gov.au/pages/home.aspx (access date: 19.06.2015).
1.6 – Review existing software and its suitability for financial management
Financial management software
As your business needs develop, grow and change, your financial management software may not meet all of your needs. Similarly, financial management software continues to develop, which can mean that your software becomes outdated.
There are two main ways to identify whether your existing software is suitable and up to scratch:
? Using the software yourself
? Communicating with the staff that do use the software.
Financial management software should enable you to manage tasks, such as:
? Managing finances overall
? Maintaining the general ledger
? Managing financial accounts
? Segmenting income and expenses
? Recording transactions
? Managing bills
? Creating and managing budgets
? Monitoring investments
? Creating reports – transaction, budgeting and management
? Calculating the value of the business.
There are many different financial management software packages available and you need to ensure that you use one that meets your accounting needs.
Your current software may offer:
? Upgrades ? Updates.
These all assist you in maintaining your software, and ensure that your needs are met, by offering you extra services you may not have needed before. They help keep you abreast of developing technology.
When looking for new software, you should:
? Read all of the information about the software
? Consult with an advisor
? Download a free demo or utilise a free trial period.
This will enable you to test the software to see whether:
? It meets your needs
? It is better than your current software
? It is easy to use
? It is worth the price.
It is probably not going to be suitable for your business, in the short or long-term, to use software that is:
? Hard to use
? Out of date
? Too expensive
? Not going to be updated and maintained.
2. Establish budgets and allocate funds
2.1 Use previous financial data to determine allocations for resources
2.2 Make informed estimates of new items for inclusion in budget
2.3 Prepare budgets in accordance with organisational requirements and statutory requirements
2.1 – Use previous financial data to determine allocations for resources
Previous financial data is generally used to determine resource allocations; this is because previous data will reveal how the business has been performing and will determine how much money there is for resources to be allocated.
As explained in sections 1.1 and 1.2, you need to study previous data to determine areas of profit and loss, as well as the reason for these.
Areas of profit may need:
? The allocation of more resources in order to facilitate further growth and success
? Less resource allocation, as a step towards efficiency, environmental sustainability and cost-saving.
Areas of loss may need:
? The allocation of more resources in order to help the area turn things around
? Less resource allocation, as allocating money and resources to a failing area can be an outright waste of money.
Financial data you can use to assist you in decisions relating to resource allocation may include:
? Sales figures
? Resource use
? Expenditure ? Cost of resources
Allocating resources in an effective and efficient way will require that you understand the previous financial data and that you understand the areas to which you are or are not allocating resources. Not understanding previous financial data can mean that areas are under or over-funded and failure to understand these areas can mean that you can under- or overallocate resources.
? Service in a bar o resource: human resources.
Bar staff have been complaining that they are understaffed, even though there are three of them working on the bar on an evening.
In order to assess their complaints, you must consider the following:
? Unfamiliar with the department: you may dismiss their claims, as there are three people being paid to work the evening and another staff member would be a waste of money
? Familiar with department: you would realise that even though there are three members of staff, the bar can get five-deep all the way around with punters yelling for service. This is because it takes a lot of time to mix cocktails and pour stout. An additional pair of hands would help keep business flowing when staff are tied up preparing drinks
? Under-allocation of resources: staff are way too busy and cannot serve customers fast enough, meaning that both customers and staff are unhappy. Staff are under significant stress, which means that there is a high turnover of staff, which wastes money and time on training
? Over-allocation of resources: if there are too many staff, unengaged staff may loiter around the bar looking bored and getting in the way. This can give customers the impression that the bar is not as busy as it should be and that it is poorly managed
Past financial data may reveal that there was a high staff turnover, increased use of sick days and walkouts. It may also reveal that there are many customer complaints and the bar has not been hitting its income targets.
These targets are achievable if the staff are able to serve the required amount of customers and drinks; if staff were happier in their work, they may be less inclined to walk out, use sick days and leave.
Identifying these problems and allocating the additional resources can mean that targets are met, customers are happy and staff stay on.
2.2 – Make informed estimates of new items for inclusion in budget
Estimating new resources
As the business grows and develops, you may need to consider using new or different resources. When you identify a need for different resources, you will need to produce estimates in order to calculate cost and justify their use.
When estimating new resources, you will need to determine:
? The new resources you may need
? The quantity of the new resources you may need
? How much you may have to spend.
New resources and items you may have to include in the budget may include:
? Human resources
The cost associated with new items in a budget may be:
? Initial cost ? Running costs/fuel
When new expenses are proposed, you will need to do two things:
1. Work out the cost of the new item, as explained above
2. Determine a budget for the item.
Assets, liabilities and equity
It is important to note that the amount of assets must equal the combined amount of liabilities and the equity.
Assets are the parts that the organisation owns, including the cash account, market securities account, inventory, accounts receivable and fixed assets, such as equipment owned.
Liabilities are what the company owes to others, such as accounts payable and equity. These are the parts of the organisation that are owned by the business owner and any other investors.
You can create an informed estimate by gathering information from relevant, accurate and trustworthy sources.
For example, if you wanted to buy a motor vehicle for your business, you would have to estimate costs associated with:
? The initial purchase
? Consumables, such as tyres
You would have to budget for the initial outlay as well as the ongoing running costs associated with the vehicle over time.
2.3 – Prepare budgets in accordance with organisational requirements and statutory requirements
You will have to abide by your organisation’s requirements, policies and procedures when you prepare budgets. This is because you are making financial decisions on their behalf.
When preparing a budget, look at the assumptions of the organisation’s business environment and check that this is correct for your budget preparation. Review any bottlenecks that may be hindering the business from attaining required sales figures or from generating further sales, and assess how this may impact on revenue growth. Determine the available funding and if there are any step-costs for business activities in the budget period (where these may be incurred and the amount).
These organisational requirements may be:
? Financial analysis assessments
? Financial management manuals
? Legal and organisational policies, guidelines and requirements
? Occupational health and safety policies, procedures and programs
? Price and exchange parameters
? Quality assurance and/or procedures manuals
? Recording and filing systems
? Internal control procedures
? Reporting requirements
? Standard financial analysis techniques.
There are several ASIC requirements that you may have to adhere to when preparing budgets:
? Delegated authorities
? Limits on volumes and types of financial transactions
? Reporting and timing of duty, excise and other overseas government charges (as a prepayment setup or by a periodic settlement basis)
? Reporting periods
? Taxation and payment timings.
By adhering to both statutory and organisational requirements, you can ensure that you work compliantly. As a manager, you should have been sufficiently trained in your workplace’s policies and be aware of your statutory requirements.
3. Implement budgets
3.1 Circulate budgets and ensure managers and supervisors are clear about budgets, reporting requirements and financial delegations
3.2 Manage risks by checking there are no opportunities for misappropriation of funds and that systems are in place to properly record all financial transactions
3.3 Review profit and loss statements, cash flows and ageing summaries
3.4 Revise budgets, as required, to deal with contingencies
3.5 Maintain audit trails to ensure accurate tracking and to identify discrepancies between agreed and actual allocations
3.6 Ensure compliance with due diligence
3.1 – Circulate budgets and ensure managers and supervisors are clear about budgets, reporting requirements and financial delegations
Create your budget and include year-to-year actual expenses and annualise this information for the full current year. Add in any step-costing, bottlenecks and expected funding limitations for the up-coming budget year. Obtain the revenue forecast and validate this with the appropriate person(s).
When you have produced and verified a budget, you will need to circulate the information to relevant managers and supervisors so that they can enforce them and use them for their own department budgetary requirements.
When other departments produce their own budgets, ensure that these are checked for errors and for comparing to the identified bottlenecks, funding and step-costing constraints.
Obtain capital budget requests and validate these before forwarding to senior management/CEO with any comments or recommendations you may have.
Budgets cover the whole business’ expenditure and are generally segmented into different departments.
For example, a supermarket’s budget may comprise the following general parts:
? Store overall
? Energy and fuel
? Checkout department
? Produce department
? Frozen department
? Ambient department
? In-store bakery
? Homewares department
? Cleaning department ? Maintenance department
? Human resources.
In this instance, you would have to deliver the overall budget, including the breakdown for the store manager of individual budgets to the relevant department managers.
When budgets have been agreed, update the budget model with all current information so it accurately reflects the finances of the business.
The budget should outline the department’s overall budget, along with a further breakdown.
Using the above example of a supermarket, the frozen food department may have a budget that covers:
? Target income
? Shrinkage guidelines (an amount applied that allows for a certain expected degree of theft or loss)
? Wastage guidelines
? Asset acquisition.
This information allows a manager to manage their department’s finances in line with what the business is expecting. Targets allow managers to work with guidance and understand where they need to make savings and how much they are permitted to spend.
Your organisation may have reporting requirements in place to communicate information about budgets. For example, managers purchasing assets or arranging maintenance and repairs would need to report their expenditure so that it is accounted for and the budget adjusted.
At the end of the year, managers should be invited to give feedback on their budgets, especially if they under-spent or over-spent significantly. Managers who have gone over budget may appeal for a higher allowance for the following year.
3.2 – Manage risks by checking there are no opportunities for misappropriation of funds and that systems are in place to properly record all financial transactions
Theft can and does occur in all business settings. There are both direct and indirect ways of stealing money from an organisation, such as staff stealing resources (for example, pens and paper), doctoring their timesheets for extra pay and outright stealing cash.
This section will focus upon the theft of money through transactions in the workplace.
Petty cash should be controlled through a request or receipt-submission system, not just handed out to staff. A request system requires the staff member to request money for a given purchase, which will need to be approved and authorised before the cash is issued. The second method involves staff purchasing items with their own money and then submitting a receipt to be refunded.
Your organisation should have a procedure in place that manages petty cash, including the instances when petty cash is issued and the need for evidence of purchases.
This can prevent:
? Staff helping themselves to cash
? Staff claiming money for their own personal purchases, such as lunches
? Staff making bogus claims for cash reimbursement
? Staff buying unnecessary items with company money
? Large amounts of money being spent
? The budget being overspent.
Actual cash in the business should be tracked and controlled. Tills should be issued with a standard float and cash should be counted when the till is closed, to ensure that no money is missing. Many retail premises use a cash room or safe to store money in once it has been taken from a till and has been counted. For added security, from both staff and customers, some organisations use suction tubes that send money to a safe place away from the checkout.
Ordered resources and consumables should be monitored to prevent staff ordering surplus stock for themselves that they can skim off the top.
Ways of doing this include:
? Checking orders before they are processed
? Counting items at the point of delivery
? Regular stock-checks
? Budget monitoring
? Monitoring resource use.
Staff responsible for issuing refunds should always require that the customer produces a valid receipt with their item. Many organisations have barcodes on the receipt that they can scan and additionally require that customers sign for their refund and provide their name and address. This is because it is possible for staff to issue themselves false refunds. If an organisation does not use thorough checking and recording procedures, there is nothing to stop a staff member helping themselves to refund money.
The best way to avoid misappropriation of funds is to record all transactions; if money vanishes that has not been used for a transaction, then it is unaccounted for and will be classed as either lost or stolen. Either way, the business has made a loss.
When a customer or staff member buys an item, this will be recorded electronically and paper confirmations – namely receipts and invoices – will be issued as a further record.
Every transaction the organisation makes will be recorded in this way or similar, whether the organisation is buying or selling.
This allows the organisation to track all of the money that moves legitimately through the business, minimising the chance of misappropriation.
3.3 – Review profit and loss statements, cash flows and ageing summaries
Reviewing past information
As explained in the first element, reviewing past documents, including profit and loss statements, cash flows and ageing summaries is very important when you are planning the organisation’s future plans and budgets.
Profit and loss statements
A profit and loss statement is a specific document that summarises the financial performance of an organisation over a designated period of time. The timeframes are typically one month, quarterly and annually. It reflects past performance and is used to measure profit or loss of a business. It can be helpful for smaller businesses to use this as a means to track business performance. A profit and loss statement is also known as a statement of financial performance and an income statement.
Your profit and loss statement should include all sales and expenses for the required period of time. You can also use this for future time periods to help you calculate your future needs. It can help you to calculate sales prices and to develop your business targets.
o total sales o cost of goods sold
? Gross profit/net sales – achieved by calculating the total of the sales, minus the cost of the goods sold (including any expenses related to the production of the goods).
The purpose of a cash flow is to understand the income and expenditure of an organisation. This information can be used to assess how well your business is doing and can help you to plan for future financial management. Cash inflows most commonly arise through financing, operations and investing while cash outflows occur from expenses and investments.
In accounting terms, cash flow is the difference between the opening balance and the end balance (within a designated period of time). If the closing balance is higher at the end of the period, this is a positive amount; if the closing balance is lower at the end, this is a negative amount, and, over time, without cash to support its operation, an organisation can become insolvent. Cash flow can be used for specific projects and to monitor an organisation’s entire business finances.
Ageing summaries show the status of unpaid bills in accounts payable. They clearly state what a business owes, to whom it is owed and how much is owed. It includes current and previous billing periods and shows the total amount (and total amount owed to any vendors). This keeps an account of the bills that a business needs to pay and should be maintained effectively when looking at the finances of a business.
Accounts receivable that have not been paid when agreed are highlighted and are generally categorised into groups, depending on how long the payment has been outstanding.
These categories may be:
? 1-30 days overdue
? 31-60 days overdue
? 61-90 days overdue
? 91-120 days overdue
? 121 + days overdue.
This allows you to see which customers are late with their payments and initiate the appropriate action.
Your accounts payable that are overdue can also be organised in this way, allowing you to prioritise payments and manage your finances in a more effective way.
3.4 Revise budgets, as required, to deal with contingencies
Contingencies can occur at any time in any business; the best way to deal with contingencies is to have measures in place to handle situations you know can happen and to be sensible when dealing with the unknown.
Some contingencies can be anticipated to a certain extent; you may understand that something could happen but not know when or if it will occur.
Examples of this may be:
? Vehicle breakdown
? Technological malfunction
? Natural disaster
? Machinery fault
? Staff strike.
Insurance policies are based upon the knowledge that contingencies can and will occur; nobody’s saying you will crash your car or have it stolen, but everyone buys car insurance.
For example, if your business relies upon vehicles, such as cars or vans, you should arrange insurance to cover you for courtesy vehicles at short notice, so that the disruption to operations is minimised.
If a major contingency occurs then you may need to adjust the department’s budget.
This contingency means that:
? Income will be lost
? Expenditure will be over budget
? Staff will be surplus to requirements.
In this instance, you may have to adjust the department’s budget to make allowances for the significant expenditure, the lost income and the staff’s wages. Your organisation may have a procedure in place that details how the budget should be revised.
Examples of budget revision may be:
? Adding an extra category to the budget to accommodate the reparation expense and adjusting the income targets for the rest of the year
? Writing up another budget to cover the department from the day the organisation reopens, detailing amended income and expenditure targets and predictions.
3.5 Maintain audit trails to ensure accurate tracking and to identify discrepancies between agreed and actual allocations
Audit trails are chronological records of transactions that can be accessed and checked in the event of a query. The audit trails need to be maintained so that they are always accurate and relevant.
A properly-maintained audit trail can be used to identify discrepancies in the financial history of the business.
These discrepancies may be:
? Absence of auditable trail
? Expenditure report mismatches
? Inappropriate authorisations
? Incorrect payments
? Incorrect report formats
? Unreconciled cash flows and operating statements
? Variances from budget and phasings.
If the audit trail is not maintained properly, then:
? It may not be able to help you answer queries about discrepancies
? It may indicate a discrepancy when one does not exist
? It can give you false information.
Discrepancies between budget allocations and actual spending will be revealed by the audit trail. The audit trail can identify both underspending and overspending by department, allowing you to make informed decisions about future budget allocations.
3.6 Ensure compliance with due diligence
There are lots of policies, procedures and protocols in place when managing business finances. You need to work compliantly yourself, as well as ensuring that other managers and staff work compliantly. Any incidents of non-compliance should be reported and dealt with immediately, before the problem worsens and bad habits are developed.
Budgets are calculated and published for a reason. Overspending and underspending can be problematic and may mean that the relevant department is not contributing to the business’ current and future objectives. Budget anomalies should be queried and investigated.
Review the budget(s) with senior management and look at any constraints or limitations caused by issues with the funding.
If staff are required to report on particular issues or at particular times, then you need to ensure that they adhere to these requirements and report accordingly. Missed reports can mean that processes requiring them stall or are delayed, while late reports can be forgotten, lost or incorrect.
If staff are required to seek approval or submit a request when purchasing items, then they must abide by this requirement; this prevents unauthorised spending and helps to manage business and departmental finances.
You need to be diligent at all times; periods of carelessness, however brief, can cause problems immediately or at some point in the future. Due diligence is the systematic process of making sure that all information, facts and figures have been checked for accuracy with authoritative and reliable sources (adherence to matters of compliance). This is required to validate financial statements. It also refers to the care that a person needs to take when undertaking agreements and transactions in business to ensure all parts have been considered correctly.
4. Report on finances
4.1 Ensure structure and format of reports are clear and conform to organisational and statutory requirements
4.2 Identify and prioritise significant issues in statements, including comparative financial performances for review and decision making
4.3 Prepare recommendations to ensure financial viability of the organisation
4.4 Evaluate the effectiveness of financial management processes
4.1 – Ensure structure and format of reports are clear and conform to organisational and statutory requirements
When reports are created for submission, they need to be checked for clarity and to ensure that they meet organisational requirements.
Organisational requirements may be:
? Use of letter headed paper
? Use of organisational forms
? Correct information
? Submission methods, such as email
? Recipient, such as duty manager
The structure of the report may be subject to organisational requirements, especially if a report has multiple components.
For example, if a department was reporting on its quarterly budget performance, the report may contain:
? A top sheet with an overview
? A sheet giving budget allocations and actual figures ? Several pages of printed audit trails showing transactions
? Notes from the department manager.
These points are the main content of the report. They may need to be structured in a specific way or given in a specific order.
Different formats may be required for different parts or types of report.
Format may include:
? Balance sheets
? Cash flow statements
? Electronic forms
? Financial year reports
? Operating statements
? Statutory forms
Using the example of the report on the quarterly budget given above, the writer may need to use the following formats:
? A top sheet with an overview:
o a pie chart
? A sheet giving budget allocations and actual figures:
o balance sheet o spreadsheet o cash flow statement
? Several pages of printed audit trails showing transactions: o audit trails o spreadsheets
? Notes from the department manager:
o financial report o plain text o operating statement.
If you receive a report for your attention or to pass on, you should check that the report meets all requirements:
? Is it complete?
? Does it have all of the required information?
? Is it in the right format?
? Has it been sent to the right person?
? Is it in on time?
Consider input from auditors and the board of your company – they may have input regarding the compliance of reports and regarding organisational and statutory requirements.
4.2 Identify and prioritise significant issues in statements, including comparative financial performances for review and decision making
When reading or writing reports and statements, you need to ensure that you highlight any significant issues that need attention, so that they can be communicated and acted upon effectively.
These significant issues may be:
? Cost structures
? Internal controls
? Losses and returns
? Profitability ? Statutory obligations
? Suppliers and markets.
Where there are issues with any of the above points, the issue will need to be put forward for review, so that decisions can be made. You may be able to detail your recommendations on the report so that they can be taken into account.
It is important to make these issues clear in statements or reports, as they can be overlooked, especially if the report will not necessarily be read from cover to cover.
Any issues with the business’ finances are important and must be acted upon, for the sake of the business.
4.3 Prepare recommendations to ensure financial viability of the organisation
When reporting on business finances you may need to focus on data concerning the financial viability of the organisation. When you write about the business’ financial viability you will need to include evidence and figures to back up your claim.
This evidence may be in the form of:
? Cash flow
? Expenses and overheads
Recommendations could include:
? Changes in business activity, including markets, goods or services traded
? Labour costs, including decisions to move production to other locations or sites ? Write-offs.
The organisation’s financial viability can be measured and defined as the business’ ability to:
? Generate income
? Have enough income to cover operating expenses
? Meet financial obligations
How able the business is to meet these obligations and goals will define its financial viability.
Organisations that cannot meet these needs can be classed as unviable and may be closed down; if you can’t pay your staff what they are owed and cannot generate enough income to pay your bills, then the business may be in serious trouble. Financiers may not want or be able to bail the business out. In this instance they are generally sold or closed down.
By examining the types of recommendations above, you can create a report that determines and explains the business’ financial viability. This may be completed as part of the annual summary.
Where you discover that there are issues, you should make a plan with the relevant department to adapt the business plan and objectives to overcome these issues as a matter of urgency. Revising goals and objectives to focus on increasing profitability and reducing debts at an early stage can bring the business back to a healthy state of viability once more.
4.4 Evaluate the effectiveness of financial management processes
Evaluating financial management
It is necessary to evaluate the effectiveness of your financial management processes to ensure that these accurately meet your requirements. Look to identify the strengths and weaknesses and adapt or change your processes to ensure all works well to the needs of the business.
Evaluation may be undertaken as a matter of course, perhaps at the end of the financial year or following a major financial problem.
When evaluating your financial management processes, you may need to ask and answer questions, such as:
? What went well?
? What didn’t go so well?
? Did the process help you detect problems early on, before they became major issues?
? Did any major problems occur within the business that could have been prevented?
? Can the process adapt to match the organisation’s needs as it grows and develops?
? Do the processes allow you to manage the business’ finances effectively?
? Can the process be improved?
Your organisation may have its own criteria for you to use when evaluating the business’ current financial management processes.
When evaluating the processes, you need to be honest and strict; if an element of the process is outdated or problematic, you need to identify this and initiate steps to replace or improve it.
Ineffective financial management processes can cause problems for your organisation, such as not enabling you to detect problems early and not meeting all of your financial management needs. This can mean that your finance is not being managed correctly or in enough depth.
Communicating with personnel who use the systems regularly can usually give you in-depth feedback on the processes, so you should always call on them during your evaluations.
You will need to also ensure your processes follow any necessary legal regulations and requirements. There are organisations/agencies that provide information and assistance on such matters that may be of help to you in your evaluations.
Organisations that can assist in matters of financial regulation include:
? Auditing and Assurance Standards Board
? Australian Accounting Standards Board
? Australian Financial Security Authority
? Australian Prudential Regulation Authority
? Australian Securities and Investments Commission
? Australian Transaction Reports and Analysis Centre
? Financial Reporting Council
? Standards Business Reporting.
The Australian Government website provides further information on financial regulation and the above organisations at their website: http://www.australia.gov.au/topics/economy-money-and-tax/financialregulation (access date: 19.06.2015)
Skills and Knowledge Activity
Major Activity – An opportunity to revise the unit
At the end of your Learner Workbook, you will find an activity titled ‘Major Activity’. This is an opportunity to revise the entire unit and allows your trainer to check your knowledge and understanding of what you have covered. It should take between 1-2 hours to complete and your trainer will let you know whether they wish for you to complete it in your own time or during the sessions. Once this is completed, you will have finished this unit and be ready to move onto the next, well done!
You have now finished the unit ‘Manage finances.’
These suggested references are for further reading and do not necessarily represent the contents of this Learner Guide
Australian Tax Office: https://www.ato.gov.au/ (accessed 10/12/14)
https://www.ato.gov.au/Rates/Company-tax/ (accessed 10/12/14)
Payroll tax: http://www.business.gov.au/registration-and-licences/Pages/register-your-company.aspx (accessed 10/12/14)
https://www.ato.gov.au/Business/GST/ (accessed 10/12/14)
CGT: http://www.business.gov.au/business-topics/tax-finance-insurance/taxation/Pages/capital-gainstax.aspx (accessed 10/12/14)
http://www.investopedia.com/terms/b/bilateral-trade.asp (accessed 10/12/14)
INCOTERMS: http://www.investopedia.com/terms/i/incoterms.asp (accessed 10/12/14)
Competition and Consumer Act, within the Australian Consumer Law:
http://www.consumerlaw.gov.au/content/Content.aspx?doc=fact_sheets/FAQ.htm (accessed 10/12/14)
http://www.mondaq.com/australia/x/72914/cycling+rail+road/Montreal+Convention (accessed 10/12/14)
World Trade Organization:
http://www.agriculture.gov.au/market-access-trade/wto (accessed 10/12/14)
Business Finance: Theory and Practice
Author Eddie McLaney, publisher Financial Times/Prentice Hall
Small Business Management: An applied approach
Author Tim Mazzarol, publisher Tilde Publishing
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