Manage budgets and financial plans assessment answers

BSBFIM501

This a question of Diploma Of Leadership and Management. The topic is Manage budget and financial plans. In this assignment, Task 1 (1500-2500 words) and Task 2 (1500-2500 words) is in Report format and these two tasks need to be done by reading Appendix and taking sample of master budget given in the last of assessment booklet. Task 3 (90 words each question) is just question and answer.

Learner Guide

BSBFIM501

MANAGE BUDGETS AND

FINANCIAL PLANS

This learner guide is copyright protected and belongs to:

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TABLE OF CONTENTS

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

COURSE INTRODUCTION ........................................................................................................................ 2

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

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

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

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

ASSESSMENT CONDITIONS ..................................................................................................................... 8

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

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

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

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

CLARIFY BUDGET/FINANCIAL PLANS WITH RELEVANT PERSONNEL WITHIN THE

ORGANISATION TO ENSURE THAT DOCUMENTED OUTCOMES ARE ACHIEVABLE,

ACCURATE AND COMPREHENSIBLE AND NEGOTIATE ANY CHANGES REQUIRED TO BE

MADE TO BUDGET/FINANCIAL PLANS WITH RELEVANT PERSONNEL WITHIN THE

ORGANISATION ......................................................................................................................................... 10

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

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

VARIED ....................................................................................................................................................... 26

INITIATIVES TO SUPPORT WORKFORCE PLANNING OBJECTIVES .................................................................................... 28

TOPIC 2 - IMPLEMENT FINANCIAL MANAGEMENT APPROACHES ............................................. 30

DISSEMINATE RELEVANT DETAILS OF THE AGREED BUDGET/FINANCIAL PLANS TO

TEAM MEMBERS ....................................................................................................................................... 30

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

PROVIDE SUPPORT TO ENSURE THAT TEAM MEMBERS CAN COMPETENTLY

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

DEVELOP FEEDBACK MECHANISMS TO ACTION RECOMMENDATIONS ........................................................................... 32

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DETERMINE AND ACCESS RESOURCES AND SYSTEMS TO MANAGE FINANCIAL

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

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

TOPIC 3 - MONITOR AND CONTROL FINANCES .............................................................................. 35

IMPLEMENT PROCESSES TO MONITOR ACTUAL EXPENDITURE AND TO CONTROL COSTS

ACROSS THE WORK TEAM ..................................................................................................................... 35

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

MONITOR EXPENDITURE AND COSTS ON AN AGREED CYCLICAL BASIS TO IDENTIFY

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

IMPLEMENT, MONITOR AND MODIFY CONTINGENCY PLANS AS REQUIRED TO MAINTAIN

FINANCIAL OBJECTIVES AND REPORT ON BUDGET AND EXPENDITURE IN ACCORDANCE

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

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

TOPIC 4 - REVIEW AND EVALUATE FINANCIAL MANAGEMENT PROCESSES .......................... 49

COLLECT AND COLLATE FOR ANALYSIS, DATA AND INFORMATION ON THE

EFFECTIVENESS OF FINANCIAL MANAGEMENT PROCESSES WITHIN THE WORK TEAM

AND ANALYSE DATA AND INFORMATION ON THE EFFECTIVENESS OF FINANCIAL

MANAGEMENT PROCESSES WITHIN THE WORK TEAM AND IDENTIFY, DOCUMENT AND

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

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

IMPLEMENT AND MONITOR AGREED IMPROVEMENTS IN LINE WITH FINANCIAL

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

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

ADDITIONAL INFORMATION - GST ..................................................................................................... 58

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

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

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

SUMMARY ................................................................................................................................................... 63

GLOSSARY OF TERMS .............................................................................................................................. 63

REFERENCES ............................................................................................................................................ 66

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COURSE INTRODUCTION

ABOUT THIS GUIDE

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

package:

 BSBFIM501 - Manage budgets and financial plans

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

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

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

monitoring and controlling finances and reviewing and evaluating effectiveness of financial

management processes.

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

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

financial objectives of the team and organisation.

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

ABOUT THIS RESOURCE

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

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

easier to follow.

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

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

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

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

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

learning material.

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

assessments in class to support your learning.

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ABOUT ASSESSMENT

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

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

practical on the job improvements.

You are going to be assessed for:

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

workplace.

 Your ability to apply your learning.

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

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

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

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

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

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

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

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

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

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

skills and knowledge.

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

 Written Activity

 Case Study

 Observation

 Questions

 Third Party Report

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

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

trainer and assessor.

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

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

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

assessor will outline the requirements in these instances.

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ELEMENTS AND PERFORMANCE CRITERIA

1 Plan financial management

approaches

1.1 Access budget/financial plans for the work team

1.2 Clarify budget/financial plans with relevant personnel within

the organisation to ensure that documented outcomes are

achievable, accurate and comprehensible

1.3 Negotiate any changes required to be made to

budget/financial plans with relevant personnel within the

organisation

1.4 Prepare contingency plans in the event that initial plans need

to be varied

2 Implement financial

management approaches

2.1 Disseminate relevant details of the agreed budget/financial

plans to team members

2.2 Provide support to ensure that team members can

competently perform required roles associated with the

management of finances

2.3 Determine and access resources and systems to manage

financial management processes within the work team

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

control costs across the work team

3.2 Monitor expenditure and costs on an agreed cyclical basis to

identify cost variations and expenditure overruns

3.3 Implement, monitor and modify contingency plans as

required to maintain financial objectives

3.4 Report on budget and expenditure in accordance with

organisational protocols

4 Review and evaluate financial

management processes

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

effectiveness of financial management processes within the work

team

4.2 Analyse data and information on the effectiveness of

financial management processes within the work team and

identify, document and recommend any improvements to

existing processes

4.3 Implement and monitor agreed improvements in line with

financial objectives of the work team and the organisation

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EVIDENCE REQUIREMENT S

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

KNOWLEDGE EVIDENCE

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

 Describe basic accounting principles

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

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

 Explain the key requirements for financial record keeping and auditing

 Describe the principles and techniques involved in managing:

o budgeting

o cash flows

o electronic spreadsheets

o GST

o ledgers and financial statements

o profit and loss statements

PERFORMANCE EVIDENCE

Evidence of the ability to:

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

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

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

changes and disseminate information

 Prepare, implement and modify financial contingency plans

 Monitor expenditure and control costs

 Support and monitor team members

 Report on budget and expenditure

 Review and make recommendations for improvements to financial processes

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

auditing purposes

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

once.

ASSESSMENT CONDITION S

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

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

work and include access to:

 Resources and documentation used in the workplace

 Workplace policies and procedures

 Workplace budgets and financial plans

 Business technology

 Case studies and, where available, real situations

Assessors must satisfy NVR/AQTF assessor requirements.

PRE-REQUISITES

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

There are no pre-requisites for this unit.

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TOPIC 1 – PLAN FINANCIAL MANAGEMENT APPROACHE S

ACCESS BUDGET/FINANCIAL PLANS FOR THE WORK TEAM

WHAT IS A BUDGET?

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

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

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

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

planning financial management approaches.

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

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

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

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

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

strategic, tactical and operational plans.

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

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

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

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

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

are;

 Review and understand the past.

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

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

and enhancing expected behaviour.

 Set Strategies and Plans.

o Ensure financial plans align with human resource and asset management

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

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

strategic financial planning process.

 Forecast the future.

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

levels of revenue and expenses. Incorporate the organisations policies,

initiatives and priorities into forecasts. Identify, understand and develop

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

 Set Annual Budgets.

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

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

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

undermine the long-term objectives of the business.

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

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

marketing campaign, etc.

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

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

conform to a number of key points;

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

achievable

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

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

investigated and acted upon

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

what needs to be achieved

Effective Accounting and Financial Management systems provide accurate records in a

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

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

CLARIFY BUDGET/FINANCIAL PLANS WITH RELEVANT

PERSONNEL WITHIN THE ORGANISATION TO ENSURE THAT

DOCUMENTED OUTCOMES ARE ACHIEVABLE, ACCURATE

AND COMPREHENSIBLE AND NEGOTIATE ANY CHANGES

REQUIRED TO BE MADE TO BUDGET/FINANCIAL PLANS

WITH RELEVANT PERSONNEL WITHIN THE ORGANISATION

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STAFF BUDGETS

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

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

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

 Monitor and control business performance

 Provide a focus for employees in the conduct of business

 Define areas of responsibility and authority

Budgets and the budget process do have limitations, including:

 Budgeting consumes large amounts of time and cost

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

and even misleading depending on the source of information

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

to “missed” opportunities or opportunity costs

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

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

exchange rate where imports are involved.

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

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

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

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

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

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

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

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

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

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

opportunity to do business under a different model.

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

and the contributing to the enhancement of brand value?

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

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

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

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

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

training and staff development.

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

redundancy, job placement and counselling services.

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

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

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

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

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

than companies who have not adopted a flexible labour structure.

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

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

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

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

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

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

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

limit or control the effects.

PREPARING A BUDGET

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

following questions can be incorporated into the budgets;

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

 How does the business expect to achieve that goal?

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

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 How is the business placed to achieve these results?

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

towards these goals?

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

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

within that budget framework.

TYPES OF BUDGETS

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

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

common types of budgets;

 Financial Budgets and Statements

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

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

 Fixed (or Static) Budgets

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

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

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

clarifying the occurrence of the variances.

 Flexible Budgets

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

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

expenses. It is also known as a comparison budget.

 Budgeted Balance Sheet

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

in the budgeting process after a specific duration of time.

 Budgeted Revenue Statement

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

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

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

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

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

fundraising, etc.

 Cash Budget/Budgeted Cash flow

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

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

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

period.

 Expenditure Budgets

Predicts the expected expenses to be incurred by the business.

PLANNING BUDGETS

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

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

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

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

involved, then certainly considered;

 Financial or accounting areas of the business

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

within the budgets

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

the business

 Other Key stakeholders

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

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

information;

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

 Details pertaining to the growth of the business

 Projections and progress of specific projects

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 To control expenditure

 To target performance

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

 To provide information to investors

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

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

standards, etc.

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

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

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

Service Businesses utilise the follow budgets;

 Fees or revenue budget

 Operating expenses budget

 Budgeted income statement (budgeted profit & loss)

 Budgeted balance sheet

 Cash flow statement

Retail Businesses utilise the follow budgets;

 Sales budget

 Purchases budget

 Cost of goods sold budget

 Operating expenses budget

 Inventory budget

 Budgeted income statement

 Budgeted balance sheet

 Cash flow statement

Manufacturing Businesses utilise the follow budgets;

 Sales budget

 Production budget

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 Direct material purchases budget

 Direct material usage budget

 Direct labour budget

 Factory overhead budget

 Cost of goods sold budget

 Operating expense budget

 Inventory budget

 Budgeted income statement

 Budgeted balance sheet

 Capital expenditure budget

 Cash flow statement

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

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

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

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

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

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

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

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

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

the business.

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

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

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

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

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

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

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

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

business.

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

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

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

the cost cutting savings made in maintenance?

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FINANCIAL STATEMENTS – THE FUNDAMENTALS

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

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

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

These budgets are:

 Balance Sheet

 Profit and Loss Statement

 Cash Flow Statement

BALANCE SHEET

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

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

by the business.

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

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

business.

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

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

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

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

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

office.

The balance sheet is essentially made up of three categories;

 Assets

 Liabilities

 Proprietorship/Capital/Owners Equity

Example 1:

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How Many More Budgets To Go! Pty Ltd

Budgeted Balance Sheet as at 31 March 2010

These categories are defined in the definitions section.

PROFIT AND LOSS STATEMENTS

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

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

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

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

business is performing against a previous period or budgeted figures.

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

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

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

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

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

a loss.

ASSETS $ $ LIABILITIES $ $

Current Assets Current Liabilities

Bank 10000 Creditors 25000

Debtors 15000 Tax Payable 100000

Stock 28000 Accrued Rent 1500 126500

Prepaid

Insurance

45000 57500

Deferred Liabilities

Fixed Assets Mortgage on Premises 100000

Premises 200000

Vehicles 50000 Owners’ Equity

Machinery 100000 Capital 175000

Loan to AB Ltd 10000 360000 Undistributed profits 16000 191000

Total Assets 417500 Total Liabilities and Owners

Equity

417500

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Tom and Jerry's Cheese Factory

Budgeted Profit and Loss Statement

for the year to end 31 December 20X5

Budgeted Sales 400000

less Cost of Goods Sold

Budgeted Stock (1 January 20X5) 50000

Budgeted Purchases 250000

300000

Budgeted Stock (31 December 20X5) 40000 260000

Budgeted Gross Profit 140000

less Budgeted Operating Expenses

Selling and Distribution Expenses 70000

Administration Expenses 40000

Financial Expenses 10000 120000

Budgeted Net Profit 20000

CASH FLOW STATEMENTS

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

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

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

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

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

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

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

can be broken down into three core areas;

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 Operating

 Investing

 Financing

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

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

Operating cash flows can include;

 Cash receipts from the sale of goods and services

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

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

activity depending on the type of business)

 Tax payments

 Payments to suppliers for goods and services

 Payments to employees (or on behalf of employees)

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

make and sell its products.

Investing cash flows include;

 Interest received from loans issued by the business

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

 Receipts from purchase of plant and equipment

 Expenditure for purchase of plant and equipment

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

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

Financial cash flows include;

 Proceeds from issuing shares

 Proceeds from issuing short or long term debt

 Payments of dividends

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 Payments for repurchase of company shares

 Repayment of debt principal, including capital leases

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

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

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

 Doubtful debts

 Discount allowed

 Depreciation

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

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

cash by;

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

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

suppliers in a timely manner which suits the business

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

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

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

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

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

appropriate audit and fraud controls exist

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

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

timely and efficient receipt of money occurs

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

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

‘cash.'

DEVELOPING BUDGETS

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

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 Preparing budgets & other financial plans

 Collecting actual operating data & information

 Analysing & reporting deviations or variances

 Taking corrective action including revising plans as appropriate

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

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

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

forward.

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

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

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

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

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

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

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

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

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

in controlling the processes within a business.

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

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

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

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

are sent to the departmental managers to act on.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ACCOUNTING PRINCIPLES

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

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

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

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

 Business Entity

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

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

and other business entities.

 Historical Cost Concept

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

reflects past and historical events.

 Going Concern

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

indefinitely.

 The Accounting Period

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

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 Objectivity

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

 Conservatism

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

 Consistency

Using the same methods of accounting over different periods.

 Materiality

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

is not considered ‘material’).

BUDGETING APPROACHES

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

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

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

business’s life.

 Unit Cost budgeting

o Linkage of financial information to activity levels

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

product.

o Enables comparison across areas or products/services.

 Bottom Up budgeting

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

each.

o Need to identify every detail.

o Complex and time consuming to perform.

 Top Down budgeting

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

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

organisation.

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

 Zero Based budgeting

o Common approach in current economic crisis

o Managers create budgets from scratch

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

previous history or performance.

o Requires a lot of time and effort.

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PREPARE CONTINGENCY PLANS IN THE EVENT THAT

INITIAL PLANS NEED TO BE VARIED

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

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

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

planning process.

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

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

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

‘extreme situations’ can cause.

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

 The world Economic Crisis

 9/11

 Natural Disasters

o Victorian Bush Fires

o Hurricane Katrina

o Flu Pandemics

 Climate Change

 Mining Boom in Western Australia and Queensland

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

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

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

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

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

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

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

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

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

against the potential cost and likelihood of the disaster

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

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

99” fields in date sensitive programs.

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

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

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

compliance in the event of a major supply chain failure.

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

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

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

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

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

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

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

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

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

 The nature of the extreme situation

 The potential risk involved

 The likely impact on the business

 The costs associated with the plans implementation

 A recovery plan

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

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

 List all the activities of the plan

 Establish the interdependencies of each activity

 Determine the resources and time required by each activity

 Determine the sequences of each activity

 Track and test the progress of the plans development.

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

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

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

of a successful plan.

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

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

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

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

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

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

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

INITIATIVES TO SUPPORT WORKFORCE PLANNING OBJECTIVES

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

Anon circa 1800.

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

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

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

test…..what’s in it for me.

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

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

Managing effective change requires the following steps.

 A clear vision

 The ability to model the way

 The pressure for change

 The capacity for change

 Actionable first steps

 Reinforcement and consolidation

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

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TOPIC 2 - IMPLEMENT FINANCIAL MANAGEMENT APPROACHE S

DISSEMINATE RELEVANT DETAILS OF THE AGREED

BUDGET/FINANCIAL PLANS TO TEAM MEMBERS

COMMUNICATE THE BENEFITS OF COST CONTROL

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

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

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

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

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

commonly feel disregarded and taken advantage of.

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

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

implement.

They ensure: