BSB60215 Advanced Diploma of Business

BSB61218 Advanced Diploma of Program Management

BSB61015 Advanced Diploma of Leadership and Management

BSB61315 Advanced Diploma of Marketing and Communication

BSBFIM601

Manage finances

Additional Reading

Table of Contents

Application 5

Performance Criteria 6

Foundation Skills 7

Assessment Requirements 8

1. Plan for financial management 10

1.1 – Review and analyse previousfinancial data to establish areas which have generated a profit or loss 11

Accounting principles 11

Examining past figures 13

Your budget 13

Forecasting 14

Activity 1A 16

1.2 – Undertake research to review reasons for previous profit and loss 17

Investigating profit and loss 17

Researching results 18

Activity 1B 20

1.3 – Review business plan to establish critical dates and initiatives that will require or generate resources in the next financial cycle 21

Critical dates 21

Slow periods 22

Resources 23

Business plan 24

Activity 1C 25

1.4 – Analyse cash flow trends 26

Cash flow 26

Analysing cash flow 26

Activity 1D 28

1.5 – Review statutory requirements for compliance and liabilities for tax 29

Tax liability 29

Other statutory requirements and restrictions 31

World Trade Organization (WTO) – Agriculture. (n.d.). Retrieved from http://www.agriculture.gov.au/market-access-trade/wto Accessed 01/02/17 33

Fair trading laws 33

Licensing permits 33

Activity 1E 34

1.6 – Review existing software and its suitability for financial management 35

Financial management software 35

Activity 1F 37

2. Establish budgets and allocate funds 38

2.1 – Use previous financial data to determine allocations for resources 39

Resource allocation 39

Financial data 39

Activity 2A 41

2.2 – Make informed estimates of new items for inclusion in budget 42

Estimating new resources 42

Informed estimates 43

Activity 2B 45

2.3 – Prepare budgets in accordance withorganisational requirements and statutory requirements 46

Preparing budgets 46

Activity 2C 47

3. Implement budgets 48

3.1 – Circulate budgets and ensure managers and supervisors are clear about budgets, reporting requirements and financial delegations 49

Circulating budgets 49

The budget 50

Reporting requirements 50

Communicating effectively 51

Active listening and questioning 52

Activity 3A 53

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 54

Avoiding theft 54

Fraud 55

Recording transactions 56

Activity 3B 57

3.3 – Review profit and loss statements, cash flows and ageing summaries 58

Reviewing past information 58

Profit and loss statements 58

Cash flows 58

Activity 3C 60

3.4 – Revise budgets, as required, to deal with contingencies 61

Contingencies 61

Revising budgets 61

Activity 3D 64

3.5 – Maintain audit trails to ensure accurate tracking and to identifydiscrepanciesbetween agreed and actual allocations 65

Audit trails 65

Budget allocations 66

Activity 3E 66

3.6 – Ensure compliance with due diligence 67

Compliance 67

Due diligence 67

Activity 3F 68

4. Report on finances 69

4.1 – Ensure structure andformat of reports are clear and conform to organisational and statutory requirements 70

Checking reports 70

Receiving reports 73

Ratio analysis 74

Activity 4A 75

4.2 – Identify and prioritise significant issuesin statements, including comparative financial performances for review and decision making 76

Identifying issues 76

Activity 4B 77

4.3 – Preparerecommendations to ensure financial viability of the organisation 78

Financial viability 78

Recommendations 79

Activity 4C 79

4.4 – Evaluate the effectiveness of financial management processes 80

Evaluating financial management 80

Activity 4D 81

References 82

Unit of Competency

Application

This unit describes the skills and knowledge required to undertake budgeting, financial forecasting and reporting and to allocate and manage resources to achieve the required outputs for the business unit. It includes contributing to financial bids and estimates, allocating funds, managing budgets and reporting on financial activity.

It applies to individuals who have managerial responsibilities which include overseeing the management of financial and other resources across a business unit, a series of business units or teams, or an organisation. It covers all areas of broad financial management. In a larger organisation this work would be supported by specialists in financial management.

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

Unit Mapping Information

BSBFIM601A Manage finances – equivalent unit

Unit Sector

Finance – Financial Management

Performance Criteria

Element Elements describe the essential outcomes.	Performance Criteria Performance criteria describe the performance needed to demonstrate achievement of the element.
Plan for financial management	Review and analyse previous financial data to establish areas which have generated a profit or loss Undertake research to review reasons for previous profit and loss Review business plan to establish critical dates and initiatives that will require or generate resources in the next financial cycle Analyse cash flow trends Review statutory requirements for compliance and liabilities for tax Review existing software and its suitability for financial management
Establish budgets and allocate funds	Use previous financial data to determine allocations for resources Make informed estimates of new items for inclusion in budget Prepare budgets in accordance with organisational requirements and statutory requirements
Implement budgets	Circulate budgets and ensure managers and supervisors are clear about budgets, reporting requirements and financial delegations Manage risks by checking there are no opportunities for misappropriation of funds and that systems are in place to properly record all financial transactions Review profit and loss statements, cash flows and ageing summaries Revise budgets, as required, to deal with contingencies Maintain audit trails to ensure accurate tracking and to identify discrepancies between agreed and actual allocations Ensure compliance with due diligence
Report on finances	Ensure structure and format of reports are clear and conform to organisational and statutory requirements Identify and prioritise significant issues in statements, including comparative financial performances for review and decision making Prepare recommendations to ensure financial viability of the organisation Evaluate the effectiveness of financial management processes

Foundation Skills

This section describes language, literacy, numeracy and employment skills incorporated in the performance criteria that are required for competent performance.

Reading

Interprets, analyses and evaluates complex information to determine and adhere to organisational or legislative requirements and to assist with financial decision making.

Writing

Develops and records information which incorporates a detailed analysis of factual and forecasted information
Prepares documents using format, content and layout appropriate to audience, purpose and regulatory requirements.

Oral Communication

Explains financial decisions and outcomes clearly and uses listening and questioning techniques to exchange information and obtain agreement.

Numeracy

Reviews and analyses numerical data embedded in organisational documentation and legislation
Compares and contrasts complex numerical data to analyse and evaluate financial position and processes.
Uses appropriate formulae to analyse financial data to assess and manage risk and identify discrepancies.

Navigate the world of work

Recognises, understands and adheres to legislative and organisational requirements in undertaking own work.

Interact with others

Selects and uses appropriate conventions and protocols when communicating with supervisors and managers to share information or seek agreement.

Get the work done

Uses logical processes in planning, implementing and evaluating complex tasks to achieve stated goals
Uses formal analytical thinking techniques to identify issues, investigate underlying causes and generate possible solutions, seeking input from others as required
Uses a range of digital technology to access, filter, compile, integrate and logically present complex information from multiple sources
Investigates new digital technologies and applications to manage and manipulate data.

Assessment Requirements

Performance Evidence

Evidence of the ability to:

Plan for financial management
Read and review profit and loss statements, cash flows and ageing summaries
Prepare, implement and revise a budget which aligns with the business plan, is based on research and analysis of previous financial data and cash flow trends, and meets all compliance requirements
Contribute to financial bids and estimates
Establish a budget and allocate funds in accordance with statutory and organisational requirements
Communicate with other people including:

reporting on financial activity and making recommendations
identifying and prioritising significant issues
ensuring managers and supervisors are clear about budgets.
Analyse the effectiveness of existing financial management approaches including reviewing financial management software, managing risks of misappropriation of funds, ensuring systems are in place to record all transactions, maintaining an audit trail and complying with due diligence.

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

Knowledge Evidence

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

Identify the requirements for financial probity
Describe the principles of accounting and financial systems
Explain Australian, international and local legislation and conventions that are relevant to financial management in the organisation
Outline the requirements of the Australian Tax Office, including Goods and Services Tax, Company Tax, Pay As You Go.

Assessment Conditions

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:

Financial data
Relevant legislation and Australian Tax Office requirements
Examples of business plans, profit and loss statements, cash flows and ageing summaries
Organisational financial policies and procedures
Financial management software.

Assessors must satisfy NVR/AQTF assessor requirements.

Links

Companion Volume implementation guides are found in VETNet – https://vetnet.education.gov.au/Pages/TrainingDocs.aspx?q=11ef6853-ceed-4ba7-9d87-4da407e23c10

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

By the end of this chapter you should be able to:

Examine previous financial data
Identify profits and losses for different areas

Accounting principles

There are a variety of different principles which should inform your practice when managing finances.

Accounting principles include:

‘Accrual principle – This is the concept that accounting transactions should be recorded in the accounting periods when they actually occur, rather than in the periods when there are cash flows associated with them. This is the foundation of the accrual basis of accounting. It is important for the construction of financial statements that show what actually happened in an accounting period, rather than being artificially delayed or accelerated by the associated cash flows. For example, if you ignored the accrual principle, you would record an expense only when you paid for it, which might incorporate a lengthy delay caused by the payment terms for the associated supplier invoice.
Conservatism principle – This is the concept that you should record expenses and liabilities as soon as possible, but to record revenues and assets only when you are sure that they will occur. This introduces a conservative slant to the financial statements that may yield lower reported profits, since revenue and asset recognition may be delayed for some time. Conversely, this principle tends to encourage the recordation of losses earlier, rather than later. This concept can be taken too far, where a business persistently misstates its results to be worse than is realistically the case.
Consistency principle – This is the concept that, once you adopt an accounting principle or method, you should continue to use it until a demonstrably better principle or method comes along. Not following the consistency principle means that a business could continually jump between different accounting treatments of its transactions that makes its long-term financial results extremely difficult to discern.
Cost principle – This is the concept that a business should only record its assets, liabilities, and equity investments at their original purchase costs. This principle is becoming less valid, as a host of accounting standards are heading in the direction of adjusting assets and liabilities to their fair values.
Economic entity principle – This is the concept that the transactions of a business should be kept separate from those of its owners and other businesses. This prevents intermingling of assets and liabilities among multiple entities, which can cause considerable difficulties when the financial statements of a fledgling business are first audited.
Full disclosure principle – This is the concept that you should include in or alongside the financial statements of a business all of the information that may impact a reader’s understanding of those financial statements. The accounting standards have greatly amplified upon this concept in specifying an enormous number of informational disclosures.
Going concern principle – This is the concept that a business will remain in operation for the foreseeable future. This means that you would be justified in deferring the recognition of some expenses, such as depreciation, until later periods. Otherwise, you would have to recognize all expenses at once and not defer any of them.
Matching principle – This is the concept that, when you record revenue, you should record all related expenses at the same time. Thus, you charge inventory to the cost of goods sold at the same time that you record revenue from the sale of those inventory items. This is a cornerstone of the accrual basis of accounting. The cash basis of accounting does not use the matching the principle.
Materiality principle – This is the concept that you should record a transaction in the accounting records if not doing so might have altered the decision making process of someone reading the company’s financial statements. This is quite a vague concept that is difficult to quantify, which has led some of the more picayune controllers to record even the smallest transactions.
Monetary unit principle –This is the concept that a business should only record transactions that can be stated in terms of a unit of currency. Thus, it is easy enough to record the purchase of a fixed asset, since it was bought for a specific price, whereas the value of the quality control system of a business is not recorded. This concept keeps a business from engaging in an excessive level of estimation in deriving the value of its assets and liabilities.
Reliability principle – This is the concept that only those transactions that can be proven should be recorded. For example, a supplier invoice is solid evidence that an expense has been recorded. This concept is of prime interest to auditors, who are constantly in search of the evidence supporting transactions.
Revenue recognition principle – This is the concept that you should only recognize revenue when the business has substantially completed the earnings process. So many people have skirted around the fringes of this concept to commit reporting fraud that a variety of standard-setting bodies have developed a massive amount of information about what constitutes proper revenue recognition.
Time period principle –This is the concept that a business should report the results of its operations over a standard period of time. This may qualify as the most glaringly obvious of all accounting principles, but is intended to create a standard set of comparable periods, which is useful for trend analysis’.

Accounting Tools, Basic accounting principles, http://www.accountingtools.com/basic-accounting-principles (accessed 29/01/2017)

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.

Your budget

A budget will include details of the required expenses for a period of time – usually over a one month period, but this can depend on the needs of the business. These expenses must fall within the allocated income assigned to the budget.

An example budget:

Expenses	Amount $	Total $
Buildings
Rent Insurance	4000.00 150.00	4150.00
Utilities
Electric Water Telephone/Internet	150.00 120.00 200.00	470.00
Services
IT support Webhosting Catering Cleaning	500.00 100.00 300.00 500.00	1400.00
Equipment
Stationery IT equipment	$100.00 $800.00	900.00
	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.

Forecasting

It is important to look at look at financial forecasts to help plan ahead for 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.

You should:

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 2012-2013 year/period to $6,000,000 in the 2013-2014 year/period; 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 between 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.

Activity 1A

1.2 – Undertake research to review reasons for previous profit and loss

By the end of this chapter you should be able to:

Investigate the reasons for 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:

Price
Presentation
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.

Researching results

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 – to see money allocated, expectations and variances in these totals, such as overspend
Cash flow/profit reports – 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) – to see money coming in, money spent and how money is spent, as well as periodic results and statements
Market valuations – to value the business, its stock and its assets – market valuations are determined by fluctuations in supply and demand, and what someone is willing to pay, e.g. a stock may be priced at $50.00 per unit but if no one is willing to pay more than $45.00 a unit then the market value will drop to this.

An example budget with forecast and variations included:

Expenses	Budget forecast $	Amount spent $	Difference in forecast to spend $
Buildings
Rent Insurance	4200.00 150.00	4000.00 150.00	-200
Utilities
Electric Water Telephone/Internet	150.00 120.00 250.00	150.00 120.00 200.00	-50
Services
IT support Webhosting Catering Cleaning	600.00 100.00 300.00 500.00	500.00 100.00 300.00 500.00	-100
Equipment
Stationery IT equipment	100.00 700.00	$100.00 $800.00	100
Total $	7170.00	6920.00	-250

An example cash flow showing profits:

	January	February	March	April
	$	$	$	$
Start cash balance	14,000.00	41,400.00	86,720	100,120.00
Cash in
Product 1	50,000.00	60,000.00	40,000.00	46,000.000
Product 2	20,000.00	25,000.00	20,000.00	22,000.00
Product 3	22,000.00	25,000.00	18,000.00	18,000.00
Total cash in	92,000.00	110,000.00	78,000.00	86,000.00
Cash out
Rent	-4000.00	-4000.00	-4000.00	-4000.00
Utilities	-600.00	-680.00	-600.00	-720.00
Salaries	-60,000.00	-60,000.00	-60,000.00	-60,000.00
Total cash out	-64,600.00	-64,680.00	-64,600.00	64,720.00
Balance	27,400.00	45,320.00	13,400.00	21,280
Closing balance (with start balance)	41,400.00	86,720.00	100,120.00	121,400

An example profit and loss statement:

Profit and loss statement July 1^st to July 31^st 2016
Operating revenue
Product sales	$20,000.00
Service sales	$15,000.00
Total operating revenue	$35,000.00
Operating expenses
Costs of goods sold	$8,000.00
Gross profit	$27,000.00
Overheads
Rent	$1,700.00
Insurance	$200.00
Utilities	$100.00
Office supplies	$80.00
Total overheads	$2,080.00
Operating income	$24,920.00
Other income (expenses)
Loan interest	$500.00
Earnings before tax	$24,420.00
Taxes	$8,000.00
Net earnings	$16,420.00

Activity 1B

1.3 – Review business plan to establish critical dates and initiatives that will require or generate resources in the next financial cycle

By the end of this chapter you should be able to:

Establish critical dates and initiatives in need of resources in the next financial cycle
Establish critical dates and initiatives that will generate resources in the next financial cycle

Critical dates

Planning your financial year in detail will allow you to make the most of the 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:
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.
end of financial year sales (EOFYS):
when retail businesses sell off current stock before new stock arrives (around the month of June).
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:

such as seasonal clothing changes
newly-released items
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

Slow periods are times that your trade is generally quieter and may occur at the same time every year.

For example:

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 busier 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:
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.

Resources

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:

take more staff on in busy periods
reduce staff numbers or hours during slower periods
consider the use of flexible staffing, e.g. temporary or casual staff
Energy. Consider energy use:

higher when the store is open more and busier and hence justified
lower when the store is open less
cost of heating
cost of air conditioning
cost of lighting
Materials. Resources used in production:
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
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:

short-term cash investment (usually up to a timeframe of one year), which allows cash to be liquidated quickly when it is needed
meet customer demand – if customers are desperate for the latest fashion or gadget, order stock in for them
have a sale to get rid of last year’s/last season’s stock
have the stock available.

Business plan

You can plan for these busy and quiet periods using your business plan. A business plan is a written document detailing the organisation’s business and its sales and marketing strategies on how to achieve its goals. It is usual to include financial information such as the financial background (e.g. year-end statements), projected profit and loss statements and budget forecasts. This will depend on your organisation’s needs. Regarding organisational finances, the business plan will help to manage sales production and financial activities.

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:

when to gather additional materials and stock
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!’

Activity 1C

1.4 – Analyse cash flow trends

By the end of this chapter you should be able to:

Analyse cash flow
Identify cash flow trends

Cash flow

Cash flow is the movement of money in and out of the business. By analysing your cash flow, you can see when and where the 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:
money gained and spent through the operation of the business:

business income
business losses
expenditure
Investment activity:
purchase and return of investments, such as:

property
assets
equipment
Financing activity:
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 on taking advantage of these opportunities.

An example format for a cash flow analysis:

(XYZ Company) Statement of cash flow – for year end 30/06/2015
Cash flow from operating activities	$
Payments to suppliers	-8000.00
Payments to employees	-80,000.00
Interest payments	-5000.00
Interest received	3000.00
Taxes paid	-10,000.00
Net cash flow from operating activities	-103,000.00

Cash flow from investing activities	$
Purchases of equipment	-10,000.00
Purchases of property	–
Proceeds from sale of equipment	2,000.00
Proceeds from sale of property	–
Net cash flow from investing activities	-8,000.00

Cash flow from financing activities	$
Proceeds from borrowing	4,000.00
Payments of borrowings (repayment of principal)	-2,000.00
Investments into business	-10,000.00
Drawings from business investments	15,000.00
Net cash flow from financing activities	19,000.00

Net increase/decrease in cash held	-92,000.00

Cash at beginning of period	2000,000.00
Cash at end of period	108,000.00

Activity 1D

1.5 – Review statutory requirements for compliance and liabilities for tax

By the end of this chapter you should be able to:

Identify statutory requirements for compliance and liabilities for tax
Review requirements and liabilities to ensure compliance

Tax liability

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 unit.

The main taxes applied to businesses are:

Company tax
Payroll tax
Goods and Services Tax (GST)
Capital Gains Tax (CGT).

Company tax as of 9 May 2016 the Australian Government has assumed a caretaker role with company tax until the new government is in place. It has been proposed that corporate tax will be reduced progressively from 30% to 25% over the next ten years. Currently, small businesses have been given a reduction from 28.5% to 27.5%; to illustrate company tax in more detail the below rates show the tax year 2015 to 2016.

Company tax in the tax year 2015 to 2016:

Companies:

small business entities, (for income years beginning on or after 1July 2015) 28.5%
otherwise 30%

Life insurance companies 30%
RSA providers (other than life insurance companies):

RSA component of taxable income 15%
additional tax on no-TFN contribution income 34%
Pooled development funds (PDFs):

small and medium enterprises 15%
unregulated investment component 25%
other 30%
Credit unions:

small credit unions under $50,000, large credit unions $150,000 and over (small business entities for income years beginning on or after 1July 2015) 28.25%, otherwise 30%
medium credit unions $50,000 to $149,999 (small business entities for income years beginning on or after 1July 2015) 42.75%, otherwise 45%
Non-profit companies on taxable income:

$0 to $416 nil
$417 to $915 55%
$916 and above 30%
Non-profit companies that are small businesses:

$0 to $416 nil
$417 to $863 55%
$864 and above 28.5%.

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 unit.

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 unit.

Goods and Services Tax (GST) is a national tax applied to many goods and services that are sold in Australia. The rate is currently (July 2016) 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 unit.

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 unit.

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 minimise trade deficits.”

Bilaterial Trade Definition |Investopedia. (n.d.) Retrieved from http://www.investopedia.com/terms/b/bilateral-trade.asp Accessed 01/02/17

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).”

Incoterms Definition | Investopedia. (n.d.). Retrieved from http://www.investopedia.com/terms/i/incoterms.asp Accessed 01/02/17

Competition and Consumer Act

The Trade Practices Act 1974 was superseded by the Competition and Consumer Act on January 1^st 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.”

Accessed 09/12/2014

Warsaw Convention

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.”

Montreal Convention – Transport – Australia – Mondaq. (n.d.). Retrieved from http://www.mondaq.com/australia/x/72914/cycling+rail+road/Montreal+Convention Accessed 01/02/17

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.”

World Trade Organization (WTO) – Agriculture. (n.d.). Retrieved from http://www.agriculture.gov.au/market-access-trade/wto Accessed 01/02/17

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
Price
Industry regulation (e.g. gas, electricity, airports, telecommunications).

The Australian Competition and Consumer Commission are in charge of enforcing the Competition and Consumer Act.

Licensing permits

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 enable 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-and-licences/Pages/default.aspx and at the Australian Business Licence and Information Service website: https://ablis.business.gov.au/pages/home.aspx (accessed: 27/01/2017).

Activity 1E

1.6 – Review existing software and its suitability for financial management

By the end of this chapter you should be able to:

Test existing software for its suitability for financial management
Identify suitable financial management software

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 who 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:

Add-ons
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
Incomplete
Too expensive
Not going to be updated and maintained.

Popular accounting software packages

Intuit QuickBooks provides a comprehensive range of accounting features and is popular for small businesses; it has security and encryption (as used in banks), tracks financial activity and data can be accessed online.

MYOB, along with providing accounting features this software goes further by enabling the user to look at ways to increase profitability. It is SuperStream compliant for the Australian Taxation Office’s superannuation requirements.

Reckon is software suitable for small businesses; it offers a comprehensive range of accounting features, e.g. resource planning, credit management and document management.

Saasu is accounting software that can be used across many platforms/devices; it offers the ability to automate many tasks such as setting up direct client prompts for payments and reminders and provides smart bank fees to save time on bank reconciliations.

Xero is a well-used accounting software program and offers a full range of services for the user, for example, you can send online invoices, import data and reconcile, set up bank fees, and can work away from your desk with a mobile app.

Activity 1F

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

By the end of this chapter you should be able to:

Analyse previous financial data
Identify areas which need resources

Resource allocation

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

Financial data you can use to assist you in decisions relating to resource allocation may include:

Sales figures
Profitability
Resource use
Expenditure
Cost of resources
Efficiency.

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 over-allocate resources.

For example:

Service in a bar
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 the 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 walk-outs. 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.

Activity 2A

2.2 – Make informed estimates of new items for inclusion in budget

By the end of this chapter you should be able to:

Gather information from accurate, trustworthy sources to make informed estimates
Estimate what new items need to be included in the 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 the 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
Consumables.

The cost associated with new items in a budget may be:

Initial cost
Running costs/fuel
Maintenance.

When new expenses are proposed, you will need to do two things:

Work out the cost of the new item, as explained above
Determine a budget for the item.

Assets, liabilities and equity

It is important to note that the number 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.

Informed estimates

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
Tax
Insurance
Fuel
Consumables, such as tyres
Maintenance
Repairs.

An example to highlight estimation of costs:

Items	Estimated amount $
Cost of car	40,000.00
Stamp duty	1,200.00 (example figure for NSW)
Registration transfer fee	24.00 (example figure for NSW)
Vehicle registration	300.00
Company car insurance	600.00
Fuel – estimated yearly mileage 12,874.75 Km	2000.00 (estimated yearly cost)
Maintenance per year	600.00
Consumables per year	300.00
Repairs	500.00
Total estimated costs $	45,524.00

You would have to budget for the initial outlay as well as the ongoing running costs associated with the vehicle over time.

Activity 2B

2.3 – Prepare budgets in accordance with organisational requirements and statutory requirements

By the end of this chapter you should be able to:

Identify relevant organisational and statutory requirements regarding budgets
Prepare budgets

Preparing budgets

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.

Activity 2C

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

By the end of this chapter you should be able to:

Circulate budgets appropriately
Check managers and supervisors understand budgets, reporting requirements and financial delegations

Circulating budgets

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 upcoming 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
Resources
Check out 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

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
Maintenance
Repairs
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.

Reporting requirements

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.

You will need to be clear and concise when giving information to managers and supervisors. When you are clear and concise, you provide information without room for misinterpretation in a timely and efficient way.

Being clear and concise means:

Speaking at a reasonable pace, for easy comprehension
Varying the tone and place emphasis on important points
Speaking at a good volume, so that everybody can hear
Articulating your words, for general understanding
Using uncomplicated language
Paying attention to your audience
Acting positively for the achievement of desirable outcomes (especially when dealing with prospective customers)
Being assertive, for the perception of confidence, and clarity of thought
Not dominating conversations
Not waffling or repeating yourself

Communicating effectively

You will need to understand how to communicate effectively with a range of different stakeholders and for different purposes. You may communicate with people during meetings, in conferences and on a one-to-one basis.

Tips for verbal communication:

Using active listening techniques e.g. clarifying by summarising
Controlling your tone of voice and body language e.g. remain calm and demonstrate understanding:
- talk slowly
- look interested by maintaining eye-contact and expression of concern
- do not fold arms
Interpreting non-verbal and verbal messages e.g. resistance
Your use of language, verbal or non-verbal – try to be accommodating and adapt your style
Questioning to clarify and confirm understanding
Using language and concepts appropriate to cultural differences:
- different cultures and communities have different euphemisms and accents, which you should bear in mind when speaking
- English can potentially be a second language
- some words, terms and phrases may be offensive
Using positive, confident and co-operative language.

Active listening and questioning

Active listening and questioning skills are very important to hone.

Questioning techniques could include:

Open questions allow other people to give a full description or expand on certain points. The best open-ended questions start with ‘when’, ‘what’, ‘how’, ‘who’ or ‘where’.
Closed questions (that predict a yes or no answer) are okay for gathering information, but bear in mind that they give no opportunity for you to discuss things.
Either/or questions give a person two choices but restrict the respondent to those choices – you should only use these if you are certain that the answer is one or the other.
Leading questions are suggestive and can sometimes be used to persuade.

It has been said that people spend 25% of their time speaking, and 75% listening during verbal exchanges. It is absolutely essential that you demonstrate excellent listening skills in the business world.

You will need to be able to:

Effectively comprehend information
Maintain concentration and show enthusiasm
Repeat what the other person has said, as evidence that you are listening attentively
Maintain eye contact
Resist the temptation to interrupt
Practice turn taking during discussions.

It is also a good idea to keep a record of the key information discussed with colleagues. If you don’t do this then there will be a risk of forgetting essential information.

You cannot talk as well as listen. When someone else is speaking, you should make it your duty to actively listen to what they are saying. This will help you to respond appropriately. Try to say less so that the person you are talking to can say more (and you can listen).

Active listening is a form of communicating; it requires the listener to feed back what they hear to the speaker, rather than simply hearing what they say.

When listening actively, you should provide enough time for the speaker to tell their full story and offer a sufficient delay after they speak. Use this delay after they speak to think about what you will say – try to tune out any thoughts that occur while the other person is speaking.

Active listening usually involves either verbal or non-verbal feedback and is useful to demonstrate your understanding and empathy. When someone is listening to the words being spoken by another, they are also taking note of the way the words are being spoken.

Feedback can include:

Verbal feedback:

‘Mmm’ ‘Yes’
‘I see’
‘Carry on’
Non-verbal feedback:

Eye contact
Nodding
Reacting to what the person says through facial expression e.g. smiling, looking concerned, etc.

Activity 3A

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

By the end of this chapter you should be able to:

Check for opportunities for misappropriate of funds
Check that systems and processes are in place to record all financial transactions

Avoiding theft

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 on the theft of money through transactions in the workplace.

Petty cash

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.

Cash control

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.

Resource ordering

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.

Refunds

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.

Fraud

Fraud is a serious concern for any business and can be experienced in different ways by those working for you or with you. Accounting processes should be vigilant in looking for anomalies to ensure that these do not go undetected.

This can include:

Payroll fraud – where contractors or workers submitting for hours and expenses claim for more than they are entitled to. For example, they may mislay receipts when claiming for expenses or falsify timesheets; patterns in worker payroll activities should be carefully monitored for unusual behaviours.
Double-check fraud – where the person writing cheques for payments, writes a cheque for themselves at the same time, for example, if writing a cheque for $300.00 for ABC Company, the person writes a cheque for $100.00 in their own name while coding both cheques as ABC Company on the accounting system.
Over-ordering fraud – for example, where a worker orders too many supplies (e.g. stationery), returns them in exchange for a gift card which is then used to make a small purchase while redeeming the remaining value of the card in cash.
Friendship fraud – trusting friends and family without question at work. Most times this is not a cause for concern but if financial inconsistencies occur, believing that those closest to you would not be involved or at fault can cost dearly. For example using the company credit card for personal purchases.

White collar crimes are those crimes that are committed within businesses for financial gain. They are non-violent and can include securities fraud, embezzlement corporate fraud and money laundering. This term was introduced to describe those that commit such crimes, workers in smart dress and of social standing. An example of this can be seen with Credit Suisse in 2014, where they helped US citizens avoid tax payments by hiding income from the Internal Revenue Service.

Compiling false records in accounting is also illegal and is done to hide the true position of a business’s financial situation. False accounting fraud may be done knowing or unknowingly within an organisation. It may be that an organisation holds two financial accounts, one that is true and one that is altered for purpose.

This may be done for reasons such as:

To show higher profits
To hide losses
To inflate share prices
To cover up theft.

False invoicing can be done by those who submit invoices for payment. This can be knowingly or unknowingly, for example, as in payroll fraud, a contractor submitting an invoice can knowingly inflate costs for their own gain. Equally an individual submitting an invoice may miscalculate figures or use incorrect information to produce the invoice. Checking accounting activities will help to prevent this from occurring.

Recording transactions

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.

Activity 3B

3.3 – Review profit and loss statements, cash flows and ageing summaries

By the end of this chapter you should be able to:

Analyse 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.

For example:

Sales:
total sales
the 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).

Cash flows

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

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.

An example ageing summary may look like this:

Customer	1-30 days	31-60 days	61-90 days	Over 90 days
XYZ Company	200.00	280.00	500.00
ABC Corporation	50.00	50.00
Large Org Ltd	150.00	100.00		500.00
Total $	400.00	430.00	500.00	500.00

Activity 3C

3.4 – Revise budgets, as required, to deal with contingencies

By the end of this chapter you should be able to:

Make contingency plans for your budgets

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 on 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 on 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.

Revising budgets

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.

Taking the example budget from section 1.1 of this unit:

Expenses	Amount $	Total $
Buildings
Rent Insurance	4,000.00 150.00	4,150.00
Utilities
Electric Water Telephone/Internet	150.00 120.00 200.00	470.00
Services
IT support Webhosting Catering Cleaning	500.00 100.00 300.00 500.00	1,400.00
Equipment
Stationery IT equipment	$100.00 $800.00	900.00
	Total $	6920.00

To cover contingencies for an additional work contract the revised budget may look like this (see changed figures in bold text):

Expenses	Amount $	Total $
Buildings
Rent Insurance	4,000.00 150.00	4,150.00
Utilities
Electric Water Telephone/Internet	250.00 120.00 300.00	670.00
Services
IT support Webhosting Catering Cleaning	500.00 100.00 300.00 500.00	1,400.00
Equipment
Stationery IT equipment	$150.00 $10,000.00	10,150.00
	Total $	16,370.00

Activity 3D

3.5 – Maintain audit trails to ensure accurate tracking and to identify discrepancies between agreed and actual allocations

By the end of this chapter you should be able to:

Conduct, or organise regular audits
Identify discrepancies between agreed and actual allocations

Audit trails

Financial probity is the process of being fair, equitable, open and transparent. It also involves maintaining a clear audit trail. 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.

An audit trail should provide you with evidence of a transaction/order; this should include where or who originated the transaction, what was provided, at what cost and when. All parts should show a clear and logical succession of activities with dates and agreements. An audit trail can be on paper or be documented electronically.

An audit trail may contain the following:

The original sales order for goods or services
Copy of the quote supplied to the customer
Agreements to supply
Receipts
Invoice(s)
Payments received.

Budget allocations

Discrepancies between budget allocations and actual spending will be revealed by the audit trail. The audit trail can identify both underspending and overspending by the department, allowing you to make informed decisions about future budget allocations.

Activity 3E

3.6 – Ensure compliance with due diligence

By the end of this chapter you should be able to:

Regularly read policies and procedures to ensure you work compliantly
Check that staff are working compliantly

Compliance

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

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.

Reporting requirements

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.

Spending rules

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 the business and departmental finances.

Due diligence

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). It is checking that all information provided is factually correct and is in accordance with legal requirements for all business activities.

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.

Activity 3F

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

By the end of this chapter you should be able to:

Structure and format reports for clarity
Check reports meet organisational requirements

Checking reports

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
Timeliness
Submission methods, such as email
Recipient, such as duty manager
Layout
Format.

Structure

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.

Format

Different formats may be required for different parts or types of report.

The format may include:

Audits
Balance sheets
Cash flow statements
Electronic forms
Financial year reports
Operating statements
Spreadsheets
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:
a pie chart
A sheet giving budget allocations and actual figures:

balance sheet
spreadsheet
cash flow statement
Several pages of printed audit trails showing transactions:

audit trails
spreadsheets
Notes from the department manager:

financial report
plain text
operating statement.

Receiving reports

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.

Financial report

A financial report contains the financial activities undertaken by an organisation. This may include information that spans more than one year, e.g. a three-year financial report, to provide background to and evidence of the organisation’s financial growth.

An annually produced report will be compiled to reflect on past business and also for lodging a financial report (if applicable) with Australian Securities and Investments Commission (ASIC). This can also be lodged as a half-year financial report.

An organisation may require a financial report each business quarter so that they are able to review the organisations business and financial activities on a closer basis.

A financial report can contain:

Statement of financial position
Statement of comprehensive income
Cash flow statements
Profit and loss statements
Equity changes
Balance sheets
Notes for financial statement, including accounting policies
Director’s report.

Ratio analysis

Ratio analysis helps a company to evaluate their financial performance, for example, liquidity, profitability and solvency. The ratio trends are studied over time to determine financial activity performance and improvements.

Key financial ratios include:

Profitability ratios	Operational efficiency ratios
Gross margin ratio: Gross margin ration = gross margin divided by net sales Profit margin ratio: Profit margin ratio = net income divided by net sales Return on assets ratio: Return on assets ratio = net income divided by average total assets Return on equity ratio: Return on equity ratio = net income divided by shareholders’ equity	Account receivable turnover ratio: Accounts receivable turnover ratio = net credit sale divided by average accounts receivable Working capital ratio: Working capital ratio = current assets divided by current liabilities Asset turnover ratio: Asset turnover ratio = net sales divide by average total assets Days in inventory ratio: Days in inventory = ending inventory divided by cost of goods sold, multiplied by 365
Liquidity ratios:	Leverage ratios:
Quick ratio: Quick ratio = cash plus cash equivalents plus short term investments plus current receivables, divided by current liabilities Or Total current assets minus inventory minus prepaid expenses, divided by current liabilities Current ratio: Current ratio = current assets divided by current liabilities Times interest earned ratio: Times interest earned = income before interest and taxes divided by interest expense	Debt to equity ratio: Debt to equity ratio = total liabilities divided by total equity Equity ratio: Equity ratio = total equity divided by total assets Debt ratio: Debt ratio = total liabilities divided by total assets

Activity 4A

4.2 – Identify and prioritise significant issues in statements, including comparative financial performances for review and decision making

By the end of this chapter you should be able to:

Identify issues in financial statements
Prioritise issues in financial statements

Identifying issues

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.

Activity 4B

4.3 – Prepare recommendations to ensure financial viability of the organisation

By the end of this chapter you should be able to:

Prepare recommendations
Justify recommendations with evidence

Financial viability

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
Loss
Profit.

Recommendations could include:

Changes in business activity, including markets, goods or services traded
Consolidation
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
Grow.

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.

Recommendations

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.

Activity 4C

4.4 – Evaluate the effectiveness of financial management processes

By the end of this chapter you should be able to:

Identify strengths and weaknesses in the financial management process
Draw conclusions about how effective it is

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.

Financial regulations

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: Australian Government, Financial Regulation, http://www.australia.gov.au/topics/economy-money-and-tax/financial-regulation (accessed 27/01/2017))

Activity 4D

References

These suggested references are for further reading and do not necessarily represent the contents of this unit.

Websites

Australian Tax Office:

https://www.ato.gov.au/

Company tax:

https://www.ato.gov.au/Rates/Company-tax/

Payroll tax:

http://www.business.gov.au/registration-and-licences/Pages/register-your-company.aspx

GST:

https://www.ato.gov.au/Business/GST/

CGT:

http://www.business.gov.au/business-topics/tax-finance-insurance/taxation/Pages/capital-gains-tax.aspx

Bilateral trade:

http://www.investopedia.com/terms/b/bilateral-trade.asp

INCOTERMS:

http://www.investopedia.com/terms/i/incoterms.asp

Competition and Consumer Act, within the Australian Consumer Law:

https://www.accc.gov.au/about-us/australian-competition-consumer-commission/legislation#the-competition-and-consumer-act-2010

Warsaw Convention:

http://www.mondaq.com/australia/x/72914/cycling+rail+road/Montreal+Convention

World Trade Organization:

http://www.agriculture.gov.au/market-access-trade/wto

Publications:

Business Finance: Theory and Practice, Eddie McLaney, publisher Financial Times/Prentice Hall

Small Business Management: An applied approach, Tim Mazzarol, publisher Tilde Publishing

All references accessed on and correct as of 27/01/2017, unless other otherwise stated.