Slide 1 D2.TFA.CL7.02. Subject elements This unit comprises three Elements: Slide 2 1 2 3 Determine...

INTERPRET FINANCIAL STATEMENTS AND REPORTS

Slide 1

D2.TFA.CL7.02

Subject elements

This unit comprises three Elements:

Slide 2

1

2

3Determine action to be taken on the basis of interpretation of financial information

Interpret financial information

Determine the context for financial information

1

2

3

Assessment

Assessment for this unit may include:

Oral questions

Written questions

Work projects

Workplace observation of practical skills

Practical exercises

Formal report from supervisor

Slide 3

Element 1:


Slide 4

Determine the context for financial informationPerformance Criteria for this Element are:

Slide 5

Identify the financial statements and reports used by the organisation

Define financial terminology commonly used by the organisation

Identify financial indicators commonly used by the organisation

Identify the frequencies with which financial information is required to be interpreted

2

3

4

1


Performance Criteria for this Element are:

Identify the personnel responsible for providing financial information, reports and statements

Describe the non-financial indicators to be considered when interpreting financial information

Describe the operational areas to which the interpretation of financial information applies

Slide 6

Importance of finance

Aspects of financial success

In order to be successful a good business should:

Earn a satisfactory profit for its owners

Use its short term and long term assets efficiently

Be able to pay its short term debts on time

Maintain adequate cash stocks to meet requirements

Provide a return on investment

Slide 7

Accounting

Role of accounting

All organisations record their financial activities and consolidate this information:

In reports

That convey their financial achievements

Over arbitrary time periods

Of equal length

Slide 8

Accounting

Role of accounting

Accounting is often referred to as the “language of business”

Principles and terminology that provide the structure for the information system

Reports that summarise financial activities

Slide 9

AccountingCommon accounting terms and definitions

Accounting

Asset

Liability

Proprietorship

Debtor

Creditor

Operating cycle

Revenue

Expense

Slide 10

Accounting

Financial accounting

Financial accounting includes the preparation, review and interpretation of financial reports or statements that accurately represent what the business own and owes

This is called the financial position of the business

Slide 11

Financial statements & reports

Financial statements/reports

A financial statement is a formal record and summary of the financial transactions of a company.

It is the end product of the accounting process or cycle:

What are examples of commonly used financial statements and reports?

Refer to TM Pages 11-13

Slide 12

Financial statements & reports

Purpose of financial statements

The objectives of financial statements are to provide information about the company’s:

Financial position

Financial performance

Changes in financial position

Cash flow

Slide 13

Types of financial information

Range of financial information

The range of financial information potentially available to management is diverse and can be manipulated in many ways to create a variety of reports, statements and documents:

What types of financial information exist in a travel and tourism business?

Slide 14

Types of financial informationSource documents

Invoices

Receipt books

Cash register audit tapes

Internal vouchers and promotional vouchers

Daily takings sheets

Credit card imprints and vouchers

Time / wages sheets

Purchase orders

Receipts

Slide 15


Journals

A journal is any internal book or record-keeping system that records entries and figures of daily financial transactions, in chronological order.

Provide a complete list of all transactions in the one place:

Cash Receipts Journal

Cash Payments Journal

Sales Journal

Petty Cash Journal

Slide 16


Accounts

Current Assets

Fixed Assets

Current Liabilities

Long-term Liabilities

Operating Revenues

Cost of Goods Sold

Operating Expenses

Slide 17


Trial balance

Lists all the ledger accounts in the following order with their current balances:

Assets (current and non-current)

Liabilities (current and non-current)

Owners Equity

Revenue

Expenses

Slide 18


Statement of Financial Position / Balance Sheet

A balance sheet is a financial statement that summarises at a specific point of time a company's:

Assets

Liabilities

Equity

Slide 19


Statement of Financial Performance / Profit and Loss Statement

Statement of comprehensive income or profit & loss statement is a financial statement that measures a company's financial performance over an accounting period:

Revenue

Less Cost of Goods Sold

= Gross Profit

Less Operating Expenses

= Net Profit

Slide 20


Cash flow reports

Critical in the operation of any business, the cash flow report indicates the present financial liquidity of the property

Slide 21


Invoices

These documents come from suppliers and show stock delivered by:

Quantity

Type, size

Unit cost

Total for the particular delivery

Slide 22


Budgets

A statement of management’s planned outcomes for the business, expressed in dollars or quantities to achieve its objectives for a precise period of time:

What types of budgets are there?

Slide 23


Types of budgets

Sales budgets

Labour budgets

Material budgets

Inventory budget

Overhead budgets

Capital expenditure budgets

Budgeted Financial Performance statement

Cash budgets

Budgeted statement of Financial Position

Slide 24


Purchase summary reports

These reports group purchases by supplier and category

Present an overview of where the purchases are being made, and how much is being spent

Slide 25


Variance reports

This report provides an overview of all variances that have been identified throughout the property

Variances between ‘budget’ figures and ‘actual’ figures

Cover both the positive and the negative variances, and will present both dollar figures and percentages

Slide 26


Wastage reports

These reports will highlight:

Stock that has not been used as intended, to produce revenue

Situations where too much perishable stock is being bought

Storage practices that are sub-standard and thus causing product loss

Slide 27


Sales reports

This report condenses revenue figures from all the revenue areas into one detailed document

Set out and compared to budgeted figures

Comparisons with the same time last year, together with a running year-to-date total

Slide 28

Types of financial informationSupporting information

Number of actual enquiries

Number of customers

Units sold

Types of packages or tours booked

Actual products and services booked

Average spends of customers

Staff wage costs

Productivity

Slide 29


Banking information

Bank statements

Bank Reconciliations

Bank deposit documentation

Merchant statements

Cheque books

Credit card transaction statements

Slide 30


International Air Transport Association (IATA) reports

The International Air Transport Association (IATA) is a trade association of the world’s airlines:

What topics are covered in their reports?

Slide 31


Billing and Settlement Plan (BSP) documentation

IATA BSP documentation includes:

Standard Traffic Documents (STDs

Standard Administrative Forms (SAFs)

Forms raised by airlines

BSP Calendar

BSP Manual for Agents

BSPlink Manuals

COMPLETE ACTIVITY 1

Slide 32

Financial indicators

Financial indicators or benchmarks

Many business use financial indicators or benchmarks to judge the way the business is performing:

What is a benchmark?

What in an indicator?

Slide 33

Financial indicators

Types of financial indicators and benchmarks

Financial indicators and benchmarks may be based on:

Costs

Sales

Profit

Operating performance

What are examples of indicators & benchmarks for each category?

COMPLETE ACTIVITY 2

Slide 34

Frequencies for financial informationFinancial accounting period

Every accounting entity must collate transactions into financial reports in a timely manner

This requires that all organisations set specific time periods of equal length for reporting and measuring financial results

Each financial report must clearly state the time period being reported, known as the accounting period

Slide 35


The accounting period is the period with reference to which accounting books of any company are prepared.

It is the period for which accounting books are:

Closed

Balanced

Financial statements are prepared

Slide 36


Generally, the accounting period will be:

Daily

Weekly

Monthly

Quarterly

Half-yearly

Annually

Slide 37


What impacts the frequency of financial information, statements or reports to be prepared?

COMPLETE ACTIVITY 3

Slide 38

Financial information personnel

Personnel involved in preparing and using financial information

Slide 39

It is important to

identify personnel

responsible for:

Providing financial information

Users of financial information


Slide 40

Personnel responsible

for providing financial

information

Accounting staff

Departmental heads

Managers

Supervisors

Head office

Providers, suppliers

and carriers



Managers

Shareholders or current investors

Potential investors

Financial institutions

Suppliers

Customers

Slide 41



Potential Employees

Existing Employees

Competitors

General Public

Government

COMPLETE ACTIVITY 4

Slide 42

Non-financial indicators

Importance of non-financial indicators

Whilst financial indicators will be the primary focus on analysing the financial success of a travel and tourism operation, it is essential that non-financial indicators are also taken into account.

What are examples?

How do they differ from financial indicators?

How can they be beneficial?

Slide 43

Non-financial indicators

Types of non-financial indicators

Customer service levels

Customer satisfaction levels

Safety

Condition of property, systems, equipment and facilities

Ambience of the property

Cleanliness

Slide 44

Non-financial indicatorsTypes of non-financial indicators

Staff training

Complaints

Community participation

User friendly experience

Employee satisfaction

Repeat customer business

Awards

COMPLETE ACTIVITY 5

Slide 45

Operational areas requiring financial information Each travel and tourism establishment will have

different structures to meet the needs of their operations and the types of products and services they provide to their customers

Regardless of the organisational structure established, it is essential that financial information is captured and assessed in relation to every unit within the business

Slide 46

Operational areas requiring financial information

Segments of an organisation

The financial statements are prepared for the company and business units.

Logical element or segment of a company are called:

Business units

Departments

Divisions

Cost centres

Slide 47

Operational areas requiring financial informationTypes of business units

Outlets

Geographical offices

Specific sales related areas

Types of customers / market segments

Accounting

Production

Marketing

Research & development

Human resources, and Sales and marketing

COMPLETE ACTIVITY 6 Slide 48

Element 2:


Slide 49


Performance Criteria for this Element are:

Slide 50

Review the financial information provided

Verify information contained within the material provided

Undertake statistical analysis of the financial information provided

Draw conclusions from the financial information provided

1

2

3

4

Review financial information


From a management perspective there is an ongoing need to review financial information in terms of its day-to-day impact on work operations and the attainment of organisational goals

Why is it important to review financial information?

Slide 51


Reasons to review financial information

Ascertain accuracy of information collected

Determine importance of information

Meet legally imposed taxation and other business requirements

Demonstrate due diligence in the operation of the business

Develop a growing resource to help evaluate the performance of the business

Slide 52


Reasons to review financial information

Compare actual business performance to budgeted/expected figures

Identify strengths and opportunities

Identify problems in a timely manner

Identify areas requiring improvement

Assist in making future decisions

Identify its current financial position

Slide 53


Reviewing financial information

Reading the material

Gaining a general appreciation of what the information contains

Comparing statistics to previous periods

Identifying trends

Determining if any trigger points or red flag situations have arisen

Clarifying queries

Slide 54

Verify financial information

Importance of verifying financial information

One of the first things to do when reviewing financial records is to view the documents with a view to convincing yourself the data they contain is accurate and complete:

Why is this important?

How can you verify financial information?

Slide 55


Financial maintenance policies and procedures

Each organisation will need to have established policies and procedures in order to ensure financial information collected, collated and included in statements or reports is verified and determined to be an accurate reflection of actual activities:

What are examples of policies and procedures used to ensure financial reporting is done accurately?

Slide 56

Verify financial informationFinancial maintenance policies and procedures

The records to be created and maintained

Naming protocols for budgets and budget lines

Timelines for updating records

Frequency of report generation

Identification of types of reports to be produced

Type of accounting system to be used

Qualifications of people

Distribution list for records and reports

Slide 57


Financial maintenance policies and procedures

Storage and security protocols for the data

Accounting standards to be applied

Reviews and evaluations of the policies and procedures

Triggers (red flags) for individual statistics, KPIs or data

Auditing requirements

Slide 58


Activities associated with verifying financial information

Checking source documentation

Ensuring all relevant documentation, including source documentation has been provided

Verifying ‘brought forward’ figures from previous documentation

Ensuring only charges relevant to the business/unit have been posted

Slide 59


Activities associated with verifying financial information

Ensuring all revenue for the business/unit has been posted

Checking extensions and calculations within the documentation

Ensure financial information has been 'balanced'

Slide 60


Identifying discrepancies

What are common types of discrepancies?

What causes them?

How can they be identified?

Slide 61

Undertake statistical analysis

Importance of financial information analysis

Interpretation of financial information is required to measure the success or otherwise of trade for the period in question and to plan future action:

How can you do it?

What would you analyse?

How can you measure financial success or failure?

Slide 62


Why analyse financial information?

Interpretation and analysis of financial information is required to:

Measure the success or otherwise of trade/operations for the period in question

Plan future action

Slide 63


Why analyse financial information?

The key in interpreting and then analysing financial information is to be able to:

Explain what is happening

Understand why it has happened

How you can fix it (if required)?

Slide 64


Objectives of financial analysis

Evaluate past performance

Assessment of current position

Prediction of future business position and strategies

Slide 65


Undertaking analysis

Analysis involves comparing the actual performance against:

Budget

Forecast

Industry leaders

Industry average

Slide 66


Measuring the financial position

Select financial analysis method

Conduct financial analysis

Identify significant variances

Determine the cause of significant variances

Take corrective action as required

Slide 67

Financial analysis methods

Select financial analysis method

The 3 common analysis methods are as follows:

Horizontal

Vertical

Ratio

Slide 68


Horizontal Analysis

Methods of financial statement analysis generally involve comparing certain information:

Across periods

Across companies

Against benchmarks

Measured:

Dollar analysis

Percentage analysis

Slide 69


Vertical analysis

Vertical analysis is most often used in tourism organisations to monitor and control expenses that appear on an income or profit and loss statement

The amount of each expense is divided by total revenue and converted to a percentage

COMPLETE ACTIVITIES 7 & 8

Slide 70


Ratio Analysis

Ratio is a mathematical way of expressing one number in terms of another

A ratio is regarded as a statistical yardstick

Relationship between two or various figures can be compared or measured using ratio.

Total Current Assets Total Current Liabilities

Slide 71


Ratio Analysis

Ratio analysis uses a number of different measuring devices:

Ratios – such as ‘working capital ratio of 2:1’, or ‘the ratio of FITs (Fully Independent Travellers) to group tour guests is 4.5:1’

Rates – such as ‘debtors turnover is 6.8 times per year’

Percentages – such as ‘the gross profit margin for the department is 37%’

Slide 72

Liquidity (short term stability) ratios

These ratios show us whether or not we can meet our short term debts and how speedily we can pay them.

Slide 73

Current ratio = Current assets

Current liabilities

Quick asset ratio = Current assets – (stock + prepaid expenses)

Current liabilities

Working capital = Current assets – current liabilities

Activity ratios

Asset turnover ratio

This ratio tells us how efficiently we use our assets to provide us with income:

Slide 74

Asset turnover ratio:Total sales

Total assets

Activity ratios

Average Inventories Turnover (Stock Turnover)

This calculation shows how long it takes to “turnover” or sell the inventory of the organisation

Debtors turnover ratio

This ratio tells us how skilful we are at collecting our debtors

It shows the number of days it takes to collect in monies from our customers

Slide 75

Debtors turnover ratio = Average debtors

Average daily credit sales

Profitability ratios

Gross Profit ratio

Gross profit ratio demonstrates the direct relationship between Sales and the Cost of Goods Sold

Slide 76

Gross profit ratio = Gross profit

x100 Net sales


Net Profit ratio

This shows how much of each sales dollar becomes profit

Slide 77

Net profit after tax*x100

Net sales


Return on Investment (ROI)

ROI indicates the efficiency of management’s decisions regarding the purchase and use of assets

Slide 78

(Net operating profit + tax + interest)x100

Average total assets

Long term solvency ratios

Leverage (Gearing) ratios

These ratios test an entity’s financial stability from a longer term point of view

COMPLETE ACTIVITIES 9 & 10

Slide 79

Debtor to equity ratio

Total liabilitiesx100

Total assets

Proprietorship ratio

Owners equity (shareholders funds)x100

Total funds or total assets

Draw conclusions

Process of drawing conclusions

Once the complex task of analysing financial information has been completed, conclusions will be made regarding the current financial status of the organisation and strategies for further activities will be identified

How do you draw conclusions?

What do you do with these conclusions?

Slide 80

Draw conclusionsProcess of drawing conclusions

Determining if current position is within acceptable parameters

Noting aspects of the information for investigation or attention

Identifying operational aspects of the business for investigation or attention

Determining if one-off special events gave rise to exceptional results

Seeking input from relevant others

Checking and confirming statistics

Slide 81

Draw conclusions

Provide reasoning for variances

Slide 82

COMPLETE ACTIVITY 11

Determine the cause of significant

variances

Identify significant variances

Element 3:

Determine action to be taken on the basis of interpretation of financial information

Slide 83

Determine action to be taken on the basis of interpretation of financial informationPerformance Criteria for this Element are:

Slide 84

Identify whether or not action needs to be taken

Consider options available to address identified need

Select the most appropriate option(s) for action

Share information and proposed action with relevant personnel

1

2

3

4

Determine action to be taken on the basis of interpretation of financial informationPerformance Criteria for this Element are:

Apply the proposed course(s) of action

Monitor the results of the changes

Review remedial action and revise as required

Slide 85

Identify need for action

Identify the need to take action

Variances may be large or small on both monetary and percentage terms.

Some may be so small they are deemed not to be a problem, whilst others may require further investigation:

How can you decide when action needs to be taken?

Slide 86


The tolerance limit

Organisations have policies that managers can follow detailing the size of the variance that is acceptable and variances that should be investigated further.

This is called a tolerance limit.

Tolerance limits are generally expressed as percentages

What is acceptable tolerance limits?

Slide 87


Identifying need to take action

Determining whether or not to allow the situation to continue unchanged or whether to take remedial action

Determining if action needs to be taken on revenue, costs or both

Confirming the need for action with relevant others

Slide 88


Identifying business trends

Variances may be a one-off event

It may be some once off occurrence or be part of a pattern or trend that is emerging

Most properties ignore one-off variances, but will explore trends

Slide 89


Identify trigger points

A trigger can be seen as a pre-determined point at which action must be taken or investigation must be undertaken to identify the reason for ‘actual’ performance

As with trends, this trigger may exist for both positive and negative results

Slide 90


Identify trigger points

An adverse report or audit from some authority

A one-off critical incident that is significant in nature

Customer complaints that have reached a certain level

An adverse internal audit that identifies failure to comply with in-house policies and procedures


Slide 91

Consider options to address need

Identify options

When a need to take action has been identified, it is now time to determine options that can be taken in response to the trend or trigger:

What are different options to address a need?

Slide 92

Consider options to address needCritical points about identifying options to address trends and

triggers

Your contributions to this process must be:

Made only when you are in full possession of all the relevant facts

Able to be seen as ‘part of the solution and not part of the problem’

Practical and able to be readily implemented

Able to demonstrate the required changes will occur of your

suggestions are followed

Fully-costed

Talked through with management

Slide 93


Identify options

Your contributions to this process must be:

Select line items in TM Financial Statements in Section 2.3

requiring action

Identify range of options that can be applied to address

problem

Refer to options in Section 3.2 as a reference

Slide 94


Income and expense related options

What are examples of:

Income related options?

Expense related options?

Refer to options in Section 3.2 as a reference


Slide 95

Select appropriate option

Select the most appropriate option(s) for action

Now that a range of possible options, whether focused on income, expenses or operational systems, have been identified it is now time to select the most appropriate options or group of options that can be implemented to address the identified trend or trigger:

How can you identify the best option?

Who needs to be part of the selection process?

Slide 96


Selecting the most appropriate options for action

Ensuring the options selected align with business objectives

Ensuring compliance with legislated requirements

Ensuring a cost-benefit analysis has been undertaken to support the decision(s) taken

Ensuring the decisions taken can be supported by the resources available

Making relative comparisons with alternatives available.

Slide 97


Identify corrective action to be undertaken

Name of the account or item investigated

Actual monetary amount

Budgeted monetary amount

Variance – indicating if it is favourable or unfavourable

Causes, reasons and suggested corrective action


Slide 98

Share information

Share information and proposed action

It is important that relevant financial information is shared with other colleagues in a timely manner. It is important to determine who to share this information with and what information is allowed to be shared:

Who needs information?

What information do they need?

How can information be communicated to them?

Slide 99

Share information

Sharing information activities

Explaining rationale for proposed action

Describing potential alternatives available

Explaining rationale for selection of chosen course of action

Describing costs and benefits of implementing proposed course of action

Slide 100

Share information

Sharing information activities

Describing implementation details relating to the proposed course of action

Setting trigger points and key performance criteria in relation to the revised course of action

Developing implementation plans for the proposals

Obtaining approval/authorisation to implement the proposed course of action

Slide 101

Share information

Sharing information considerations

Audience of financial information

Reporting periods

Confidentiality

Location of audience

Methods of communication

Slide 102

Preparing a financial report

Writing a financial report

Executive summary

Introduction

Resources

Methodology

Detailed Analysis

Recommendation

Conclusion

Slide 103


Factors to consider for a good financial analysis report

Clearly understood

Understand the needs of the readers

Clear framework and analysis

Integration of financial analysis with operations

Timeliness

Accuracy

Slide 104


Prepare explanatory notes

Notes almost always accompany financial statements.

These notes provide users with information such as:

Source of financial information such as external data

Detailed activities

Explanations for movements or changes

The basis for any calculations

Slide 105

Sharing financial information

Ways to share financial information

Printed copies

Conduct meeting / discussion

Conduct presentation

Distribute electronically

Slide 106

Sharing financial information

Sharing information

Make the sharing timely

Maintain confidentiality

Keep to the facts

Produce the information with users in mind

Indicate further action required


Slide 107

Apply proposed actions

Apply the proposed course(s) of action

Planning for the implementation of actions is essential to ensure all aspects relating to the proposed actions have been considered, planned and have clear plans for implementation:

What needs to be considered?

What needs to be planned?

Slide 108


Implementation considerations

Legal liability exposure

Integration with other aspects of the business

Timing issues

Resources

Changes to policies and procedures

Documentation & record keeping

Service delivery

Slide 109


Implementation planning inclusions

Details of intended actions to be taken

Allocation of responsibilities for action to nominated persons

Determination of accountability for actions taken

Timelines for completion of nominated actions

Details of the budget and resources allocated

Description of the processes for monitoring progress

Details and timelines for reviewing progress

Slide 110


Budgeting resources

Staff

Training

Time

Feedback

Physical resources

Slide 111


Identify and communicate action strategies

Key vision of the action

Reasoning or purpose behind the action

Background information

End objectives

How the action will be implemented

Roles and responsibilities of key stakeholders

Timelines

Support mechanisms

Slide 112

Monitor changes

Importance of monitoring

In order for a tourism organisation to be successful in being able to overcome financial issues that have been identified, it is essential that plans that have been implemented in the hope of overcoming these problems, are being undertaken as planned:

Why is it important to monitor?

How can you monitor?

Slide 113

Monitor changes

Importance of monitoring

Activities must be monitored to find out:

What is being done correctly

What needs improvement, by identifying causes and remedy

Slide 114

Monitor changes

Aim of monitoring courses of action

Tracking changes to sales and costs

Tracking attainment of projected figures against actual results

Monitoring reactions to changes

Identifying areas which are being done well and rewarding accordingly

Identifying where areas of operationscan be improved

Slide 115

Monitor changes

Monitoring and evaluation methods

Reviewing updated financial information, statements and reports

Obtaining customer feedback

Use of checklists

Staff input and review

Observation

Benchmarking

COMPLETE ACTIVITIES 16 & 17 Slide 116

Review remedial action

Review remedial action and revise as required

It is important that all remedial action is reviewed on a regular basis

This should be done, as far as possible, using verifiable data and also feedback from stakeholders

Slide 117


Timing of reviews

Weekly, monthly or quarterly reviews

Performance reports

Financial reports

New trends or triggers

Slide 118


Undertaking reviews

Identify the extent to which financial issues have been addressed and overcome

Identify the areas in which issues may still exist

Identify the precise areas within areas where issues are still occurring and steps being taken to address them

Identify the precise nature of any outstanding problems

Slide 119


Undertaking reviews

Identify the staff involved and gather first hand information that may be helpful in understanding and overcoming financial issues

Discover what can be done to improve a less than optimum situation

Identify what needs to be done to improve remedial courses of action

Slide 120

Providing feedback and recommendations


Any feedback and recommendations must:

Be positive and constructive

Respect the feelings of the person you are providing advice to

Be fair and accurate

Be based on facts

Not be personal in nature

Restrict your comments to only those things that can be changed

Slide 121


Methods of providing feedback and recommendations

Informal discussions

Holding team meetings

Providing hard copy information

Sharing information via the intranet

Disseminating information at staff briefings

Slide 122


Feedback and recommendation information

Explaining if the remedial actions and efforts worked

Identifying the reasons why they worked or not work.

Identifying significant variations and the factors associated with the changes.

Discuss unusual results and determine their causes

Slide 123


Feedback and recommendation information

Identifying areas of strength

Identifying weaknesses and potential areas of improvement

Outlining implications of the results and conclusions on financial and operational performance

Outlining suggested recommendations to improve remedial actions


Slide 124

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