StudentWorkbook(7)

Manage budgets andfinancial plansBSBFIM501A

Student Workbook

Part of a suite of support materials for the

BSB07 Business Services Training Package

Student Workbook BSBFIM501A Manage budgets and

financial plans 2nd Edition 2010

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© 2010 Innovation and Business Industry Skills Council Ltd

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Published by: Innovation and Business Industry Skills Council Ltd Level 11 176 Wellington Pde East Melbourne VIC 3002 Phone: +61 3 9815 7000 Fax: +61 3 9815 7001 email: [email protected] www.ibsa.org.au

First published: July 2009

Print version: 2.0

Release date: February 2010

Printed by: XL Colour Printing 28–32 Bruce St Kensington VIC 3031

ISBN: 978-1-921749-05-6

Stock code: FIM501ACL

Table of Contents

Getting Started ........................................................................................................ 1

About the Student Workbook ........................................................................... 1

Features of the Training Program .................................................................... 1

Structure of the Training Program ................................................................... 2

Introduction ............................................................................................................. 3

About the theme/scenario ............................................................................... 3

What skills will you need? ................................................................................ 3

Information and budgets .................................................................................. 4

The role of management and the management cycle .................................... 6

Section summary .............................................................................................. 7

Further reading .................................................................................................. 7

Section 1 – Plan Financial Management Approaches ......................................... 8

What skills will you need? ................................................................................ 9

Planning and control ......................................................................................... 9

Planning, production and selling/administration processes and costs ...... 11

What are financial plans? ............................................................................... 14

Cost accounting ............................................................................................... 24

Section summary ............................................................................................ 26

Further reading ................................................................................................ 26

Section checklist ............................................................................................. 26

Section 2 – Risk Management and Contingency Planning ................................ 27

What skills will you need? .............................................................................. 27

What is risk? .................................................................................................... 27

How do we help minimise the risk? ............................................................... 29

Five steps for risk management matrix ......................................................... 29

Contingency planning ..................................................................................... 32

What to include in the contingency plan ....................................................... 33

Section summary ............................................................................................ 36

Further reading ................................................................................................ 36


Section 3 – Implement Financial Management Approaches ............................. 37


Source data ..................................................................................................... 38

Setting clear objectives .................................................................................. 43

Section summary ............................................................................................ 45

Further reading ................................................................................................ 45


Section 4 – Develop Systems to Manage Budgets and Finances ..................... 46


Processes to monitor expenditure and control cost budgets ...................... 47

Job costing ....................................................................................................... 47

Cost classifications ......................................................................................... 49

What do we do with budget variances? ......................................................... 54

Closing the accounts....................................................................................... 57

Government regulations regarding reporting ................................................ 57

Section summary ............................................................................................ 63

Further reading ................................................................................................ 63


Section 5 – Review and Evaluate Financial Management Processes .............. 64


Financial management processes ................................................................. 65

Ageing summaries .......................................................................................... 65

Analysing the data ........................................................................................... 70

The importance of review and evaluation ..................................................... 71

Selecting, evaluating and reviewing ideas .................................................... 73

Evaluation grid ................................................................................................ 75

Continuous improvement ............................................................................... 76

Section summary ............................................................................................ 77

Further reading ................................................................................................ 77


Appendices ............................................................................................................ 78

Appendix 1: Sample cash flow statement ..................................................... 78

Appendix 2: Sample operational plan ........................................................... 79

Appendix 3: Sample of financial projections ................................................. 81

Student Workbook Getting Started

BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 1 of 82

Getting Started This unit addresses the skills and knowledge required to develop systems to manage budgets and finances. It applies to individuals employed at a managerial level in a range of environments who need skills to create financial plans and monitor financial performance and business outcomes. In their work role they are most likely to be responsible for negotiating with others to work towards the company’s financial goals.

About the Student Workbook

This Student Workbook is designed to assist the learner with activities around the use of budgets and financial plans and performance monitoring. It does not cover basic budgeting skills. This guide uses different scenarios as the focus of the activities to enable learners to get a feel for the requirements of different companies and provide authentic learning activities.

Features of the Training Program

The key features of this program are:

Student Workbook (SW) – self-paced learning activities to help you to understand key concepts and terms. The Student Workbook is broken down into several sections.

Facilitator-led sessions (FLS) – challenging and interesting learning activities that can be completed in the classroom or by distance learning that will help you consolidate and apply what you have learned in the Student Workbook.

Assessment Tasks – summative assessments where you can apply your new skills and knowledge to solve authentic workplace tasks and problems.

Getting Started Student Workbook

BSBFIM501A Manage budgets and financial plans Page 2 of 82 © 2010 Innovation and Business Industry Skills Council Ltd

Structure of the Training Program

This training program introduces you to the performance outcomes, skills and knowledge required to conduct market research. Specifically, you will develop the skills and knowledge in the following topic areas:

1. Plan financial management approaches

2. Risk management and contingency planning

3. Implement financial management approaches

4. Develop systems to manage budgets and finances

5. Review and evaluate financial management processes.

Note: the Student Workbook sections and session numbers are listed next to the topics above.

You facilitator may choose to combine or split sessions. For example, in some cases, this training program may be delivered in two or three sessions, or in others, as many as eight sessions.

Student Workbook Introduction


Introduction This section is an overview of what is involved with budgets and the management cycle.

About the theme/scenario

Throughout the workbook you will be referred back to the following scenario:

Scenario: Dolly’s Delight – Doll house manufacturer

Dolly’s Delight Pty Ltd Manufacturing Company builds and sells dolls houses to retail companies. The company employs 70 people in the manufacturing side of the business and 16 people in the administration side of the business.

The company was a sole proprietorship which has recently become a publicly listed company and which has been running now for ten years.

The company was initially funded by Eden Black, and had been struggling financially for the past four years. After a recent reshuffle of staff and a few changes in management, the business has now become stable again and is beginning to make a profit.

The company has decided to outsource what it can and has moved some of the aspects of the business to contractors and outside organisations. This has included sections of the business such as the basic bookkeeping and payroll, the delivery of its goods to outside businesses, website design and update – now allocated to a contractor who works from home and gets sent projects as required.

The company made a net income last year of $130,000 and aims to increase this by 20% in the following year. Its retained earnings were $15,000 with the rest of its income being paid in dividends to shareholders.

The company took out a long term loan last year of $600,000, on which they have chosen to only repay the yearly interest of $60,000, and reduce the principle in increasing amounts of ten thousand dollars where the schedule of repayments are as follows:

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9

30,000 40,000 50,000 60,000 70,000 80,000 90,000 90,000 90,000

What skills will you need?

In order to work effectively with managing budgets and financial plans, you must be able to:

look at information and budgets

learn about the role of management.

Introduction Student Workbook


Information and budgets

Planning and organising your work is an important skill that will help you stay ahead of the challenges you are likely to meet in your job. When working with an organisation it is important to know what to plan for, how to access the relevant data and what the priorities of the organisation are.

In this subject we will cover how to use and analyse budget data, where the source information for the budget comes from, how to use the budget to see where the business is going, how to plan for and work through problems the organisation may face and finally, we will work through how to evaluate the information and what we have learnt.

Information is a critical business resource. Accurate and timely data is vital for planning for future business success. Budgets are used and analysed to assist with the planning and control of finances. In order to effectively control finances, you need to know what information to look at and where the relevant information is coming from.

In the past a manager would focus solely on controlling the costs of a business. We now know that reports and outcomes for various scenarios are important for quality assurance as well as for assessing cost. An example of this would be when analysing the wellbeing of patients when leaving a hospital before relating the cost. A customer service business may increase the cost to improve customer service of the company, in order increase client number, thus creating more income.

When looking at costs and how to plan for them, the tool of greatest importance is the budget.

Some of the budgets important for the future planning of Dolly’s Delights Pty Ltd Manufacturing Firm are shown below.

Sales Budget

Product Sales volume Selling price per unit ($)

Budgeted sales revenue ($)

Doll houses 170,000 50 8,500,000

Doll furniture 1,000,000 9 9,000,000

Total 17,500,000



Production Budget

Doll houses Doll furniture

Budgeted sales (units) 170,000 1,000,000

Required ending finished goods inventory

3,000 16,000

Finished goods required 173,000 1,016,000

Less beginning finished goods inventory

1,000 7,000

Required production 172,000 1,009,00

Direct Material Budget

Material Total used on houses (Litres)

Total used on furniture (Litres)

Direct materials cost

(Litres)

($)

A 320,000 2,700,000 2.80 8,456,000

B 280,000 1,700,000 1.70 3,366,000

Total 600,000 4,400,000 11,822,00

The above examples show how one budget flows onto the next. The various departments would then use this information to view how their actual performance is going and to work on sticking to the budget and analyse any excessive expenses. The financial controller would then gather the information and assess it by comparing it with the actual data for the period.

Introduction Student Workbook


The role of management and the management cycle

As a manger we need to work with our staff to assess and prioritise our goals. Our role is varied and sometimes we need to work with our team and delegate duties to ensure the many tasks we need to complete throughout the day are completed.

A manager’s role can be grouped into five functional areas: planning, organising, staffing, leading and monitoring. In this unit as we discuss how we manage budgets and financial plans, we will formulate a process that delivers outcomes by ensuring we have systems in place in accordance with the ‘Management cycle’.

Model of the management cycle

Planning requires the formation of goals and objectives followed by decisions on appropriate action to achieve these goals.

Organising is a coordination function involving people, materials, equipment, machines, time, money and other resources.

Staffing covers all activities needed to attract, recruit and retain individuals in the company.

Leading is providing support, guidance and motivation to ensure other employees work towards achieving the plan.

Monitoring ensures that a manager knows what is happening in all areas of their responsibility.



Learning activity: Management cycle

Use the management cycle model and brainstorm three managerial activities associated with each of the stages within the cycle. For example:

Planning: objective and goal setting

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Organising: prioritising

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Monitoring: performance appraisals

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Staffing: recruitment and selection

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Section summary

You should now have a clearer idea of what a budget looks like and how the information from one budget may be useful for another department. You should also have an understanding of the roles a manager fulfils and how the five functions of the management cycle clarifies the mangers role.

Further reading

Bear, A, Blythe, P and Flanders, D 2005, Introduction to budgeting. 4th edn, Thomson, Melbourne, pp. 1–10.

Section 1 – Plan Financial Management Approaches Student Workbook


Section 1 – Plan Financial Management Approaches

This section introduces the methods of planning and control as part of the cost allocation process, as well as looking at budgets in more detail and the use of financial plans. We look at how to communicate the information from the budgets and data and effective ways to pass on information and using correct negotiation skills in the process.

Scenario: Management roles

One of the critical problems with the Dolly’s Delight initially was that there were too many middle managers with unclarified roles. Their roles would overlap and the essential daily tasks would get passed around and often not completed.

Another problem with too many middle managers was that the staff were not sure to whom they should report, and certain important information would get lost along the way before reaching the relevant manager by which time it would be too late to implement procedures to prevent the identified problems.

After the reshuffle, the following people have retained their management positions and their role is beside their name:

Eden Black CEO

Janet Belchar Managing Director

Michael Smith Financial Controller

Amanda McKae Operations Manager

Jose Hernanz Senior Accountant

Dora Brown Marketing Manager

Piers Marshall Sales Manager

Maureen Moss Production Manager

Mike Wilkins HR Manager

Eden Black’s reshuffle of staff has made the business a lot more efficient as well as allowing managers to take responsibility for things they are able to control in their department.

Student Workbook Section 1 – Plan Financial Management Approaches



In order to work effectively with budgets and financial plans, you must be able to:

clarify budget/financial plans with relevant personnel within the organisation to ensure it is documented

look at budgets for a way to measure cost

access budget/financial plans for the work team

look at the stakeholders of an organisation and determine who is responsible for providing certain financial reports

negotiate any changes required to be made to budget/financial plans with relevant personnel within the organisation

understand the basics of costing methods

disseminate relevant details of the agreed budget/financial plans to team members.

Planning and control

Planning and control are two key components of the basic managerial responsibilities that the management accounting system assists greatly.

Planning involves formulating the firm’s objectives and includes the detailed description of the steps needed to meet these objectives. Planning involves activities like:

o sales price and volume forecasting

o determining the profitability of products

o determining funds needed for research and development

o undertaking capital upgrades

o utilisation of technology to enhance business prospects.

Control involves the continuous assessment of actual performance with a budget or standard.

Figure 1 – Key part of managerial role.

Planning

Control



Key tasks of management accounting

Management accounting is involved with the following tasks:

providing key strategic information that helps managers with their decision making

determining the firm’s critical success factor

implementing benchmarks that will enhance operational efficiency.

Management accounting in service organisations

While the concepts of cost management found a natural home in the manufacturing sector, these days it is widely accepted across all fields including financial services.

The key difference between the service and manufacturing organisations is that with the service industry most services are consumed as they are produced. Services cannot be held as inventory like the manufacturing firm can.

Service industries tend to be more labour intensive than the manufacturing one.

Learning activity: One of each

Planning and control are two key elements in management function. From your experience, identify and describe at least one activity that you have done or witnessed for each area.

Planning –

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Control –

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Planning, production and selling/administration processes and costs

When looking at a manufacturing company like Dolly’s Delight, it is useful to assign costs to a process in the company. If we look at the processes in a flow chart, we can visualise where the costs are in the line and how they flow along.

From the diagram above we can identify the costs involved in production and how they flow from the one process to the next. It is important to assign the costs to the process so that we can work on identifying where the costs have come from.

Planning and process costs: These costs identify the initial stages of the production process and include things such as the development of a new product and its design, as well as working on the processes that will be involved with the manufacture.

Production and manufacture costs: The direct costs involved with the manufacture of the product for sale. It involves everything from the assembly, to the equipment used and the direct materials involved with the production.

Selling and administration costs: The costs in this area involve all the final costs involved with getting the product into the market and the distribution of the final item. It involves all the office and administration costs as well.

Budget examples

A budgeted income statement summary for Dolly’s Manufacturing is shown below, as well as the production and sales budgets that were shown earlier:

Selling and Admin

Marketing Distribution Customer Service

Production and Manufacture

Manufacturing Production

Planning Processes

Research and Development Design and processes Supply of Product



Budgeted income statement

Sales 17,500,000

Less cost of goods sold (11,822,000)

Less other expenses (3,498,000)

Gross profit 2,180,000

Less general selling and administration expenses

(1,780,000)

Net profit 400,000

Sales Budget

Product Sales volume Selling price per unit ($)

Budgeted sales revenue ($)

Doll houses 170,000 50 8,500,000

Doll furniture 1,000,000 9 9,000,000

Total 17,500,000

Production Budget

Doll houses Doll furniture

Budgeted sales (units) 170,000 1,000,000

Required ending finished goods inventory

3,000 16,000

Finished goods required 173,000 1,016,000

Less beginning finished goods inventory

1,000 7,000

Required production 172,000 1,009,00

Direct Material Budget

Material Total used on houses (Litres)

Total used on furniture (Litres)

Direct materials cost (Litres)

($)

A 320,000 2,700,000 2.80 8,456,000

B 280,000 1,700,000 1.70 3,366,000

Total 600,000 4,400,000 11,822,00



Learning activity: Assigning the budget

Using the above budgets for Dolly’s Delight, can you assign the budget to the manager that would be responsible for its preparation (the Dolly’s Delight Managers and their roles are listed below)? Can you also list some of the major costs involved with the manufacture of the dolls houses that you have identified using the budgets?

Name Position Relevant budget

Eden Black CEO









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What are financial plans?

Just as we manage our personal finances, organisations must ensure that they achieve their financial goals through financial planning and budgeting. Whether it’s the original start-up or the ongoing operational costs of the business, all finances should be planned well into the future.

Devising a budget lets you plan for how your organisation will spend its money, as well as giving you an idea of what you will do with the money you earn. It allows you to examine whether your product or service appeals to the masses or caters for a niche market. The reasons products and services succeed are varied, and it is important to plan what you hope to achieve from your business, and how you hope to achieve this financially.

Financial plans should include:

funds required to start the entity

anticipated funding/profits over the next one, two and three years

use of funding/profits

a timeline for funding/profits.

The financial aspect of any business is where all the earnings and expenses are brought together and future results are planned for and anticipated. It forms the basis of both planning and decision making. All of these elements of your initial financial plan should coincide with the goals and visions of the business as stated in the overall business plan or mission, including the financing necessary to cover operations, marketing, and promotion. As a manager, you will also be responsible for the activities of your department and for helping keep to budget, as well as providing the data for the budget estimates for your department.

To assist us in the management of our financial plans we will need to develop:

projected profit statements

projected cash flow budgets

projected revenue

job/product costing

short term budgets/plans

spreadsheet-based financial projections

projected statement of financial position (balance sheet)

targets or key performance indicators (KPI’S) for production, productivity, wastage, sales, income and expenditure.

With this sort of preparation organisations can plan their activities, meet their financial obligations and maximise their profits. The concept is very similar to household budgeting but on a much larger scale.

‘If we fail to plan, we plan to fail!’

– Ralph Waldo Emerson



What are budgets?

Budgets are simply an organisation’s plan expressed in financial terms.

They are used as expected outcomes for an organisation, most often used in predicting profits and costs for a particular period. Some examples of what budgets are used for are:

cash flow projections

long-term budgets or plans

operational plans

short-term budgets or plans

spreadsheet-based financial projections

targets or key performance indicators for:

○ production

○ productivity

○ waste

○ sales

○ income

○ expenditure.

Learning activity: Internet research

Search the internet for different types and examples of financial planning tools and resources. As part of your research, select five tools or resources and prepare a written summary below of the tool’s purpose for the five selected.

Note: the following sites have some useful information:

<http://www.jaxworks.com>

<http://www.businesslink.gov.uk/bdotg/action/layer?topicId= 1074416511>

<http://www.civicus.org/new/media/Budgeting.pdf>

<http://www.financialplan.about.com/msubbudg.htm>.

Tool/resource no. 1

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Tool/resource no. 2

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Tool/resource no. 3

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Tool/resource no. 4

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Tool/resource no. 5

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Communicating the budgets and financial plans

When using budgets/financial plans, it is imperative that what is put in the plan/budget is communicated to all team members effectively. There are many terms used when talking about finance and budgets and there is no point explaining things to your team if they do not understand the concepts or terms involved. Defining budget/finance terms may be necessary in order to be meaningful to the work team. Training should be made available to those who need it, as well as giving them the knowledge to be able to read and interpret the budgets and plans. Feedback for team members is also crucial in ensuring the terms and ideas were expressed clearly and understood.

Developing budgets and financial plans

Budgets are generally developed in accordance with the organisation’s strategic plan. The strategic plan is usually a five year in-depth plan looking to the future aims and goals of the organisation.

In larger organisations numerous people are involved in the development of budgets and financial plans. The larger the organisation, the more complex it can be. The information used for a budget is usually collated and then sent to the managers from the various departments. Therefore many people need to be involved in setting up plans so that the plan includes all components of the organisation.



The following people may be involved:

Financial manager – the manager in charge of the financial systems and processes put in place at a business, and responsible for providing support in these areas to his or her co-workers and peers.

Accountant – An accountant is the person who keeps track of the organisation’s money. The Accountant will use this information to generate financial reports to show how the organisation is performing financially at a specific point in time.

Financial controller – The financial controller has a say in where the money will go in the business, as well as being involved in all monetary aspects of the business.

Production manager – A production manager’s role can be varied. It can involve working on processes to increase production and reduce costs, as well as ensuring that the daily production processes are adhered to, and timelines are met.

Supervisor – A supervisor is a person who is in control of a department in an organisation. They will have a budget allocated to them, and their primary role is to keep their department moving along smoothly and that the daily requirements of their department are met.

Just from looking at the previous descriptions you may be able to see that some of the roles may overlap, and that the information they provide about the business may be important for different departments and outside parties.

However, it is still important to involve all these job roles because the people in them have varied:

expertise

understanding of finance

understanding of production or manufacturing costs

understanding of labour costs

understanding of taxation laws

understanding of accounting principles

understanding of advertising and marketing costs.

Potential budget problems and difficulties

Smaller businesses often use less formal methods when using a budget than the larger organisations do. Some of the problems faced by the larger organisations are:

Getting everyone working on the goals together. It is difficult to motivate the employees towards achieving common goals for the organisation.

The way the budget is determined can also be a problem. If the budget is decided by senior management with little input or feedback from the employees it affects, then it might seem unfair to the various departments and resentment may result. If departmental managers are given the task to set their own budgets, then we may also have the problem of over-estimation to pad out their budgets.



Some remedies to these problems would be:

Continuous feedback for employees and managers.

A reward system for departments who consistently achieve budget targets.

All employees are expected to work together to achieve budgetary targets, and therefore they are also accountable for outcomes they can control.

Access to budgets and financial plans

It is vital for a business to allow all stakeholders access to the budgeting and financial plans development and ongoing management.

Why would it be important to disclose financial plans to all stakeholders?

The more your team knows about how the organisation is performing the easier it is for them to manage performance that might affect the budget.

Your team is more likely to conform and understand restrictions and limitations.

Providing access to funds when needed (e.g. petty cash).

By the same token, your team may not need access to all financial documents (e.g. profit and loss statements), but they may need to be provided with:

department budgets

sales budgets

waste costs

production schedules

wage budgets, etc.

One of major costs of any business is the cost of labour. A simple business such as a biscuit producing factory would have employee or outsourcing costs of some or all of the following:

production manager

marketing manager

factory workers

payroll staff

administration staff

delivery staff

a design team (for packaging of the product)

sales team.

There are probably many other employee costs which could be added to the list, and as you can see, for such a simple process there are many continuing labour costs incurred from factors removed from the actual production process.



Prioritise your stakeholders

Learning activity: Your stakeholders

Think about an organisation you are familiar with, or in which you work.

Think about the people who have, or need access to, the organisation’s budgets and financial plans. These people are your stakeholders.

Write the position title of the stakeholder in the left-hand column, and in the right describe the valuable information or expertise they have to contribute to the financial planning process.

Position Title What information or expertise do they have?



You may now have a long list of people and organisations that need to be informed of your plans. Some of these may have the power either to block or advance your interests. Some may be interested in what you are doing, others may not care.

Map out your stakeholders on a power/interest grid as shown in the figures below, and classify them by their power over your plans and their interest in your plans.

Power/interest grids for stakeholder prioritisation

For example, your boss is likely to have high power and influence over your projects and high interest. Your family may have high interest, but are unlikely to have power over it.

Someone’s position on the grid shows you the actions you have to take with them:

High power, interested people: these are the people you must fully engage with, and make the greatest efforts to satisfy.

High power, less interested people: put enough work in with these people to keep them satisfied, but not so much that they become bored with your message.

Low power, interested people: keep these people adequately informed, and talk to them to ensure that no major issues are arising. These people can often be very helpful with the detail of your project.

Low power, less interested people: again, monitor these people, but do not bore them with excessive communication.

Negotiating budgets and financial plans

You may have the opportunity to submit requests for funding or equipment or participate in the planning of the budget. If you do have the opportunity to take part in the budgeting process you will often find that input will be required from other people. This can become quite a debate as other teams and team members may have conflicting views when it comes to the way they want the organisation’s money spent.



Tips for conflict resolution and negotiation

Negotiation skills help you resolve situations where what you want conflicts with what someone else wants. The aim of negotiation is to explore the situation to find a solution that is acceptable to both parties.

There are different styles of negotiation, depending on circumstances. Where you do not expect to deal with people ever again and you do not need their goodwill, it may be appropriate to ‘play hardball’, seeking to win a negotiation while the other person loses out. Many people go through this when they buy or sell a house – this is why purchasing a house can be such a confrontational and unpleasant experience.

Similarly, where there is a great deal at stake in a negotiation (for example, in large sales negotiations) it may be appropriate to prepare in detail and use a certain amount of subtle gamesmanship to gain advantage.

Both of these are usually ineffective approaches for resolving disputes with people you have an ongoing relationship with: if one person plays hardball, this puts the other person at a disadvantage. This may lead to reprisals later, or failed negotiations.

Similarly, using tricks and manipulation during a negotiation can severely undermine trust and damage teamwork. While a manipulative person may not be caught out if negotiation is infrequent, this is not the case when people work together on a frequent basis. Honesty and openness are the best policies in this case.

Preparing for a successful negotiation

Depending on the scale of the disagreement, varied levels of preparation will be appropriate for conducting a successful negotiation.

For small disagreements, excessive preparation can be counter-productive because it takes time that is better used elsewhere. It can also be seen as manipulative because just as it strengthens your position, it can weaken the other person’s. Sometimes though, negotiation is just a better use of resources between two parties.

If a major disagreement needs to be resolved, however, it can be worth preparing thoroughly. Think through the following points before you start negotiating.

Goals – What do you want to get out of the negotiation? What do you expect the other person to want?

Trades – What do you and the other person have that you can trade? What do you each have that the other might want? What might you each be prepared to give away?

Alternatives – If you don’t reach agreement with the other person, what alternatives do you have? Are these good or bad? How much does it matter if you do not reach agreement? Does failure to reach an agreement cut you out of future opportunities? What alternatives might the other person have?

Relationships – What is the history of the relationship? Could or should this history impact on the negotiation? Will there be any hidden issues that may influence the negotiation? How will you handle these?



Expected outcomes – What outcome will people be expecting from this negotiation? What has the outcome been in the past, and what precedents have been set?

The consequences – What are the consequences for you of winning or losing this negotiation? What are the consequences for the other person?

Power – Who has what power in the relationship? Who controls resources? Who stands to lose the most if agreement isn’t reached? What power does the other person have to deliver what you hope for?

Possible solutions – Based on all of the considerations, what possible compromises might be reached?

Style is critical

For a negotiation to be ‘win–win’, both parties should feel positive about the situation when the negotiation is concluded. This helps maintain a good working relationship afterwards. A polite and rational approach should govern the style of the negotiation – histrionics and displays of emotion are clearly inappropriate. They only undermine the rational basis of the negotiation and bring a manipulative aspect to them.

Despite this, emotion can be an important part of negotiations because people’s emotional needs are often triggered in such situations and must be met fairly. If emotion is not discussed when it arises, the agreement reached can be unsatisfactory and temporary. Be as detached as possible when discussing your own emotions – perhaps discuss them as if they belong to someone else.

Negotiating successfully

The negotiation itself is a careful exploration of your position and the other person’s position, with the goal of finding a mutually acceptable compromise that gives you both as much of what you want as possible.

People’s positions are rarely as fundamentally opposed as they may initially appear – the other person may quite often have very different goals from the ones you expect!

In an ideal situation, you will find that the other person wants what you are prepared to trade, and that you are prepared to give what the other person wants.

If this is not the case and one person must give way, then it is fair for this person to try to negotiate some form of compensation for doing so. The scale of this compensation will often depend on many of the factors discussed above. Ultimately, both sides should feel comfortable with the final solution if the agreement is to be considered win–win.



Learning activity: ‘Dolly’s Delight Role Responsibilities’

As stated earlier, Dolly’s Delights Pty Ltd recently had a major change in staff management. To help with clarification of their roles, can you look at the management staff listed below and work out who would be responsible for specific processes involved in the setting of wage and expense budgets?

Name Position Role in setting wage and expense budgets

Eden Black CEO









Learning activity: Setting wage and expense budgets

Read the scenario of Dolly’s Delight company and answer the following questions:

1. Who would be responsible for developing and documenting the budget?

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2. Who would the person developing the budgets need to consult and why?

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3. Why is it important for a number of people to have input into the budget process?

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4. Who would have the final say over the financial plans?

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5. If a company employee wanted additional money to replace old equipment,

whom should he approach?

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Cost accounting

Cost accounting is an approach to evaluating the overall costs that are associated with conducting business and classifies all costs as either fixed or variable in relation to changes in the volume of units produced. Costing is where the cost of an object produced is determined using the actual costs for the direct costs and a predetermined rate for the allocation of indirect costs. Managers use cost accounting to support decision-making. It is recognised as a form of management accounting, because its primary use is for internal managers rather than outside users.

Typically, you will need to use data from the past year or reporting period, since that is the only way to have accurate numbers to accompany a budget. It is important to note that the past year’s expenditures can be affected by unusual circumstances and any variances like this must be carefully accounted for. Data can come from a range of sources, but typically these are:

inventory, materials and finished product records

consumables records

records of purchases and associated costs

sales information

labour utilisation records

materials used

payroll records

manufacturing and general overhead costs.



When it comes to measuring how well company resources are being utilised, cost accounting helps to provide the data relevant to the current situation. By identifying production costs and further defining the cost of production by three or more successive business cycles, it is possible to note any trends that indicate a rise in production costs without any appreciable changes or increase in production of goods and services. By using this approach, it is possible to identify the reason for the change, and take steps to contain the situation before bottom line profits are impacted to a greater degree.

Principles of cost accounting

When performing cost accounting, there are several important principles that you should keep in mind:

accounting for costs rather that outlays

accounting for hidden costs and externalities

accounting for overheads and indirect costs

accounting for past and future outlays

accounting for costs according to the lifecycle of the product.

Absorption Vs Variable costing

Absorption costing method provides for the absorption of all manufacturing overheads (whether fixed or variable) into units of production.

Variable costing method treats fixed costs as a period cost and charges them to the operations of a period in which they are incurred, rather than to the individual product or service.

Learning activity: What would your get?

You have been given access to two sets of records (1) Unit sales results for the last 3 months and (2) the sales staff hours of work and total wages and salary paid for the same period. Describe 2 unit costs that you could develop from this information.

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Section summary

You should now have a clear idea of what is involved when working with budgets and financial plans, as well as how to develop them and communicate the expected outcomes to staff. You should be able to work out who the stakeholders of an organisation are and their interest in your sector. You should also be able to understand the methods involved with negotiation and some of the basic principles of cost accounting.

Further reading

Langfield-Smith, K, Thorne, H, Hilton, R 2006 Management accounting: information for managing and creating value, 4th edn, McGraw-Hill, Sydney, pp. 40–57.


Section checklist

Before you proceed to the next section, make sure that you are able to:

clarify budget/financial plans with relevant personnel within the organisation to ensure it is documented

look at budgets for a way to measure cost

access budget/financial plans for the work team

look at the stakeholders of an organisation and determine who is responsible for providing certain financial reports

negotiate any changes required to be made to budget/financial plans with relevant personnel within the organisation

understand the basics of costing methods

disseminate relevant details of the agreed budget/financial plans to team members.

Student Workbook Section 2 – Risk Management and Contingency Planning


Section 2 – Risk Management and Contingency Planning

This section involves the processes regarding the minimisation and identification of risk in the workplace. It shows us ways to classify a risk and offers a technique to put a contingency plan into place.

Scenario: Planning for increased production costs

Dolly’s Delight recently learnt that wage prices for its factory workers was to increase in line with new award rates with the industry.

They worked hard to implement a contingency plan for this particular problem, and put this plan in place once the increase occurred.

This allowed for minimum impact on the business financially.


In order to work effectively and manage information of an organisation, you must be able to:

prepare contingency plans in the event that initial plans need to be varied

implement, monitor and modify contingency plans as required to maintain financial objectives.

What is risk?

Risk is the potential impact (positive or negative) to an organisation or some characteristic of value that may arise from some present process or from some future event. In everyday usage, ‘risk’ is often used synonymously with ‘probability’ of a loss or threat.

The risks associated with one business may not be applicable for another – for example the rising value of the dollar should have a positive affect for importers with their goods now costing a lot less to bring in, but for exporters many previous buyers will now go somewhere cheaper. You need to assess risk independently for all organisations, and have appropriate plans in place to help address these possible threats.

In professional risk assessments, risk combines the probability of an event occurring with the impact that event would have. Generally, risk management is the process of measuring, or assessing, risk and then developing strategies to manage the risk.

In general, the strategies employed include:

transferring the risk to another party

avoiding the risk

Section 2 – Risk Management and Contingency Planning Student Workbook


adapting the product to the new circumstances

reducing the negative effect of the risk

accepting some or all of the consequences of a particular risk.

Traditional risk management focuses on risks stemming from physical or legal causes (e.g. natural disasters or fires, accidents, death, and lawsuits). Financial risk management, on the other hand, focuses on risks that can be managed using traded financial instruments. This would include looking at things like the various reports for asset liquidity in case there was a need for quick cash to cover expenses, or looking for ways to reduce loans and repayments that might blow out to unpayable proportions in a few years if not managed correctly, e.g. funds set aside when possible.

Regardless of the type of risk management, all large corporations have risk management teams and small groups and companies practice informal, if not formal, risk management.

In ideal risk management, a prioritisation process is followed whereby the risks with the greatest loss and the greatest probability of occurring are handled first, and risks with lower probability of occurrence and lower loss are handled later.



In practice the process can be very difficult, and balancing between risks with a high probability of occurrence but lower loss versus a risk with high loss but lower probability of occurrence can often be mismanaged.

Risk management may also pose some problems when it comes to effective allocation of resources. Resources spent on risk management could be instead spent on more profitable activities. Again, ideal risk management spends the least amount of resources in the process while reducing the negative effects of risks as much as possible.

Identifying risks

Risks may include:

commercial and legal relationships

economic circumstances and scenarios

human behaviour

natural events

political circumstances

technology and technological issues

management activities and controls

seasonal peaks and troughs in supply and demand.

How do we help minimise the risk?

You need to involve people from all areas of the organisation, and listen to their concerns when issues arise. Outside parties with a larger financial interest in the organisation must have their concerns addressed immediately and any extra input listened to, if not actioned. If there is a potential external stakeholder/investor who is continuously problematic, then there is obvious cause for a plan to be put in place as soon as possible to cover the loss of the investor/stakeholder.

Reports need to be timely and accurate, as well as frequently assessed internally to look for any discrepancies. The information needs to be clear, and departments notified of changes that occur which affect them directly.

The organisation needs to work together as a whole and ensure that all employees are aware of the organisation’s policies and standard processes regarding risk minimisation and awareness and that appropriate support teams or structures are in place to assist in meeting risk minimisation targets.

One procedure an organisation will use when identifying its risks and deciding how to prioritise the risk and its consequences, is using the five step risk management table.

Five steps for risk management matrix

Procedures should be put in place when preparing for your operation that addresses risk management. Essentially procedures should be written to inform how risks will be managed. This simple five step risk problem-solving process can assist greatly:



1. Identify Hazards

2. Assess the risk of an incident with a simple process of multiplying the Likelihood by the Consequence in a matrix as below, for example:

The Consequence/Probability Matrix – Risk Score

Consequence

X

Likelihood

Catastrophic

loss

(10)

Major loss

(8)

Moderate Ioss

(5)

Minor loss

(4)

Insignificant

(3)

Almost Certain (10)

100 80 50 40 30

Likely (8) 80 64 40 32 24

Possible(6) 60 48 30 24 18

Unlikely (5) 50 40 25 20 15

Rare (3) 30 24 15 12 9

3. Rate the priority of addressing the hazard against this table:

EXTREME RISK (50 or above): Immediate action required. PRIORITY

HIGH RISK (30 to 49): Management attention needed. Hazards must be considered as NOT adequately controlled.

MODERATE RISK (20 to 29): Hazards must be examined against current standards to determine whether the hazard is adequately or not adequately controlled.

LOW RISK (0 to 19): Manage by routine procedures.



4. Apply management of the Hazard according to a hierarchy described below

Hierarchy of control

Best control

Remove the hazard completely

remove risk of electrocution by using compressed air driven tools.

Separate people from the hazard

guards on power tools

use effective barriers and edge protection

enclose noisy machinery.

Use an engineered control

use Earth leakage device (safety switch) on electrical power source

use a machine to lift heavy objects

use scaffolding rather than ladders to reduce risk of falls.

Change work practices

train in lifting techniques

tag out procedures for unserviceable machinery.

Worst control

Provide personal protection (PPE)

hearing protection, eye protection, etc.

NOTE: PPE (provide personal protection) should be the last barrier to protect people. It is temporary until a better control can be put in place. The main drawback of PPE is that they don’t eliminate, reduce or isolate the hazard. Safety equipment is only a thin line of defence between the employee and the unsafe condition. It is far better to eliminate, minimise or segregate the hazard and thus remove the need for such equipment



5. Re-assess the risk until it is moderate or low.

Learning activity: The consequence/probability matrix

Read through the following possible scenarios that could occur with Dolly’s Delight. Using the table above, work out the risk score for each scenario:

1. There has been a strike organised for the production workers to occur next week if negotiations for a pay increase fail :

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2. There has been a problem with the current supplier and although there is current negotiations with another supplier it looks like production will fall short of the orders for the next month:

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A contingency plan is one way which businesses plan for these future risks and it is a way for businesses to have strategies in place to deal with already identified possible risks.

Contingency planning

In order to reduce the impact of risks associated with the way we operate it is always a good idea to develop contingency plans. This is action we plan for ‘just in case’ or making a ‘plan B’. An everyday example of this would be when having an outdoor barbecue. The contingency plan would include an alternative venue in case of rain, and a different way to cook the food because the barbecue is not practical indoors. Our risk management system may hint that there is a problem looming that is deemed to be serious enough to warrant contingency action. In many cases the contingency action would be guided by the contingency plan to develop as part of the planning process.



What to include in the contingency plan

What business you are planning for will dictate what you will include in the contingency plan. For example:

A restaurant might have an agreement with a competitor for them to store perishables in each others’ fridges/freezers in case of breakdown or power failure.

Finding cheaper or inferior raw materials to help reduce costs and sales price or when struggling to meet demand.

Being able to rent equipment at short notice in case of equipment failure or when extra equipment may be needed and.

Contracting or outsourcing particular tasks or functions.

There is also a need to monitor and alter the business’s contingency plan as required. As the circumstances surrounding businesses are always changing, the contingency plan will need continuous review and updating. It needs to be an ongoing investment by the business. Through continual review we will be able to:

perform activities required to construct plans

train and retrain employees

develop and revise policies and standards as the department changes

exercise strategies, procedures, team and resources requirements

re-exercise unattained exercise objectives

report on-going continuity planning to senior management

research processes and technologies to improve resumption and recovery efficiency

perform contingency plan maintenance activities.

Learning activity: Contingency planning

In your small groups refer back to the Dolly’s Delight Manufacturing Company scenario. Brainstorm anything which could go wrong or impact on Dolly’s Delight Manufacturing Company. List what you have come up with on some flipchart paper.



Example: Risk management

The table below is an example of a contingency plan that an entity might use in the event that they have to absorb award or wage increases. It addresses the issue of risk management in that it develops strategies to manage future financial risk to the company.

Contingency Plan

Company name: Proactive Pty Ltd

Name of person developing the plan: Barney Rubble – General Manager

Who was consulted as part of this plan?

Name Position

Charlie Robson Operations Manager

Julie Grooves Human Resource Manager

Rick Towers Financial Management

Risk identified: New award for manufacturing employees to be implemented in six months’ time – 60% of workforce – current date 15 January 201X

Strategies/activities to minimise the risk By when By whom

Evaluate total cost of new award rates with current rosters.

31/01/0X JG/CR

Analyse new award for savings provisions with adjusted rostering.

15/02/0X JG

Analyse budgets for savings that can be assigned to capital expenditure.

15/02/0X RT

Meet with union and employee representatives to discuss implications of award.

28/02/0X BR

Identify employment opportunities to up-skill 10% of manufacturing workforce.

15/03/0X JG

Identify areas of automation to reduce manufacturing workforce.

15/03/0X CR

Communicate changes and opportunities to the manufacturing workforce.

31/03/0X JG/CR



Learning activity: Contingency planning

Using the above example, use one of the risks identified by your group to work on strategies intended to minimise risk and complete a contingency plan table using the template below.

Contingency Plan

Company name:

Name of person developing the plan:

Who was consulted as part of this plan?

Name Position

Risk identified:

Strategies/activities to minimise the risk By when By whom



Section summary

After reading this section, you should be able to identify risks as they might occur in everyday business. You should now have a clear idea of what is involved when creating and implementing a contingency plan, and have learnt ways to minimise risk using these methods.

Further reading

Daft, R and Samson, D 2009 Fundamentals of Management, 3rd edn, Cengage Learning, Melbourne, pp. 53–56.

Section checklist


prepare contingency plans in the event that initial plans need to be varied

implement, monitor and modify contingency plans as required to maintain financial objectives.

Student Workbook Section 3 – Implement Financial Management Approaches


Section 3 – Implement Financial Management Approaches

This section is about working out where to source data for the financial plans and budgets as well as looking at effective coaching/mentoring methods and setting clear objectives.

Scenario: Working on an objective

Due to the increase in wage costs, Dolly’s Delight held a meeting to see if it was feasible to increase sales, increase profit margins or work on reducing costs.

They worked together and implemented the SMART method to achieve the goal of increasing profit margins by increasing the cost to purchasers by a minimal amount, and to also have the sales team target new buyers while cementing contracts for a longer period with current buyers.

They thought that this would be the best plan due to continued future growth with this objective.


In order to work effectively when managing budgets and financial plans, you must be able to:

look at the source data for the budgets and financial plans

provide support to ensure that team members can competently perform required roles associated with the management of finances

use effective coaching and mentoring methods to pass on relevant information and by using the SMART method be able to set clear objectives.

Managing budgets and finances will often require you to delegate fragments of your budget to selected employees. Periodic monitoring, support mechanisms and mentoring are just a few of the responsibilities you will need to demonstrate to ensure how your overall budget is being managed.

Some of the functions you may choose to delegate to others may be:

banking – you may choose to keep this function to the same person as it is usually done on a daily basis

debt collection

ensuring security, accuracy and currency of financial operations

invoicing clients, customers and consumers

maintaining journals, ledgers and other record keeping systems

maintaining petty cash system

purchasing and procurement

wages and salaries payments and record keeping.

Section 3 – Implement Financial Management Approaches Student Workbook


It is important that before handing over any of the above tasks, that staff are aware of exactly what is expected of them, and have knowledge of the processes involved in being able to do the task effectively.

A staff member needs to know what is required of them so that they can go about their job effectively whilst knowing that they are fulfilling their job requirements.

For example, maintaining a petty cash system with petty cash vouchers:

Petty cash vouchers should have supporting documentation (e.g. till receipts) stapled to them and filed.

Each month the money spent out of the petty cash should be put back in.

It is best for one person to control the petty cash – to minimise risk of money being unaccounted for or going missing (A petty cash register may be used if this is not possible).

A computerised ledger account will record any balances and record any transactions.

Knowing what is required of them makes members of the team also responsible for things when they go wrong. Delegating tasks can also help employees feel more certain of their roles.

Feedback is an important tool for both the manager and the team-member. A work appraisal is one way that you can validate an employee and inform them of their strengths, while offering support (such as training sessions), to assist employee development.

Source data

Creating accurate, relevant and achievable budgets is best achieved by gaining access to the right source data. Accounting officers keep the most useful data to help formulate a budget, but so will the production supervisor, sales supervisor, payroll manager and stores manager. By contacting these people, and assembling the appropriate paperwork and numbers, a ‘best practice’ budget is within reach.

Types of source data

Inventory, materials, finished goods records – these would be kept with the production manager and will get your the volumes to set your variable costs by.

Consumables records – a stores officer would hold these records. They are records that cover what has been consumed in the production process.

Purchasing records and materials used – buyers would be the people most likely to hold these records. They would cover incoming stock and raw material required for the production place.

Sales information –would be kept by both the accounts department and the sales department. It would be records of past sales identified by invoices or report summaries.

Payroll and labour utilisation – will provide all the information needed to calculate the direct labour and the wages and salaries overheads.

Service charge-out rates – would be set by the accountant and deal with the fees charged on invoices for work done in service type enterprises.



Data storage

Common recording and storage methods for data would be in pre-printed books, on forms specially developed to capture data or electronically in databases, spreadsheets or computerised accounting programs.

Gathering data occurs as a normal part of the operations of a business. Accounts departments gather information and hold it for many years due to requirements set by the Australian Taxation Office and the Australian Securities and Investment Commission.

Data security and backup

Ways the organisations can manage data security are:

Limit access to the data – through system security, managing onsite user password protected access.

Have organisational policy that deal with data storage, especially on mobile devices.

Maintain secure backup copies of data offsite and back up regularly.

Record ethics

Conflicts of interest – A conflict of interest is a situation in which financial or other personal considerations have the potential to compromise or bias professional judgment and objectivity. It is important that conflicts of interest do not impede your ability to objectively set up realistic and achievable budgets.

Disclosure – Deals with the obligation to make known information that would potentially bias you in one way or another. Disclosure is to explain your reasons for wanting the information and what you intend to do with the information once you have collected it.

Confidentially – is ensuring that information is accessible only to those authorised to have access and is protected throughout its lifecycle. Confidentiality is an important principle in business because it functions to impose a boundary on the amount of personal information and data that can be disclosed without consent.

Influences on organisational data storage

Influences or process within an organisation that affect data storage are:

the organisation’s existing business information systems and technological environment

the organisation’s corporate culture

the existing documentation outlining your organisation’s prioritised requirements (often contained in policy and procedure docs)

personnel available with strategic planning skills and understanding of risk and feasibility issues

personnel with an understanding of corporate governance (e.g. legal and audit specialists).



Learning activity: Make it safe.

Describe a process that would safeguard all the data contained on the head office server from a corrupt hard disk

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Mentoring and coaching

From time to time it may be necessary to conduct some one-on-one coaching to ensure your staff have the skills and knowledge they need to best keep abreast of relevant financial results, plans and reporting processes. Coaching is defined as the process of equipping people with the tools, knowledge, and opportunities they need to fully develop themselves to be effective in their commitment to themselves, and their work.

You should seek alternative support approaches when addressing:

low motivation

poor equipment

poor attitude

laziness

poor discipline

inadequate supervision

inadequate support

ineptitude.

These issues may be resolved using a mentoring system, or other support. Coaching should be focused on improving work performance through training support.

When coaching somebody in a new technique or procedure, it is important to follow a certain method in order to ensure the important information is passed along. The flow chart below shows a coaching model used by managers:



Effective coaching model – observer feedback

Managers of organisations need to ensure that their staff have the adequate skills and knowledge to be able to fulfil the duties of their role. Organisations will generally have support systems in place for new employees, for employees recently receiving a promotion or for employees needing to learn new techniques or skills.

With legislation and standards often changing and new knowledge required to keep up to the new standard, most organisations have a training department with a training co-ordinator who will use assessment tasks or bring in experts from other companies to assist employees with learning specific new concepts or to renew licenses or certificates.

A support method often used for staff moving into a new role, is to have them ‘shadow’ a mentor for one or two weeks until they are familiar with their new role and understand what is required of them. It is critical to have a strong mentor so that bad habits do not get passed along to the newer staff member.

From time to time it may be necessary to conduct some one-on-one coaching to ensure your staff have the skills and knowledge they need to best keep abreast of relevant financial results, plans and reporting processes. Coaching is defined as the process of equipping people with the tools, knowledge, and opportunities they need to fully develop themselves to be effective in their commitment to themselves, and their work. This is a very important step in ensuring that the correct work is being done, and that procedures and checks put in place are followed and staff members are accountable.



Scenario: Staff issues

Denise Simmons has just joined Dolly’s Delights Pty Ltd, as the administration assistant. Denise was previously employed in a similar role with a competitor named ABC inc.

In her new role, Denise’s responsibilities include department invoicing and purchasing, debt collection, sales and expense reports and maintaining the accounting system. This is very similar to the accountability procedures Denise used back at ABC Inc.

Denise has a working knowledge of the most current accounting, spreadsheet and database systems available, which she will be required to use as part of her employment at Dolly’s Delight.

Three weeks into her employment Denise comes to you looking overwhelmed and frustrated and says: ‘I don’t think I’m cut out for this job, I just don’t seem to be able to get it right! Everything is different to my last job and I am finding working her really hard.’

Being convinced that Denise will be a fantastic employee given the right support, you decide to sit her down and diagnose the problem.

Learning activity: Providing support and resources

Read the scenario above and answer the following questions:

What transferable skills did Denise bring with her to Dolly’s Delight Pty Ltd?

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What Dolly’s Delight Pty Ltd specific skills does Denise require to do her job?

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What leadership behaviours do you think will best help Denise to learn her job better?

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Why is it important to recognise the skills that Denise has brought with her as well as the progress she has made?

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Setting clear objectives

Setting objectives

A good idea, when managing, is to set goals or objectives with action plans that clarify what is expected of team members and when. When setting goals, whether they are personal or business, they need to follow the SMART format.

Specific: goals should be clear and specific. When writing specific goals you are identifying the tasks to be done and the time it will take to complete them.

Measurable: specific goals provide you with milestones that indicate your progress. You will learn to estimate the time it takes to achieve the results you want. When you are asked to nominate the time it will take to complete a given task you will be able to measure your progress against the goals you have set.

Agreed: each team member should be in agreement as to what is to be achieved.

Realistic: goals must be attainable. There is no point in setting unreachable targets. Instead set goals that might stretch your capabilities a little. Goals that are too easy to achieve are meaningless and of little value in providing feedback on personal work performance.

Timeframe: goals must have deadlines if they are to be effective. If you do not have a schedule to work to your goals might be pushed aside by inevitable day-to-day problems. Setting deadlines helps you to estimate your progress and focus on your achievements.

Examples of SMART goals:

to increase sales by 10% by 1 July 201X

to reduce staff turnover by 15% by 1/7/1X

to implement new computer system into 90% of business units by 1/7/1X

to train all Safety Committee team members in OHS consultation using approved WorkCover accredited training program by 1/11/1X

to sign five new clients to two-year contracts by 20/12/1X.



Learning activity: Setting the rules

The following activity will be completed in groups of two or three. It will be assumed that each member of the company (group) has three subordinates, all of whom have a segmented responsibility in the area of their manager’s financial responsibility.

As a group you will need to author:

A SMART objective that states what is to be achieved with regard to your budget and financial plan.

A team charter which each manager will share with their employees. This might include meetings and times; an open-door policy; what a team member might do if they cannot attend a meeting, etc.

Team objective:

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

No Activity By whom By when



Section summary

After reading this section you should now be able to use the processes involved in providing support to your team members and be able to show to use the resources effectively and where the data sources come from. You should also now be aware of the SMART system and how to use it effectively to obtain your objectives.

Further reading

Daft, R and Samson, D 2009 Fundamentals of Management, 3rd edn, Cengage Learning, Melbourne, pp. 53–56.


Section checklist


look at the source data for the budgets and financial plans

provide support to ensure that team members can competently perform required roles associated with the management of finances

use effective coaching and mentoring methods to pass on relevant information and by using the SMART method be able to set clear objectives.

Section 4 – Develop Systems to Manage Budgets and Finances Student Workbook


Section 4 – Develop Systems to Manage Budgets and Finances

This section is about implementing procedures and processes for monitoring expenditure and expenses as well as deciding what action to take regarding any excessive variances.

Managing budgets and finances will often require you to delegate fragments of your budget to selected employees. Periodic monitoring, support mechanisms and mentoring are just a few of the responsibilities you will need to demonstrate to ensure your overall budget is being managed.

Scenario: Production cost variance

Dolly’s Delight needed to increase its production in order to meet the new sales target. It used the marginal cost method to look at each unit of production and its cost.

The actual cost for the extra units of production exceeded the budgeted cost by a large amount and so Eden Black requested that the financial controller look at the budgets and actual costs to see why the variances occurred.

After close examination of the budgets and actual figures, the financial controller decided that the breakdown of the equipment during the period and subsequent overtime work payments for staff were the main reason for the larger than acceptable amount of the budget variance.


In order to work effectively when managing budgets and financial plans, you must be able to:

determine and access resources and systems to manage financial management processes within the work team

implement processes to monitor actual expenditure and to control costs across the work team

learn about the different cost drivers

monitor expenditure and costs on an agreed cyclical basis to identify cost variations and expenditure overruns

analyse the budget variances

report on budget and expenditure in accordance with organisational protocols and external legal requirements.

Student Workbook Section 4 – Develop Systems to Manage Budgets and Finances


Processes to monitor expenditure and control cost budgets

Once goals or targets have been set and relevant plans are prepared and implemented, we need to work out any variances between the projected and actual outcomes. We need to examine why the variances occurred, what we have learned from these discrepancies and how we can monitor and achieve our goals in the future.

An example of this would be if a restaurant went over its budget for wastage. It would then need to look closely at the reasons why so much food was going to waste – possibly due to over ordering of perishables or mistakes in the kitchen, and it would implement new performance plans to try bring the figures back to budget. This could include things such as finding alternative foods or defrosting less, and keeping a detailed record of dishes and mistakes to see where the most wastage occurs in the kitchen and when.

Job costing

Job costing is fundamental to managerial accounting, as it is the process of tracking the expenses incurred on a job against the revenue produced by that job. It is most useful as a tool when large amounts of money or income are derived from relatively small numbers of customers, e.g. a helicopter supplier would find it a useful tool, whereas a newsagency or convenience store manager would not.

Manufacturing cost models

Prime cost – direct ingredients

Product cost – total cost of a product

Direct materials

Direct Labour

Prime Cost

Direct materials

Direct Labour

Factory Overheads

Product Costs



Conversion Cost – cost required to convert a product from raw material to a product

Cost sheet

A statement of cost for a product for a given period of time.

It consists of the direct and indirect expenses incurred in producing a given product.

Classifying expenses according to office administration, selling and distribution, overheads.

Marginal costs

Marginal costs are the costs incurred in producing incrementally more units of production, i.e. if it costs $1,000 to produce 100 units and $1,005 to produce 101 units then the marginal costs are $5. Marginal costs are different to average costs. Average costs look at the total production costs and units. In the above example the average cost would be $1,005 divided by 101 = $9.95

Learning activity: Calculate the results

Given the information below, calculate the Prime cost, the Product cost and the Conversion costs.

Factory overheads – $100,000

Direct materials – $50,000

Direct labour – $20,000

Cost Answer

Prime cost

Product cost

Conversion costs

Factory overheads

Direct Labour

Conversion Cost



Cost classifications

There are a number of different ways that we can classify costs: by behaviour, function, relevance and traceability. For us the key classification is traceability since in management accounting we are attempting to track costs as accurately as we can. Typically, manufacturing costs are classified as either direct or indirect and can be tracked as either fixed or variable costs.

Variable vs. fixed

Fixed costs per month are those costs you need to spend to maintain your business or product sales each month but which do not change in line with changes in your sales volume or business activity. Rent is a good illustration of a fixed cost. Regardless of how much you sell, the rent is still going to be the same. Other fixed costs could include equipment rental or lease arrangements, insurance, interest on debt, plant and equipment expenses, utilities, business licenses and salaries of permanent full-time workers. As the charts below show, total fixed costs do not change with increased volume yet the fixed cost per unit reduces the more volume is produced.

Figure 2 – Fixed costs

Variable costs are those costs that do vary in line with and usually in direct proportion to changes in sales volume or business activity. Usually the largest and most common variable cost is the costs of buying or manufacturing the goods that are sold. This cost is often referred to as Cost of Goods Sold (COGS). Other variable costs might include packaging, and labour directly involved in a company's manufacturing or sales process, vehicle fuel and salesperson’s telephone calls. As the chart below shows, variable costs will increase in line with volume yet the variable cost per unit will remain the same.



Figure 3 – Variable costs

Semi-variable costs are those that are a blend of the two. For example, electricity to run the machinery that makes products is included on the same bill for the electricity that lights the office, whether there is production happening or not.

Direct vs indirect

Indirect costs are also referred to as overheads. Overheads are the costs incurred by the firm but which cannot be attributed directly to a unit of production. One example of an overhead is rent, which is a necessary cost of business but is not directly related to the production of a specific product.

Direct costs are those costs incurred by a firm which can be directly attributed to units of production. One example of a direct cost is raw material without which a final product would not exist. Raw material is a direct cost because it can be directly attributed, proportionally, to a unit of production.

Learning activity: Name that cost

Look at the cost on the left and decide whether it is more fixed than variable and whether it is more direct than indirect.

Cost Fixed Variable Direct Indirect

Rent

Casual production wages

CEO salary

Head office building insurance

Raw materials

Electricity to run the plant



Monitoring expenditure and variance

When reviewing reports we need to ensure that the timing is correct. If a business uses the report when it is too late to implement a plan for change then it is ineffective. Also, if the financial reports show substantial gain for the business and we fail to capitalise, then yet again, the reports are ineffective. The reports will provide us with:

a reason to change current practices

a foundation for our future budgets and financial planning.

When monitoring for any unfavourable variances, we need to ensure any corrections are done quickly. This involves:

continuous reviewing of the relevant reports

ensuring that any changes are made within acceptable time frames.

How to analyse the variance

When we examine why businesses fail, it often comes down to bad management and inadequate planning. Small business failure rates are particularly alarming, with an estimated 80 per cent of small businesses closing within five to ten years. While larger businesses have greater resources and usually more funds available to them, bad planning and management will lead to reduced profits and productivity below optimum levels.

If processes are put in place that allow us to continually monitor how the business is going according to the budgets and financial plans, we are then able to effectively deal with any problems arising from variances and this will allow us to analyse and work on what we need in order to do to remedy the situation.

Financial planning and monitoring will show up any weaknesses as well as allow managers to build on the strengths of the business.

Variances and undesirable financial outcomes can be due to things like:

decreased sales

not achieving optimum output levels

equipment failure

new competition

poor marketing techniques

large bad debts

staffing issues

increase in purchase costs

similar products entering the market

too much or too little stock on hand.

Even with the financial reports on hand, sometimes it can still be difficult to interpret the information and see what the drivers are behind the variances. In this circumstance it might be wise to employ someone who has specialist knowledge in the area.



These would include professionals such as:

an accountant or financial planner

government sponsored bodies

your bank advisor

consultancy firms.

On the following page is an example of a budgeted cash flow statement for three years shown in table format:

Jolimont Accountancy Firm

2006 2007 2008 Total

$ $ $ $

Cash flows from operating activities

Collections from debtors 200,000 145,000 210,000 555,000

Collections from cash sales 120,000 135,000 160,000 415,000

Interest received 2,000 1,700 2,300 6,000

Payments to creditors -100,000 -87,000 -121,000 -308,000

Wages and salaries -14,000 -18,000 -16,000 -48,000

Interest Payments -3,000 -4,000 -3,500 -10,500

Other Operating expenses paid -16,000 -18,000 -17,000 -51,000

Income tax paid -20,000 -17,000 -21,000 -58,000

Total Cash flows from operating expenses 169,000 137,700 193,800 500,500

Cash flows from investing activities

Proceeds from sale of property 90,000 90,000

Payment for motor vehicle -10,000 -10,000

Purchase of shares in Singh’s Ltd -10,000 -12,000 -22,000

Total cash flows from investing activities 80,000 -10000 -12000 58,000

Cash from financing activities

Proceeds from call on shares 55,000 22,000 7,000 84,000

Loan from Abbotsford Mortgage Co. 123,000 123,000

Loan repayments -14,000 -14,000

Dividends Paid -27,000 -32,000 -28,000 -87,000

GST Collections 2,890 3,780 12,400 19,070

GST Paid -880 -1,270 -13,800 -15,950

ATO - GST Settlement 2,010 2,510 -1,400 3,120

Total cash flows from financing activities 30,010 115,510 -36,400 109,120

Net change in cash 279,010 260,210 166,400 725,620

Opening bank balance 20,000 299,010 559,220 725,620

Closing bank balance 299,010 559,220 725,620 1,451,240



Learning activity: Cash flow

The previous example showed different sources of cash flow calculated under different headings showing the sources. The importance of being able to differentiate between normal operating expenses and revenues from other sources of cash flows in and out of the business is very important in order to have a more accurate picture of a business’s operating revenue and its current financial position. Below are listed some sources of income and expenses for Dolly’s Delight Pty Ltd for the month of February, and the headings from the previous example. Can you put the expenses and revenues under the appropriate headings to work out both the cash flow for operating activities and the remaining balances?

Cash sales: $17,500,000 Interest payments: $60,000

Debtors payments: $30,000 GST paid: $120,000

Proceeds from disposal of equipment: $25,000

Wages and salaries: $280,000

GST collections: $159,091 Payments to creditors: $49,000

Purchase of new machinery: $25,000

Interest received: $16,000

Opening bank balance: $22,000

Loan repayment: $30,000

Other operating expenses paid: $ 69,000

Cash flows from operating activities:

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

Total Cash flows from operating expenses:

Cash flows from investing activities:

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

Total cash flows from investing activities:



Cash from financing activity:

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

Total cash flows from financing activities:

Net change in cash:

Opening bank balance:

Closing bank balance:

What do we do with budget variances?

When budget variances occur, they need to be analysed so that the correct actions can be taken depending on which sector the variance affects. We need to work out if the variance is due to a lack of producing income or whether it is due to increased costs.

When looking at variances that show lower income levels we will need to examine things such as:

competition

patent issues

incorrect pricing

loss of staff with specialist knowledge

high level of debtors

not keeping up with consumer tastes

the economy – for example the global financial crisis

accounting errors

bad publicity

bad preparation for seasonal peaks and troughs.

We need to find the key drivers for these variances before we can work on the solution. A band-aid solution will not do if the key driver will still be causing the same problem next month. How the business is performing needs to be examined along with what is causing the lower income levels immediately to ensure future viability of the business.



When looking at cost increases as the cause of budget variance, we may need to look at things like:

whether funds have been invested incorrectly

whether the budget was underestimated

is the department using its resources efficiently or is there a lot of unnecessary wastage

are there other methods available to cut costs such as leasing equipment rather than purchasing

failure of communication between departments

allocation of resources to failing products or projects.

With the expense variances, again we need to look at the key drivers behind the costs, but it is usually clearer to see where the expenses have been incurred and therefore we can begin implementing measures to rectify the situation as soon as they are recognised.

Another important aspect of financial analysis regarding reports is to examine whether the expense has occurred due to normal operating procedures. If the revenue from the sale of equipment or property is not gained from normal operating activities, then even though it might be on the balance sheet, we need to disregard it when calculating how the business has performed during the period.

What actions can we take?

Monitoring is a process that assists managers and staff to measure or assess their progress towards specific goals. When there is unsatisfactory performance, prompt action needs to be taken to ensure the situation is rectified and the budget or goal achieved. There are four types of corrective action that can be taken.

Interim action: this is action that aims to buy time until the real cause of the problem can be identified and fixed. Often called a ‘Band-Aid’ approach, it is a valuable management response when used correctly and if only for a short time.

Adaptive action: sometimes performance targets are set unrealistically high. There may be a number of valid reasons – errors, over-enthusiasm, changes in circumstances and so on. At some point it becomes clear that a performance deficit is inevitable. Adaptive action involves reviewing the performance standards and bringing them in line with the new reality. Adaptive action should not be used to cover up poor performance.

Corrective action: this targets the cause of the substandard performance. It is designed to get the performance back on the rails.

Preventative action: this action removes the cause of potential performance shortfalls before they occur. Effective monitoring provides the early warning system that enables appropriate preventative action to be taken.



Learning activity: Achieving our goals

The below scenario will highlight a few potential problems a business may face when running daily operations. Apply one of the action methods to each of the problems you identify, and then explain why you chose to use that action. As there may be numerous reasons for the variances to occur, try to guess some of the possible underlying causes of the variances as this will help you choose an appropriate action.

Steve is the owner of a small local restaurant. He recently examined his financial reports for the past three months, and when he compared them to his budgeted financial reports found that there were many concerning variances.

The first thing he noticed was that the wages costs were much higher than the previous month, even though profits were slightly lower.

Next he noticed that his utilities charges were a lot higher than the budget figures had anticipated.

Repairs to equipment had also been an unexpectedly large cost.

Somehow there had been a larger than usual number of debtors written off with bad debts. The allowance for doubtful debts wasn’t able to cover the cost.

1. Possible cause for the variance:

Action taken:


Action taken:


Action taken:


Action taken:



Internal reporting

The general purpose of financial reporting is to provide the relevant users of the information with the required data when making decisions regarding the allocation of resources.

Potentially anybody could be using the information of a financial report or data so we need to ensure it is clear and user friendly while containing the relevant information.

With computerised systems now in place in virtually every business, the accuracy and availability of the information used has been greatly improved. Yet what type of system, and who is in control of the financial information may vary greatly according to size. For example, a production manager may use the sales budgets and reports to work out inventory and production levels.

Reports are required for various reasons such as for reporting to the Australian Tax Office (ATO), Australian Securities and Investment Commission (ASIC), and for internal reporting and auditing purposes.

In larger businesses there may be an accounting department where all the information is centrally processed and then distributed to the various departments as needed. In smaller firms it may be the operations manager who keeps a record of what is happening and it is their job to ensure that the reports are then analysed and accurate.

There are various government bodies to which the organisation will need to pass on information such as financial reports or for taxation purposes. These will be the legal requirements of the business and can lead to fines or restrictions on the business if these requirements are not met.

Closing the accounts

Businesses require the closing of accounts before final balances can be analysed and compared with budgets or for generating reports. It is the only way that final balances can be accurately measured as well as it being a legal requirement for external reporting to governmental authorities. It also assists with accurate measurement of final debtor and creditor balances.

Government regulations regarding reporting

As stated earlier, an organisation has a responsibility to produce accurate reports for internal purposes but there are also legal requirements for organisations in regards to reporting.

The Australian Securities and Investment Commission(ASIC) requires a larger proprietary company to submit audited financial statements, and while the smaller companies may not have their financial statements audited by ASIC, the Australian Tax Office (ATO) may still choose to perform an audit, where the accuracy of reports and records is still crucial.

So what is a large proprietary company?



The ASIC website (<www.asic.gov.au>) states that a proprietary company is defined as large for a financial year if it satisfies at least two of the following paragraphs:

the consolidated revenue for the financial year of the company and any entities it controls is $25 million or more

the value of the consolidated gross assets at the end of the financial year of the company and any entities it controls is $12.5 million or more, and

the company and any entities it controls have 50 or more employees at the end of the financial year.

Large proprietary companies will have their accounts audited yearly unless otherwise informed by ASIC, and they need to submit a financial report and a directors’ report annually.

The ASIC states that a proprietary is defined as small for a financial year if it satisfies at least two of the following paragraphs:

the consolidated revenue for the financial year of the company and any entities it controls is less than $25 million

the value of the consolidated gross assets at the end of the financial year of the company and any entities it controls is less than $12.5 million, and

the company and any entities it controls have fewer than 50 employees at the end of the financial year1.

Even though small proprietary companies may not need to lodge annual financial reports with ASIC, it is still important that they keep clear and precise documentation and record keeping for internal accuracy because the Australian Tax Office (ATO) may want to do an audit.

What reports will the ATO look at?

The ATO will conduct an audit to ensure that all tax law responsibilities are met by the organisation and that any deductions and offsets you have claimed are actually entitled to you. They will examine the income statement, statement of cash flows and balance sheet and look for any discrepancies.

When a notification letter arrives from the ATO informing you of their intention to audit your organisation, a thorough review of reports and business activity statement (BAS) information should be conducted and any errors accounted for.

Business activity statement and GST

One report that needs to be filled in quarterly or estimated yearly is the business activity statements (BAS). These give a written figure on how much goods and services tax (GST) and pay as you go (PAYG) withholding an organisation will have to pay or possibly have refunded. An organisation can claim most GST paid by the business against any GST paid on the final product or service to work out the total. Currently the government charges ten percent GST.

1 Australian Securities and Investments Commission, 2009, Are you a large or small proprietary company?, viewed February 2010, <http://www.asic.gov.au/asic/asic.nsf/byheadline/Are+you+a+large+or+small+ proprietary+company%3F?openDocument>.



The way it is calculated is shown in the following flow chart.

If you pay $55 for materials to make a doll house, you will have already paid $5 GST in that transaction.

If you sell the doll house for$110, the GST the consumer pays to you will be $10.

It is worked out this way to avoid double counting and paying excess GST. The ATO still gets its $10 – $5 from you, and $5 from the business you bought the materials from.

In business terms, there will be a ledger account with the GST balance. Every time GST is paid for business purposes, we will classify this as an input credit. When GST is received for services or products we will add this in the ledger account as an output credit. If the input credits are higher than the output credits then we receive a refund, and vice-versa.

The way to calculate 10% GST from any given amount is to divide it by 11. So for example, the GST on $43 is worked out by dividing $43 by 11, which equals $3.90.

Learning activity: GST calculation

Still using the example of Dolly’s Delights, work out the GST for the following monthly transactions, and then add the total to discover if you need to pay GST to the ATO, or if you are due for a refund.

Transactions Amount paid/received GST

Purchases of raw materials

$330,000

Electricity expense $550

Insurance expense $740

Purchase of equipment $20,000

Sales $550,000

Total GST payable or received:

You are then entitled to claim the previously paid $5. So you owe the ATO $5 GST.



Budgeting for GST

When working out budgets for GST and there are creditors and debtors involved as well as cash, it is important to use the accruals accounting method. When calculating GST amounts to be added on the BAS, we need to include three separate accounts. These are to account for GST collected in cash during each month, GST to be paid during each month and cash to be sent to the ATO (or refunded). Below is a table with the information required for budgeting for GST and the budgeted GST liability for Tania’s Candy Shop.

Example: Tania’s Candy Shop

March April May

Budgeted cash receipts incurring GST:

Cash sales: Cash revenue: (besides sales) Cash receipts from sale of assets (not stock) Total receipts for GST

13,900 600

5,000

19,500

14,100 720

14,820

14,000 680

14,600

Budgeted non-cash receipts incurring GST:

Debtors sales: Total non-cash receipts:

4,200 4,200

3,900 3,900

4,500 4,500

Total budgeted receipts incurring GST

23,700 18,720 19,100

Budgeted cash payments incurring GST

Cash Purchases of Stock Cash Expenses Total cash receipts incurring GST

15,200

6,400 21,600

14,800

5,900 20,700

15,700

6,700 22,400

Budgeted credit payments incurring GST

Credit purchases of stock incurring GST Credit purchases of assets (besides stock)

Total cash payments incurring GST

4,000

2,000

6,000

3,800

1,700

5,500

4,300

2,300

6,600

Total budgeted cash payments incurring GST

27,600 26,200 29,000



GST Cash Budget Calculations

a) Cash receipts

b) Cash Payments

c) GST Liability

(total receipts-total payments)x10%

d) Amount to be added to BAS and sent or refunded

19,500 x 10% =

1950

21,600x10%=

2,160

(23,700-27,600) x 10%=

(390)

120 (last month’s figures)

14,820x10%=

1,482

20,700x10%=

2,070

(18,720-26,200)x10%=

(780)

(390)

14,600x10%

1,460

22,400x10%=

2,240

(19,100-29,000)x10%=

(990)

(780)

Learning activity: Ange’s Scrapbooking business

Using the above information from Ange’s Scrapbooking Business, see if you can complete the table below and calculate the budgeted GST amounts for each month.

March April May

Budgeted cash receipts incurring GST:

Cash sales: Cash revenue: (besides sales) Cash receipts from sale of assets (not stock)

Total receipts for GST

12,000

800

6,000

18,800

13,000

600

13,600

13,900

490

14,390

Budgeted non-cash receipts incurring GST:

Debtors sales:

Total non-cash receipts:

5,300

5,300

3,900

3,900

5,000

5,000

Total budgeted receipts incurring GST

24,100 17,500 19,390



Budgeted cash payments incurring GST

Cash Purchases of Stock Cash Expenses

Total cash receipts incurring GST

11,900

4,300

16,200

12,400

5,200

17,600

12,500

5,250

17,750

Budgeted credit payments incurring GST

Credit purchases of stock incurring GST Credit purchases of assets (besides stock)

Total cash payments incurring GST

3,900

1,800

5,700

4,100

1,900

6,000

4,250

2,050

6,300

Total budgeted cash payments incurring GST

21,900 23,600 24,050

GST cash budget calculations

a) Cash receipts

b) Cash payments

c) GST liability

(total receipts-total payments)x10%

d) Amount to be added to BAS and sent or refunded

A sample of a BAS statement is available at <www.ato.gov.au> and it gives information about how to correctly fill in the BAS. There is also a free service provided by the ATO, where BAS advisers may come to your business or premises to assist you when filling out your initial statement.



Section summary

You should now be aware of the systems and processes involved when monitoring budgets for variance. We learned what to look at when trying to discover key drivers for the variances, and strategies we could use when trying to minimise the impact of any budget blow-outs. We also looked at how reporting is an important part of the business, and the statutory requirements as well as internal benefits of accurate and clear reporting systems.

Further reading



Section checklist


determine and access resources and systems to manage financial management processes within the work team

implement processes to monitor actual expenditure and to control costs across the work team

learn about the different cost drivers

monitor expenditure and costs on an agreed cyclical basis to identify cost variations and expenditure overruns

analyse the budget variances

report on budget and expenditure in accordance with organisational protocols and external legal requirements.

Section 5 – Review and Evaluate Financial Management Processes Student Workbook


Section 5 – Review and Evaluate Financial Management Processes

This section talks about the procedure of reviewing and evaluating financial management processes, and goes through particular techniques showing us how we can work through a problem when trying to work on a solution.

Scenario: Interdepartmental rivalry

Eden Black noticed that there seemed to be a bit of rivalry between the different departments of the business. She felt that although a bit of rivalry helped production levels, that it was harming the flow of communication between the departments.

After meeting with her staff, they informed her that they often never got to meet with members outside their department, and that they felt as though they were on different ‘teams’ for the business rather than both trying to achieve the same goal.

Eden implemented a Fishbone diagram to identify the problems between the departments and then worked on a strategy to help unite them and allow them to get to know each other a little better.

Eden decided that the best method would be for her to hold a weekend team building session paid for by the business.


In order to work effectively with budgets and financial plans, you must be able to:

collect and collate data and information for analysis of the effectiveness of financial management processes within the work team

analyse data and information on the effectiveness of financial management processes within the work team and identify, document and recommend any improvements to existing processes

implement and monitor agreed improvements in line with financial objectives of the work team and the organisation.

Student Workbook Section 5 – Review and Evaluate Financial Management Processes


Financial management processes

Once you have examined the financial reports, you will then be able to analyse what all of the balances and entries along the way mean and get a clearer picture of how you are going.

You will need to ensure that the processes in place are effective at keeping track of expenditure and revenue, and that they are accurate, to be then able to use these to generate financial reports.

You can check how you are going with financial records on hand such as:

Bank account records – Where you would need to see the available balance, check that there is enough cash on hand and that it reconciles. Cash is the company’s most liquid asset so there needs to be enough of it on hand, but too much means that the company is not utilising this asset. They would then look at ways to invest this money, or perhaps upgrade machinery or pay out dividends.

Receipts – To ensure accuracy of cash inflows, receipts are usually matched to the register at the end of the day and any variances looked at.

Tax Invoices– These contain GST information to be calculated by the organisation. If the organisation we work for makes a sale for over $82.50 (including GST) and the purchaser asks for a tax invoice, we must supply one. Conversely, if we are to claim GST for our business, we will need to use the tax invoices in order to claim any GST we have paid on any purchases for the business.

Depreciation – If depreciation may be claimed, supporting documentation is required. The historical cost of the asset must be supported by the receipt of purchase.

GST calculations and any credits – A detailed system must be kept as was shown earlier in order to claim our GST paid against GST Collected.

Wages/salaries books (including PAYG, Superannuation etc) – These are usually the responsibility of the payroll officer, but reports regarding wage expenses should be forwarded to relevant departments.

Petty cash receipts and balances – This is usually the responsibility of a particular team member, but it needs to be reconciled at the end of the period as well – usually monthly.

Job Costing – By allocating costs to particular jobs, we can work out where the major costs are, and how to price our products to cover our costs.

Ageing summaries – These are covered in more detail below.

Ageing summaries

In organisations where there are debtors and creditors involved, an ‘ageing summary’ will be prepared by the company’s auditor using the information entered on packages like MYOB. The purpose of the accounts receivable aged summary is to provide a trial balance of debtors and show any outstanding amounts. Typically the summaries are shown using 30, 60 and 90 day periods and some businesses may prefer longer timelines to show extremely late



payments. An example of an accounts receivable aged summary is provided below:

Aged Receivables [Summary] 31/07/201X

Debtor Total Due 0–30 31 – 60 61 – 90 90+

DeeGee $3,129.60 $2,000.00 $1,000.00 $0.00 $129.60

Fryers $2,898.64 $1,989.22 $909.42 $0.00 $0.00

Crimple $18,989.99 $15,000.00 $3989.99 $0.00 $0.00

Grand Total: $25,018.23 $18989.22 $5899.41 $0.00 $129.60

Aging Percent: 76% 23.5% 0.0% 0.5%

An aged payables summary is exactly the same as the receivables summary, but with our creditors showing and our payments due showing. It is a way for the auditor to check that we are up to date with our creditor payments and that we do not owe too many overdue amounts.

Learning activity: Aged summary

Using the following data, work out the missing totals and percentages for the accounts receivable aged summary for Dolly’s Delight Pty Ltd.

Aged Receivables [Summary] 31/07/201X

Debtor Total Due 0–30 31 – 60 61 – 90 90+

Toys-a-lot $5,980.60 $1,800.60 $680.00 $0.00 $0.00

Childs Play $4,580.99 $3,580.99 $1,000 $0.00 $0.00

Wonderful $22,899.78 $19,000.00 $3989.78 $0.00 $0.00

Grand Total: $ $ $ $0.00 $0.00

Aging Percent: % % % 0.0% 0.0%

Problem-solving

From time to time it may be necessary to come together as a team and confront a particular problem or issue that is impacting on results. The Fishbone technique is typically a great place to start as it tends to identify the root or cause of the problem so that time isn’t wasted trying to fix the effects.

The following figures show an example of Dolly’s Delight tackling the problem of the need for extra production for the busy Christmas period.



Need extra production

for Christmas period

Methods Materials

Machinery/Equipment People



Cause and effect diagrams: Identifying the likely causes of problems

Identify the problem

1. Write down the exact problem you face in detail.

2. Where appropriate identify who is involved, what the problem is, and when and where it occurs.

3. Write the problem in a box on the left hand side of a large sheet of paper. Draw a line across the paper horizontally from the box. This gives you space to develop ideas.

Work out the major factors involved

1. Next identify the factors that may contribute to the problem.

2. Draw lines off the spine for each factor, and label it.

3. These may be people involved with the problem, systems, equipment, materials, external forces, etc. Try to draw out as many possible factors as possible.

4. If you are trying to solve the problem as part of a group, then this may be a good time for some brainstorming.

5. Using the 'Fish bone' analogy, the factors you find can be thought of as the bones of the fish.

Identify possible causes

1. For each of the factors you considered in stage ii, brainstorm possible causes of the problem that may be related to the factor.

2. Show these as smaller lines coming off the 'bones' of the fish.



Analyse your diagram

1. By this stage you should have a diagram showing all the possible causes of your problem.

2. Depending on the complexity and importance of the problem, you can now investigate the most likely causes further. This may involve setting up investigations, carrying out surveys, etc. These will be designed to test whether your assessments are correct.

Learning activity: Fishbone diagram

Using the fish-bone diagram example, complete your own fish-bone diagram when trying to solve the problem of Dolly Delight’s having to extra space for inventory on hand for quicker shipment to overseas customers.



Analysing the data

Nearly all businesses these days have a computerised accounting system such as MYOB or QuickBooks. This makes producing a report at any given time as easy as the touch of a button, and up to date account balances are always available to us.

The reports managers choose to use will depend on what information is required and what it is used for. You will need to sort through the information to work out what is important and how you should use it.

It will be part of your role to use this information to then make your own reports about things like:

How the business is moving towards its goals and objectives. This would focus on managers’ decisions and their success or failure to meet the criteria set. Revenue and expenses will also be included in this report, but reasons why things went the way they did will also be looked at more in depth than just looking at the figures.

Highlighting new opportunities or products as well as including information from other departments about any products that are not doing as well as they should be.

Possible challenges that may affect the business, outlining new strategies that can be put in place as a way to help deal with these. Becoming aware that your technical expert will be leaving (if it is a specialised product), or news of a new competitor are examples of potential company challenges, and it is important step to develop strategic plans to deal with these.

How your sector of the organisation is performing, and what are its weaknesses and its strengths.

Some of these reports will be used for various purposes such as providing outside sources and investors with information, as well as for other managers to assess or compare variables between departments, market research and there are many other possible scenarios.

As a manager of a particular department, a financial performance report is another way for you to show the key financial results of a more specific nature. Examples of this would be financial performance reports on wastage or specific job costs.



The importance of review and evaluation

Scenario: Evaluating and reviewing a new idea

You have produced a new spreadsheet for tracking waste and markdowns in your organisation. You have spent a great deal of time on the project and you believe it is effective and easy to use. You are very positive about the idea and believe that your team and your managers will be very happy with it.

You decide to go ahead and implement the new spreadsheet quickly as you feel that productivity and efficiency will be greatly enhanced.

After the system has been in place for a number of weeks, you find you are getting a number of complaints from your team who are saying that the spreadsheet is cumbersome and time consuming to complete. Some team members do not have access to the software required to operate the spreadsheet.

The financial manager has also complained that the new spreadsheet does not show comparisons with last years figures which she needs when writing the end of period reports.

You are quite upset and disappointed that your idea seems to be unpopular and will need revision.

Review and evaluation is about involving everyone in the company. There must be avenues for people to identify opportunities for improvement and have management evaluate and consider the merits of their ideas.

Examples of review processes and systems could include:

suggestion schemes

team meetings

newsletters and bulletins

email or intranet

staff reward mechanisms

training and development programs

focus workouts

audits

customer feedback evaluation

policies and procedures review.

Promoting constant review and evaluation in organisations requires commitment and consistency. Small incremental improvements need to be monitored and reviewed. They also need to be formally incorporated into the organisation’s policies, procedures and systems so that they become the new standard.

Monitoring and reviewing performance

How do we monitor and review improvements to ensure they are meeting the organisation’s needs? Methods may include:

technology – computerised systems and software such as databases, project management and word-processing

audits

customer feedback

reports.



Learning activity: Review and evaluate finances

Write down what type of documentation you would review and evaluate if a problem were to be identified with each of the following issues.

An employee who has been underpaid:

___________________________________________________________________

___________________________________________________________________

Paying too much GST:

___________________________________________________________________

___________________________________________________________________

An inflated expense account:

___________________________________________________________________

___________________________________________________________________

A sales representative’s commission:

___________________________________________________________________

___________________________________________________________________

An incorrect bank balance:

___________________________________________________________________

___________________________________________________________________

A ledger that does not balance:

___________________________________________________________________

___________________________________________________________________

Overstated accounts receivable:

___________________________________________________________________

___________________________________________________________________

Overstated accounts payable:

___________________________________________________________________

___________________________________________________________________



Selecting, evaluating and reviewing ideas

Selecting ideas

Once the team has generated a range of ideas, the team then needs to review these to determine which ones might work, which might need additional development and which ones definitely will not be successful. To do this, as a group, identify the materials and resources that might be needed, possible constraints, whether the ideas will meet the end user requirements and so on.

There are a number of ways in which you can sort out the more viable ideas from the ones that might not work. Sometimes it will be obvious which ideas will not work, and sometimes it will be a bit more difficult to evaluate the merit of an idea. At this stage, you should be trying to draw out some of the more practical ideas that could be developed further.

Evaluating and reviewing ideas

You now need to challenge, test and experiment with different ideas for concepts as part of a collaborative process. Some suggestions for criteria to use to help you review the ideas are:

suitability for target audience

technical feasibility

commercial potential, if this is necessary for this concept

possible social, ethical and environmental impacts

resources required to achieve the desired creative and innovative outcomes; these will depend on the type of concept being developed, but could include:

o facilities

o specialist equipment

o staffing including specialist staff

o cooperation of other external organisations

o computer hardware and software

o training needed

o materials required.

time constraints.

Choosing the best ideas

After evaluating the effectiveness of different strategies for achieving desired outcomes in an innovative and feasible way, the organisation needs to choose the best ideas.

One way to select good ideas is to use an evaluation grid, where you assess your ideas against of number of criteria.



Example of an evaluation grid

In a table, such as the example shown on the next page, note down the ideas you came up with during the brainstorm for a new concept.

A number of suggested criteria have been given, and you should mark them off or write brief notes under each heading. You can use any of the criteria that may be relevant to your ideas.

You will find the last column asks you to decide whether to continue exploring the ideas following this initial evaluation. If you are not sure, and you feel an idea may have potential, you should leave it in. There is a thorough evaluation stage to come.



Evaluation grid

Idea Suitability for target audience

Technical feasibility

Commercial potential

Possible impacts

Resources required

Time constraints

Explore further?

Yes/No



Learning activity: Design your own evaluation grid

Design your own evaluation grid, using the criteria in the example, or choose your own that meet your evaluation requirements.

Write your ideas in the ‘idea’ column – have at least six, but include as many as possible.

Assess your ideas, using the grid.

Continuous improvement

Implementing opportunities for further improvement

In order to maintain a workforce committed to improvement, processes need to be in place to ensure team members are informed of savings, productivity or service improvements in achieving the business plan.

The process for this feedback needs to be formalised so that the continuous improvement ‘loop’ remains intact. As previously discussed, continuous improvement is about involving everyone in the organisation and there must be avenues for people to identify scope for improvement and have management evaluate and consider the merits of their ideas.

Key performance indicators (KPIs) are a simple and helpful tool when trying to measure the performance of an industry. Some examples are as follows:

In the fast food industry, an easy way to measure performance is to calculate the number of meals sold, divided by the average food cost and deduct any wastage.

A retail store can measure the number of people who enter the store, against number of sales, with the average number of items per sale and the conversion rate (% of people who bought something), against their total sales.

Examples of continuous improvements processes and systems could include:

suggestion schemes

team meetings

newsletters and bulletins

email/intranet

staff reward mechanisms

training and development programs

focus workouts

audits

customer feedback evaluation

policies and procedures.



Promoting continuous improvement within organisations requires commitment and consistency.

Small incremental improvements when made need to be monitored and reviewed. They also need to be formally incorporated into the organisation’s policies, procedures and systems so that they become the new standard.

Section summary

You should be aware of which reports to use when trying to evaluate the data and how to use this information for reviewing purposes. You should now also understand how to analyse the data effectively and how to evaluate the finances of the business as well as the methods to use for continuous improvement.

Further reading

Langfield-Smith, K, Thorne, H, Hilton, R 2006 Management accounting: information for managing and creating value, 4th edn, McGraw-Hill, Sydney, pp 183–234

Australian Bureau of Statistics <http://www.abs.gov.au>

Australian Securities and Investment Commission <http://www.asc.gov.au>

Australian Taxation Office: Checklist for New Businesses <http://www.ato.gov.au/businesses>

Institute of Chartered Accountants in Australia <http://www.icaa.org.au>.

Section checklist

After having completed this section, make sure that you are able to:

collect and collate for analysis, data and information on the effectiveness of financial management processes within the work team

analyse data and information on the effectiveness of financial management processes within the work team and identify, document and recommend any improvements to existing processes

implement and monitor agreed improvements in line with financial objectives of the work team and the organisation.

Appendices Student Workbook


Appendices Appendix 1: Sample cash flow statement

Sample business plan Sample cash flow statement

Statement for the month ended_________.

Cash flow from operating activities

Net income $1,800

Non–cash expenses and revenues

Include income

Increase in accounts receivable $(1,000)

Increase in supplies 500

Increase in accounts payable 600 (900)

Net cash flow from operating activities 900

Cash flows from investing activities

Purchase of land $(10,000)

Purchase of building (25,000)

Net cash flow used by investing activities

Cash flow financing activities

Invested 50,000

Withdrawals (600)

Net cash flow provided by financing activities $49,400

Net increase (Decrease) in cash $

Student Workbook Appendices


Appendix 2: Sample operational plan

I. CHAPTER ANNUAL GOALS

1 Gather data from membership to assist with decisions related to chapter goals, member recruitment and retention, and operations.

Prepare needs assessments and satisfaction surveys

2 Determine why member attendance at monthly meetings has been dropping, including some chapter leaders.

Analyse survey data to identify member satisfaction, needs that are not being met, and services that are valued by members

3 Develop major focus areas, key strategies and tasks and timelines to address findings from above

Enhance the quality of monthly programming (strategic focus). Maintain job referral and annual seminar.

4

Determine/review long-range and annual goals for chapter, identifying corresponding criteria for measuring success.

Long range goals: Increase membership, provide greater array of resources to members, and develop depth in chapter leadership.

Annual goals: Upgrade programming and increase overall ratings to 4.5. Increase member retention by developing a mentoring program. Reduce non-renewals by 10%. Invest in the development of board members with goal of having less than 50% of the board transition off in a given year

5 Maintain 100% CORE compliance

Review CORE elements and develop reporting systems as needed.

6 Develop and publish a balanced budget

Increase dollar amount in reserve account by 3%

II. MARKETING and COMMUNICATIONS STRATEGY

Goals Tasks:

1 Update webpage with current information, products, and services Maintain past, present, and future meeting information on webpage

2 Keep membership informed of upcoming events Advertise National and local events via membership email broadcasts

3 Develop operating/procedure manuals for board members Revise operating manual to reflect changes in board member responsibilities



III. RECRUITMENT AND RETENTION STRATEGY

Goals Tasks:

1 Increase membership Develop a ‘Bring a Buddy’ campaign

Create a corporate membership option

Obtain list of local National members and develop membership campaign

2 Reduce number of members that do not renew their membership Follow up with non-renewals by board member phone process

Assist members in becoming involved in chapter activities/volunteering

Create a mentoring program

3 Utilise website effectively as a recruitment/retention tool Develop a process to keep information current and easily read

Highlight a member each month/corporate partner

Set up online registration system

IV. SUCCESSION PLANNING STRATEGY

Goals Tasks:

1 Integrate leader recruitment across all functional lines Have current board members actively recruit members to committees

Host a leadership development night to showcase learning opportunities, responsibilities, and testimonials from current/past board members

2 Identify potential chapter leaders Develop formal interview process for future leaders

3 Involve past presidents Use past presidents as leadership mentors for new board members

Student Workbook Appendices


Appendix 3: Sample of financial projections

SAMPLE of Financial PROJECTIONS SALES

Item 1

$ 50,184.00

Item 2

$ 32,319.00

Item 3

$ 2,000.00

Item 4

$ 2,352.00

Item 5

$ 1,050.00

Item 6

$ 1,050.00

Item 7

$101,304.00

$190,259.00

COGS

$ (24,000.00)

GROSS PROFIT

$166,259.00

EXPENSES:

Misc. Expense

$ 1,200.00

Rent

$ 16,704.00

Wages (4 employees @ $5.15/hr) $ 39,552.00

Electricity

$ 8,400.00

Phone $ 600.00

SBA Note Interest

$ 2,700.00

Insurance

$ 3,600.00

Bank Service Charges $ 120.00

Accounting and Legal Fees $ 500.00

Maintenance and Repairs $ 1,200.00

Depreciation

$ 1,343.10

TOTAL EXPENSES

$ 75,919.10



NET INCOME

$90,339.90

NET INCOME

$ 90,339.90

+INTEREST

$ 2,700.00

+DEPRECIATION

$ 1,343.10

TOTAL AVAILABLE CASH

$94,383.00

DEDUCTIONS:

Owner's Withdrawals

$ 14,400.00

SBA/Bank Loan (P&I)

$ 10,461.84

Other Debt Service $ -

TOTAL DEDUCTIONS

$24,861.84

NET CASH FLOW BEFORE INCOME TAXES

$69,521.16

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