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StudentWorkbook 7
StudentWorkbook 7
StudentWorkbook 7
financial plans
BSBFIM501A
Student Workbook
Student Workbook
BSBFIM501A Manage budgets and
financial plans
2nd Edition 2010
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ISBN: 978-1-921749-05-6
Stock code: FIM501ACL
Table of Contents
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.
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.
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.
Introduction
This section is an overview of what is involved with budgets and the management
cycle.
Throughout the workbook you will be referred back to the following scenario:
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 $60,000, and reduce the
principle in increasing amounts of ten thousand dollars where the schedule of
repayments are as follows:
In order to work effectively with managing budgets and financial plans, you must
be able to:
Planning and organising your work is an important skill that will help you stay
ahead of the challenges you are likely to meet in your job. When working with an
organisation it is important to know what to plan for, how to access the relevant
data and what the priorities of the organisation are.
In this subject we will cover how to use and analyse budget data, where the
source information for the budget comes from, how to use the budget to see
where the business is going, how to plan for and work through problems the
organisation may face and finally, we will work through how to evaluate the
information and what we have learnt.
Information is a critical business resource. Accurate and timely data is vital for
planning for future business success. Budgets are used and analysed to assist
with the planning and control of finances. In order to effectively control finances,
you need to know what information to look at and where the relevant information
is coming from.
In the past a manager would focus solely on controlling the costs of a business.
We now know that reports and outcomes for various scenarios are important for
quality assurance as well as for assessing cost. An example of this would be when
analysing the wellbeing of patients when leaving a hospital before relating the
cost. A customer service business may increase the cost to improve customer
service of the company, in order increase client number, thus creating more
income.
When looking at costs and how to plan for them, the tool of greatest importance is
the budget.
Some of the budgets important for the future planning of Dolly’s Delights Pty Ltd
Manufacturing Firm are shown below.
Sales Budget
Product Sales volume Selling price per Budgeted sales
unit ($) revenue ($)
Total 17,500,000
Production Budget
Doll houses Doll furniture
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.
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’.
Use the management cycle model and brainstorm three managerial activities
associated with each of the stages within the cycle. For example:
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Organising: prioritising
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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
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’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.
In order to work effectively with budgets and financial plans, you must be able to:
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.
Planning
Control
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 Processes
Production and Manufacture
Manufacturing Production
Selling and Admin
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:
Sales Budget
Product Sales volume Selling price per Budgeted sales
unit ($) revenue ($)
Total 17,500,000
Production Budget
Doll houses Doll furniture
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?
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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.
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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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.
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.
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.
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.
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.
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?
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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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.
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
Section checklist
Before you proceed to the next section, make sure that you are able to:
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.
What is risk?
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.
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.
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:
Almost 100 80 50 40 30
Certain (10)
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
Hierarchy of control
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
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 business you are planning for will dictate what you will include in the
contingency plan. For example:
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.
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
Evaluate total cost of new award rates with current 31/01/0X JG/CR
rosters.
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:
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
Section checklist
Before you proceed to the next section, make sure that you are able to:
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
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.
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
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.
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.
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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.
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.
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 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.
Team objective:
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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
Section checklist
Before you proceed to the next section, make sure that you are able to:
look at the source data for the budgets and financial plans
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.
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:
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
Direct
materials
Prime
Cost
Direct
Labour
Conversion Cost – cost required to convert a product from raw material to a product
Factory
overheads
Conversion
Cost
Direct
Labour
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
Given the information below, calculate the Prime cost, the Product cost and the
Conversion costs.
Cost Answer
Prime cost
Product cost
Conversion costs
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 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.
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.
Look at the cost on the left and decide whether it is more fixed than variable
and whether it is more direct than indirect.
Rent
Casual production
wages
CEO salary
Raw materials
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.
On the following page is an example of a budgeted cash flow statement for three
years shown in table format:
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?
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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.
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.
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.
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.
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.
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>.
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.
Sales $550,000
Budgeted non-cash
receipts incurring GST:
Debtors sales: 5,300 3,900 5,000
Total non-cash receipts: 5,300 3,900 5,000
Budgeted cash
payments incurring GST
Cash Purchases of 11,900 12,400 12,500
Stock
Cash Expenses 4,300 5,200 5,250
Total cash receipts 16,200 17,600 17,750
incurring GST
Budgeted credit
payments incurring GST
Credit purchases of 3,900 4,100 4,250
stock incurring GST
Credit purchases of 1,800 1,900 2,050
assets (besides stock)
Total cash payments 5,700 6,000 6,300
incurring GST
b) Cash payments
c) GST liability
(total receipts-total
payments)x10%
d) Amount to be
added to BAS
and sent or
refunded
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
Before you proceed to the next section, make sure that you are able to:
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
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
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.
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.
Machinery/
Equipment People
Need extra
production
for
Christmas
period
Methods Materials
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.
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.
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 training and development programs
team meetings focus workouts
newsletters and bulletins audits
email or intranet customer feedback evaluation
staff reward mechanisms policies and procedures review.
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:
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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.
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
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
Section checklist
After having completed this section, make sure that you are able to:
Appendices
Appendix 1: Sample cash flow statement
Include income
Invested 50,000
Withdrawals (600)
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
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
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)
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
$
+INTEREST 2,700.00
$
+DEPRECIATION 1,343.10