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Manage budgets and
financial plans
BSBFIM501A
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: reception@ibsa.org.au
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 checklist.............................................................................................36 
Section 3 – Implement Financial Management Approaches.............................37 
What skills will you need? ..............................................................................37 
Source data .....................................................................................................38 
Setting clear objectives ..................................................................................43 
Section summary ............................................................................................45 
Further reading................................................................................................45 
Section checklist.............................................................................................45 
Section 4 – Develop Systems to Manage Budgets and Finances.....................46 
What skills will you need? ..............................................................................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 checklist.............................................................................................63 
Section 5 – Review and Evaluate Financial Management Processes ..............64 
What skills will you need? ..............................................................................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 
Section checklist.............................................................................................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
BSBFIM501A Manage budgets and financial plans
© 2010 Innovation and Business Industry Skills Council Ltd Page 3 of 82
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
BSBFIM501A Manage budgets and financial plans
Page 4 of 82 © 2010 Innovation and Business Industry Skills Council Ltd
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 ($)
Doll houses 170,000 50 8,500,000
Doll furniture 1,000,000 9 9,000,000
Total 17,500,000
Student Workbook Introduction
BSBFIM501A Manage budgets and financial plans
© 2010 Innovation and Business Industry Skills Council Ltd Page 5 of 82
Production Budget
Doll houses Doll furniture
Budgeted sales (units) 170,000 1,000,000
Required ending finished
goods inventory
3,000 16,000
Finished goods required 173,000 1,016,000
Less beginning finished
goods inventory
1,000 7,000
Required production 172,000 1,009,00
Direct Material Budget
Material Total used on
houses
(Litres)
Total used on
furniture
(Litres)
Direct
materials cost
(Litres)
($)
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
BSBFIM501A Manage budgets and financial plans
Page 6 of 82 © 2010 Innovation and Business Industry Skills Council Ltd
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.
Student Workbook Introduction
BSBFIM501A Manage budgets and financial plans
© 2010 Innovation and Business Industry Skills Council Ltd Page 7 of 82
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
BSBFIM501A Manage budgets and financial plans
Page 8 of 82 © 2010 Innovation and Business Industry Skills Council Ltd
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
BSBFIM501A Manage budgets and financial plans
© 2010 Innovation and Business Industry Skills Council Ltd Page 9 of 82
What skills will you need?
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
Section 1 – Plan Financial Management Approaches Student Workbook
BSBFIM501A Manage budgets and financial plans
Page 10 of 82 © 2010 Innovation and Business Industry Skills Council Ltd
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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Student Workbook Section 1 – Plan Financial Management Approaches
BSBFIM501A Manage budgets and financial plans
© 2010 Innovation and Business Industry Skills Council Ltd Page 11 of 82
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
Section 1 – Plan Financial Management Approaches Student Workbook
BSBFIM501A Manage budgets and financial plans
Page 12 of 82 © 2010 Innovation and Business Industry Skills Council Ltd
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
Student Workbook Section 1 – Plan Financial Management Approaches
BSBFIM501A Manage budgets and financial plans
© 2010 Innovation and Business Industry Skills Council Ltd Page 13 of 82
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
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
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Section 1 – Plan Financial Management Approaches Student Workbook
BSBFIM501A Manage budgets and financial plans
Page 14 of 82 © 2010 Innovation and Business Industry Skills Council Ltd
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
Student Workbook Section 1 – Plan Financial Management Approaches
BSBFIM501A Manage budgets and financial plans
© 2010 Innovation and Business Industry Skills Council Ltd Page 15 of 82
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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Section 1 – Plan Financial Management Approaches Student Workbook
BSBFIM501A Manage budgets and financial plans
Page 16 of 82 © 2010 Innovation and Business Industry Skills Council Ltd
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.
Student Workbook Section 1 – Plan Financial Management Approaches
BSBFIM501A Manage budgets and financial plans
© 2010 Innovation and Business Industry Skills Council Ltd Page 17 of 82
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.
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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.
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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?
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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.
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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?
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 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.
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© 2010 Innovation and Business Industry Skills Council Ltd Page 23 of 82
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
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
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?
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
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?
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
4. Who would have the final say over the financial plans?
___________________________________________________________________
___________________________________________________________________
5. If a company employee wanted additional money to replace old equipment,
whom should he approach?
___________________________________________________________________
___________________________________________________________________
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.
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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.
 Bear, A, Blythe, P and Flanders, D 2005, Introduction to budgeting. 4th edn,
Thomson, Melbourne, pp. 1–10.
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
BSBFIM501A Manage budgets and financial plans
© 2010 Innovation and Business Industry Skills Council Ltd Page 27 of 82
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.
What skills will you need?
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
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 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.
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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:
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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)
Insignifica
nt
(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.
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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
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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 :
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
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:
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
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.
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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.
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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
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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
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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
Before you proceed to the next section, make sure that you are 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.
Student Workbook Section 3 – Implement Financial Management Approaches
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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.
What skills will you need?
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
BSBFIM501A Manage budgets and financial plans
Page 38 of 82 © 2010 Innovation and Business Industry Skills Council Ltd
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.
Student Workbook Section 3 – Implement Financial Management Approaches
BSBFIM501A Manage budgets and financial plans
© 2010 Innovation and Business Industry Skills Council Ltd Page 39 of 82
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).
Section 3 – Implement Financial Management Approaches Student Workbook
BSBFIM501A Manage budgets and financial plans
Page 40 of 82 © 2010 Innovation and Business Industry Skills Council Ltd
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
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
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:
Student Workbook Section 3 – Implement Financial Management Approaches
BSBFIM501A Manage budgets and financial plans
© 2010 Innovation and Business Industry Skills Council Ltd Page 41 of 82
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.
Section 3 – Implement Financial Management Approaches Student Workbook
BSBFIM501A Manage budgets and financial plans
Page 42 of 82 © 2010 Innovation and Business Industry Skills Council Ltd
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?
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
What Dolly’s Delight Pty Ltd specific skills does Denise require to do her job?
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
What leadership behaviours do you think will best help Denise to learn her job
better?
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
Student Workbook Section 3 – Implement Financial Management Approaches
BSBFIM501A Manage budgets and financial plans
© 2010 Innovation and Business Industry Skills Council Ltd Page 43 of 82
Why is it important to recognise the skills that Denise has brought with her as
well as the progress she has made?
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
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.
Section 3 – Implement Financial Management Approaches Student Workbook
BSBFIM501A Manage budgets and financial plans
Page 44 of 82 © 2010 Innovation and Business Industry Skills Council Ltd
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
Student Workbook Section 3 – Implement Financial Management Approaches
BSBFIM501A Manage budgets and financial plans
© 2010 Innovation and Business Industry Skills Council Ltd Page 45 of 82
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.
 Langfield-Smith, K, Thorne, H, Hilton, R 2006 Management accounting:
information for managing and creating value, 4th edn, McGraw-Hill,
Sydney, pp. 183–234.
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
 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
BSBFIM501A Manage budgets and financial plans
Page 46 of 82 © 2010 Innovation and Business Industry Skills Council Ltd
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.
What skills will you need?
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
BSBFIM501A Manage budgets and financial plans
© 2010 Innovation and Business Industry Skills Council Ltd Page 47 of 82
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
Section 4 – Develop Systems to Manage Budgets and Finances Student Workbook
BSBFIM501A Manage budgets and financial plans
Page 48 of 82 © 2010 Innovation and Business Industry Skills Council Ltd
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
Student Workbook Section 4 – Develop Systems to Manage Budgets and Finances
BSBFIM501A Manage budgets and financial plans
© 2010 Innovation and Business Industry Skills Council Ltd Page 49 of 82
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.
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287363813 student workbook-7

  • 1. Manage budgets and financial plans BSBFIM501A Student Workbook
  • 2.  
  • 3. 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
  • 4. Copyright and Trade Mark statement © 2010 Innovation and Business Industry Skills Council Ltd All rights reserved. Apart from any use permitted under the Copyright Act 1968, no part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, or otherwise, without written permission from the publisher, Innovation and Business Industry Skills Council Ltd (‘IBSA’). Use of this work for purposes other than those indicated above requires the prior written permission of IBSA. Requests should be addressed to Products and Services Manager, IBSA, Level 11, 176 Wellington Pde, East Melbourne VIC 3002 or email sales@ibsa.org.au. ‘Innovation and Business Skills Australia’, ‘IBSA’ and the IBSA logo are trademarks of IBSA. Disclaimer Care has been taken in the preparation of the material in this document; however, to the extent permitted by law, IBSA and the original developer do not warrant that any licensing or registration requirements specified in this document are either complete or up to date for your State or Territory or that the information contained in this document is error free or fit for any particular purpose. To the extent permitted by law, IBSA and the original developer do not accept any liability for any damage or loss (including loss of profits, loss of revenue, indirect and consequential loss) incurred by any person as a result of relying on the information contained in this document. The information is provided on the basis that all persons accessing the information contained in this document undertake responsibility for assessing the relevance and accuracy of its content. If this information appears online, no responsibility is taken for any information or services which may appear on any linked websites, or other linked information sources, that are not controlled by IBSA. Use of versions of this document made available online or in other electronic formats is subject to the applicable terms of use. To the extent permitted by law, all implied terms are excluded from the arrangement under which this document is purchased from IBSA, and, if any term or condition that cannot lawfully be excluded is implied by law into, or deemed to apply to, that arrangement, then the liability of IBSA, and the purchaser’s sole remedy, for a breach of the term or condition is limited, at IBSA’s option, to any one of the following, as applicable: (a) if the breach relates to goods: (i) repairing; (ii) replacing; or (iii) paying the cost of repairing or replacing, the goods; or (b) if the breach relates to services: (i) resupplying; or (ii) paying the cost of resupplying, the services. 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: reception@ibsa.org.au 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
  • 5. 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 checklist.............................................................................................36  Section 3 – Implement Financial Management Approaches.............................37  What skills will you need? ..............................................................................37  Source data .....................................................................................................38  Setting clear objectives ..................................................................................43 
  • 6. Section summary ............................................................................................45  Further reading................................................................................................45  Section checklist.............................................................................................45  Section 4 – Develop Systems to Manage Budgets and Finances.....................46  What skills will you need? ..............................................................................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 checklist.............................................................................................63  Section 5 – Review and Evaluate Financial Management Processes ..............64  What skills will you need? ..............................................................................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  Section checklist.............................................................................................77  Appendices............................................................................................................78  Appendix 1: Sample cash flow statement.....................................................78  Appendix 2: Sample operational plan ...........................................................79  Appendix 3: Sample of financial projections.................................................81 
  • 7. 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.
  • 8. 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.
  • 9. Student Workbook Introduction BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 3 of 82 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.
  • 10. Introduction Student Workbook BSBFIM501A Manage budgets and financial plans Page 4 of 82 © 2010 Innovation and Business Industry Skills Council Ltd 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 ($) Doll houses 170,000 50 8,500,000 Doll furniture 1,000,000 9 9,000,000 Total 17,500,000
  • 11. Student Workbook Introduction BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 5 of 82 Production Budget Doll houses Doll furniture Budgeted sales (units) 170,000 1,000,000 Required ending finished goods inventory 3,000 16,000 Finished goods required 173,000 1,016,000 Less beginning finished goods inventory 1,000 7,000 Required production 172,000 1,009,00 Direct Material Budget Material Total used on houses (Litres) Total used on furniture (Litres) Direct materials cost (Litres) ($) 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.
  • 12. Introduction Student Workbook BSBFIM501A Manage budgets and financial plans Page 6 of 82 © 2010 Innovation and Business Industry Skills Council Ltd 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.
  • 13. Student Workbook Introduction BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 7 of 82 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 ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ Organising: prioritising ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ Monitoring: performance appraisals ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ Staffing: recruitment and selection ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ 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.
  • 14. Section 1 – Plan Financial Management Approaches Student Workbook BSBFIM501A Manage budgets and financial plans Page 8 of 82 © 2010 Innovation and Business Industry Skills Council Ltd 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.
  • 15. Student Workbook Section 1 – Plan Financial Management Approaches BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 9 of 82 What skills will you need? 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
  • 16. Section 1 – Plan Financial Management Approaches Student Workbook BSBFIM501A Manage budgets and financial plans Page 10 of 82 © 2010 Innovation and Business Industry Skills Council Ltd 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 – ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ Control – ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________
  • 17. Student Workbook Section 1 – Plan Financial Management Approaches BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 11 of 82 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
  • 18. Section 1 – Plan Financial Management Approaches Student Workbook BSBFIM501A Manage budgets and financial plans Page 12 of 82 © 2010 Innovation and Business Industry Skills Council Ltd 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
  • 19. Student Workbook Section 1 – Plan Financial Management Approaches BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 13 of 82 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 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 ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________
  • 20. Section 1 – Plan Financial Management Approaches Student Workbook BSBFIM501A Manage budgets and financial plans Page 14 of 82 © 2010 Innovation and Business Industry Skills Council Ltd 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
  • 21. Student Workbook Section 1 – Plan Financial Management Approaches BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 15 of 82 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 ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ Tool/resource no. 2 ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________
  • 22. Section 1 – Plan Financial Management Approaches Student Workbook BSBFIM501A Manage budgets and financial plans Page 16 of 82 © 2010 Innovation and Business Industry Skills Council Ltd Tool/resource no. 3 ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ Tool/resource no. 4 ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ Tool/resource no. 5 ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ 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.
  • 23. Student Workbook Section 1 – Plan Financial Management Approaches BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 17 of 82 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.
  • 24. Section 1 – Plan Financial Management Approaches Student Workbook BSBFIM501A Manage budgets and financial plans Page 18 of 82 © 2010 Innovation and Business Industry Skills Council Ltd 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.
  • 25. Student Workbook Section 1 – Plan Financial Management Approaches BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 19 of 82 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?
  • 26. Section 1 – Plan Financial Management Approaches Student Workbook BSBFIM501A Manage budgets and financial plans Page 20 of 82 © 2010 Innovation and Business Industry Skills Council Ltd 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.
  • 27. Student Workbook Section 1 – Plan Financial Management Approaches BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 21 of 82 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?
  • 28. Section 1 – Plan Financial Management Approaches Student Workbook BSBFIM501A Manage budgets and financial plans Page 22 of 82 © 2010 Innovation and Business Industry Skills Council Ltd  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.
  • 29. Student Workbook Section 1 – Plan Financial Management Approaches BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 23 of 82 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 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 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? ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ 2. Who would the person developing the budgets need to consult and why? ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________
  • 30. Section 1 – Plan Financial Management Approaches Student Workbook BSBFIM501A Manage budgets and financial plans Page 24 of 82 © 2010 Innovation and Business Industry Skills Council Ltd 3. Why is it important for a number of people to have input into the budget process? ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ 4. Who would have the final say over the financial plans? ___________________________________________________________________ ___________________________________________________________________ 5. If a company employee wanted additional money to replace old equipment, whom should he approach? ___________________________________________________________________ ___________________________________________________________________ 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.
  • 31. Student Workbook Section 1 – Plan Financial Management Approaches BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 25 of 82 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. ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________
  • 32. Section 1 – Plan Financial Management Approaches Student Workbook BSBFIM501A Manage budgets and financial plans Page 26 of 82 © 2010 Innovation and Business Industry Skills Council Ltd 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.  Bear, A, Blythe, P and Flanders, D 2005, Introduction to budgeting. 4th edn, Thomson, Melbourne, pp. 1–10. 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.
  • 33. Student Workbook Section 2 – Risk Management and Contingency Planning BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 27 of 82 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. What skills will you need? 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
  • 34. Section 2 – Risk Management and Contingency Planning Student Workbook BSBFIM501A Manage budgets and financial plans Page 28 of 82 © 2010 Innovation and Business Industry Skills Council Ltd  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.
  • 35. Student Workbook Section 2 – Risk Management and Contingency Planning BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 29 of 82 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:
  • 36. Section 2 – Risk Management and Contingency Planning Student Workbook BSBFIM501A Manage budgets and financial plans Page 30 of 82 © 2010 Innovation and Business Industry Skills Council Ltd 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) Insignifica nt (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.
  • 37. Student Workbook Section 2 – Risk Management and Contingency Planning BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 31 of 82 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
  • 38. Section 2 – Risk Management and Contingency Planning Student Workbook BSBFIM501A Manage budgets and financial plans Page 32 of 82 © 2010 Innovation and Business Industry Skills Council Ltd 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 : ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ 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: ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ 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.
  • 39. Student Workbook Section 2 – Risk Management and Contingency Planning BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 33 of 82 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.
  • 40. Section 2 – Risk Management and Contingency Planning Student Workbook BSBFIM501A Manage budgets and financial plans Page 34 of 82 © 2010 Innovation and Business Industry Skills Council Ltd 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
  • 41. Student Workbook Section 2 – Risk Management and Contingency Planning BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 35 of 82 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
  • 42. Section 2 – Risk Management and Contingency Planning Student Workbook BSBFIM501A Manage budgets and financial plans Page 36 of 82 © 2010 Innovation and Business Industry Skills Council Ltd 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 Before you proceed to the next section, make sure that you are 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.
  • 43. Student Workbook Section 3 – Implement Financial Management Approaches BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 37 of 82 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. What skills will you need? 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.
  • 44. Section 3 – Implement Financial Management Approaches Student Workbook BSBFIM501A Manage budgets and financial plans Page 38 of 82 © 2010 Innovation and Business Industry Skills Council Ltd 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.
  • 45. Student Workbook Section 3 – Implement Financial Management Approaches BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 39 of 82 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).
  • 46. Section 3 – Implement Financial Management Approaches Student Workbook BSBFIM501A Manage budgets and financial plans Page 40 of 82 © 2010 Innovation and Business Industry Skills Council Ltd 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 ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ 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:
  • 47. Student Workbook Section 3 – Implement Financial Management Approaches BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 41 of 82 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.
  • 48. Section 3 – Implement Financial Management Approaches Student Workbook BSBFIM501A Manage budgets and financial plans Page 42 of 82 © 2010 Innovation and Business Industry Skills Council Ltd 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? ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ What Dolly’s Delight Pty Ltd specific skills does Denise require to do her job? ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ What leadership behaviours do you think will best help Denise to learn her job better? ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________
  • 49. Student Workbook Section 3 – Implement Financial Management Approaches BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 43 of 82 Why is it important to recognise the skills that Denise has brought with her as well as the progress she has made? ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ 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.
  • 50. Section 3 – Implement Financial Management Approaches Student Workbook BSBFIM501A Manage budgets and financial plans Page 44 of 82 © 2010 Innovation and Business Industry Skills Council Ltd 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
  • 51. Student Workbook Section 3 – Implement Financial Management Approaches BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 45 of 82 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.  Langfield-Smith, K, Thorne, H, Hilton, R 2006 Management accounting: information for managing and creating value, 4th edn, McGraw-Hill, Sydney, pp. 183–234. 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  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.
  • 52. Section 4 – Develop Systems to Manage Budgets and Finances Student Workbook BSBFIM501A Manage budgets and financial plans Page 46 of 82 © 2010 Innovation and Business Industry Skills Council Ltd 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. What skills will you need? 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.
  • 53. Student Workbook Section 4 – Develop Systems to Manage Budgets and Finances BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 47 of 82 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
  • 54. Section 4 – Develop Systems to Manage Budgets and Finances Student Workbook BSBFIM501A Manage budgets and financial plans Page 48 of 82 © 2010 Innovation and Business Industry Skills Council Ltd 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
  • 55. Student Workbook Section 4 – Develop Systems to Manage Budgets and Finances BSBFIM501A Manage budgets and financial plans © 2010 Innovation and Business Industry Skills Council Ltd Page 49 of 82 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.