BSBSMB406 - Manage Small Business Finances

Trainer Manual & Assessment Manage Small Business Finances

BSBSMB406

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Table of Contents 3

About BSB

5 Introduction 7

BSBSMB406/01 Implement Financial Plan 1.1 Identify financial information requirements and obtain specialist services, as required, to profitably operate the business in accordance with the business plan 1.2 Produce financial budgets or projections, including cash flow estimates, as required for each forward period, and distribute to relevant people in accordance with legal requirements 1.3 Negotiate, secure and manage business capital to best enable implementation of the business plan and to meet requirements of financial backers 1.4 Develop and maintain strategies to enable adequate financial provision for taxation in accordance with legal requirements 1.5 Develop, monitor and maintain client credit policies, including contingencies for debtors in default, to maximise cash flow 1.6 Select key performance indicators to enable ongoing monitoring of financial performance 1.7 Record and communicate financial procedures to relevant people to facilitate implementation of the business plan

40 41

Key Points ‘True’ or ‘False’ Quiz

43 BSBSMB406/02 Monitor Financial Performance 2.1 Regularly monitor and report on financial performance targets, and analyse data to establish extent to which the financial plan has been met 2.2 Monitor marketing and operational strategies for their effects on the financial plan 2.3 Calculate and evaluate financial ratios according to own or industry benchmarks 2.4 Assess financial plan to determine whether variations or alternative plans are needed, and change as required

60 61

Key Points ‘True’ or ‘False’ Quiz

62 Summary 63 Bibliography 65

Assessment Pack

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About BSB Business Services Training Package

“The purpose of education is to replace an empty mind with an open one.” Malcolm Forbes

About the Business Services Industry The BSB Business Services Training Package covers a diverse range of industries and occupations. Business Services covers a range of cross-industry functions and services supporting the commercial activities of all industries.

Defining Qualifications When units of competency are grouped into combinations that meet workplace roles, they are called qualifications. These qualifications are aligned to the Australian Qualifications Framework (AQF). Each qualification will have ’packaging rules’ which establish the number of core units, number and source of elective units and overall requirements for delivering the qualification.

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About BSB Business Services Training Package (continued)

Delivery and Assessment of Qualifications RTOs must have the qualifications (or specific units of competency) on their scope to deliver nationally recognised training and assessment. RTOs are governed by and must comply with the requirements established by applicable national frameworks and standards. RTOs must ensure that training and assessment complies with the relevant standards.

Qualification Training Pathways A pathway is the route or course of action taken to get to a destination. A training pathway is the learning required to attain the competencies to achieve career goals.

Everyone has different needs and goals, and therefore requires a personalised and individual training pathway.

Foundation Skills Foundation Skills are the non-technical skills that support the individual’s participation in the workplace, in the community and in education and training.

Australian Core Skills Framework (ACSF) This Assessment meets the five ACSF core skills as described in the Foundation Skills mapping.

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Introduction

“Knowledge is of no value unless you put it into practice.”

Anton Chekhov

This unit standard, BSBSMB406 Manage Small Business Finances, describes the performance outcomes, skills and knowledge required to implement, monitor and review strategies for the ongoing management of a small business’s finances. It also includes day to day financial management of the small business.

Specific legal requirements apply to the management of a small business.

This work is undertaken by individuals who operate a small business.

The unit is suitable for existing micro and small businesses or a department in a larger organisation.

This manual is broken up into two Elements. They are:

1. Implement Financial Plan 2. Monitor Financial Performance

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Introduction (continued)

There are activities throughout this workbook. These require the Learners to think about their experience or reactions, or to try and complete some research through reading or accessing the Internet. The activities will also help prepare Learners for their Assessment Tasks as they think through the issues raised.

Learners will then be asked to complete an Assessment Pack for this unit of competency. The information contained in this workbook will assist them. These tasks can be completed as they work through the workbook, rather than leaving it all to be completed at the end of their study.

Finally, at the end of this workbook you will find a list of useful resources that you may use for further information. You will need to have access to an Internet terminal.

Throughout the text, there are references to websites for further information and for some activities.

This unit contributes towards the attainment of nationally recognised qualifications.

Managing the finances of a small business is a multi-layered task. You need to become familiar with standard financial documents, pay attention to profits, and make the most of the business’s assets. And you always have to be thinking and planning ahead.

Starting a business takes more than talent and hard work. It takes money.

Without sufficient money, your prospects for success are not good. Most small businesses are undercapitalised right from the start, according to the experts. Without budgets and a simple cash flow statement, you risk condemning your business to failure because of lack of money. Enter your business venture prepared for the financial challenges, ahead.

In order to ensure a profit for your business, you have to think ahead in terms of expenses and income. By preparing a budget as your ‘profit plan’, you map out projected incomes and outflows for your company. Some experts recommend preparing a master budget for the entire year, then breaking it down into manageable sections, such as quarters or months.

Establishing a strong financial base is the topic of this competency.

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ELEMENT 1:

Implement Financial Plan

Performance Criteria Element 1 1.1

Identify financial information requirements and obtain specialist services, as required, to profitably operate and extend the business in accordance with the business plan

1.2

Produce financial budgets/projections, including cash flow estimates, as required for each forward period, and distribute to relevant people in accordance with legal requirements

1.3

Negotiate, secure and manage business capital to best enable implementation of the business plan and to meet the requirements of financial backers

1.4

Develop and maintain strategies to enable adequate financial provision for taxation in accordance with legal requirements

1.5

Develop, monitor and maintain client credit policies, including contingencies for debtors in default, to maximise cash flow

1.6

Select key performance indicators to enable ongoing monitoring of financial performance

1.7

Record and communicate financial procedures to relevant people to facilitate implementation of the business plan.

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Element 1: Implement Financial Plan

Implement Financial Plan Financial Planning The business financial plan is a section of the overall business plan for a small business. However, the financial plan is a self-supporting document intended to support and direct the actions of the business. It explains what your business can afford, how it can afford to do it and what the expected profits will be. For a small business, a well-written business plan can be the difference between you carrying the business or the business carrying you.

Your small business financial plan should be supported by four standard financial forms. These include the personal financial statement, the balance sheet, the income statement and the cash flow statement. These forms provide a well-rounded financial view of your business, from your personal finances to the business finances. The forms explain how your business generates income, how it spends the income and whether it can support itself.

The supporting documents of the financial plan are those that back up your financial figures. Depending on the information provided in your statements, these documents can include stock documents, life insurance policies, real estate deeds, tax statements, bank statements, register receipts and accounting ledgers. Within the business plan, these supporting documents are included in the document’s appendix and are organised in a fashion that provides easy reference.

Financial plans may include: • Analysis of sales by product/service, identifying where they were sold and to whom • Cash flow estimates for each forward period • Current financial state of the enterprise (or owner/operator) • Estimates of profit and loss projections for each forward period • Financial performance to date (if applicable) • Likely return on investment • Monthly, quarterly or annual returns • Non-recurrent assets calculations • Profit, turnover, capital and equity targets • Projected profit targets, pricing strategies, margins • Projections of likely financial results (budgeting) • Projections, which may vary depending on the importance of such information and the stage in the life of the business • Resources required to implement the proposed marketing and production strategies (staff, materials, plant and equipment)

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Element 1: Implement Financial Plan

• Review of financial inputs required (sources and forms of finance) • Risks and measures to manage or minimise risks • Working, fixed, debt and equity capital.

Working in conjunction with external consultants e.g. Investment analysts, accountants, financiers.

Creating a financial plan helps you see the big picture and set long and short-term business and in some cases, life goals, a crucial step in mapping out your financial future. When you have a financial plan, it’s easier to make financial decisions and stay on track to meet your goals.

Unless your business is accounting or bookkeeping, keeping financial records is probably not what you do best. Most likely, you’d rather spend your time selling your product or service. However, if you are going to run a successful business, accurate and timely financial information is a must. Here are some of the reasons why you need a good financial recordkeeping system: • Monitoring the Success or Failure of Your Business It’s hard to know how your business is doing without a clear financial picture. Am I making money? Are sales increasing? Are expenditures increasing faster than sales? Which expenses are too high, based on my level of sales? Does some expenditure appear to be ‘out of control?’

• Providing the Information You Need to Make Decisions Evaluating the financial consequences should be a part of every business decision you make. Without accurate records and financial information, it may be hard for you to know the financial impact of a given course of action. Will it pay to hire another salesperson? How much will another production employee cost?

Is this particular product line profitable?

• Obtaining Bank Financing A banker will usually want to see financial statements: a balance sheet, income statement, and cash flow budget for the most current and prior years, as well as your projected statements showing the impact of the requested loan. A banker may even want to see some of your bookkeeping procedures and documents to verify whether you run your business in a sound, professional manner.

• Obtaining Other Sources of Capital If your business has reached the point where you need to take in a partner, any prospective partner will want to become intimately familiar with your financial picture. If you need capital and are thinking of taking in an outside investor, you will need to produce a lot of financial information. Even your suppliers and other creditors may ask to see certain financial records. Such information may be produced by your outside accountant, but it is based on your day-to-day recordkeeping.

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• Budgeting

All businesses should use a budget for planning purposes. A budget will help keep your business on track by forecasting your cash needs and helping you control expenditures. In addition, if you are seeking bank financing or other sources of capital, a banker or prospective investor will probably want to see your budget as evidence that your business is well-planned and stable. You must have solid financial information to prepare a meaningful budget.

• Preparing Your Income Tax Return Whether your business is a sole proprietorship, partnership, or company, you must file an income tax return and pay income taxes. With good records, preparing an accurate tax return will be easier and you’re more likely to be able to do it on time. Poor records may result in your underpaying or overpaying your taxes and/or filing late (and paying penalties). If your accountant prepares your income tax return, poor records will almost certainly result in your paying higher accounting fees. If your business is a partnership, not only will you have to prepare a partnership tax return, but partnership return amounts will pass directly to the tax return of each partner. So your recordkeeping will directly affect the tax return of each partner.

• Complying with Federal and State Tax and Superannuation Rules

If you have employees, you are aware of the myriad rules and regulations relating to payroll taxes. Payroll tax is a self-assessed, general purpose state and territory tax assessed on wages paid or payable by an employer to its employees, when the total wage bill of an employer (or group of employers) exceeds a threshold amount.

The payroll tax rate and thresholds vary between states and territories. Returns are lodged, and payment of liability made, at an agreed frequency (monthly, quarterly, or annually) to the respective revenue office in the Australian state and/or territory in which the wage payment is deemed liable.

All Australian states and territories have harmonised a number of key areas of payroll tax administration. Information and Revenue Rulings on the harmonised key areas are accessible from http://www.payrolltax.gov.au

Then at the end of the financial year, you are required to give your employees the Australian Taxation Office (ATO) ‘Payment Summaries’, which must agree with your payroll returns. Sound bookkeeping practices will make compliance with all these payroll rules easy. Poor records will make it impossible.

The ATO has developed a tool (http://www.ato.gov.au/Calculators-and-tools/ Super-guarantee-eligibility/) for business owners/employers to help them determine whether they need to make super contributions for individuals they employ (including any contractors who are treated as employees). The employer answers a series of questions, online and will be given a report that contains: ○ ○ A decision about whether an individual is eligible for super for their particular arrangement ○ ○ A summary of the information the employer has provided

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○ ○ A summary of the employer’s super obligations relating to the individual.

• Submitting GST If you collect GST from your customers or clients, good records will make it easy for you to calculate the tax due and prepare the required reports.

Goods and services tax (GST) is a broad-based tax of 10% on most goods, services and other items sold or consumed in Australia. Generally, businesses registered for GST will include GST in the price of sales to their customers, and claim credits for the GST included in the price of their business purchases.

You only register once for GST, even if you operate more than one business.

When you are registered for GST, you include GST in the price of the products you sell and claim credits for GST in the price of products you buy for your business. You will need to register if your current or projected GST turnover will reach the registration threshold.

If you are registered for GST - or required to be - the goods and services you sell in Australia are generally taxable unless they are ‘GST-free’ or ‘input taxed’.

When you make a taxable sale of more than $82.50 (including GST), your GSTregistered customers need a tax invoice from you to be able to claim a credit. Tax invoices must include certain information. There are additional rules for sales of more than $1,000, and for invoices issued by agents or created by the recipient.

As a GST-registered business, you need to issue tax invoices to your customers, collect GST and send it to the tax office with your business activity statement (BAS). There are a few ways you can make this easier to manage: ○ ○ Use business accounting software to produce tax invoices and automatically generate reports of your GST liabilities and credits at BAS time ○ ○ Put the GST you collect in a separate bank account ○ ○ Take advantage of the ‘cash accounting’ option to better align your GST liabilities with your business cash flow.

You report and pay GST amounts, and claim GST credits, by lodging an activity statement or an annual GST return.

You must cancel your GST registration when selling or closing your business.

You may also need to cancel your GST registration if you are restructuring your business. You must cancel your registration within 21 days of the sale or closure of your business. Cancellation is likely to affect your ABN and any registrations for fuel tax credits, luxury car tax and wine equalisation tax. It doesn’t affect PAYG or fringe benefits tax.

• Distributing Profits If your business is a partnership, you will need good records to determine the correct amount of profits to distribute to each partner. If you are operating as a company, you must determine the company profits that you will be paying out as dividends to the shareholders.

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In most cases, with a little study and familiarisation with your bookkeeping software, you should be able to manage your most basic financial records without the help of an accountant. This includes the daily recording of transactions, maintenance of a general ledger, and maintenance of your cash records. There are some other records you may need to maintain, depending on your business, such as accounts receivable ledgers and accounts payable ledgers.

You may need an accountant to help with less routine tasks, such as preparing periodic adjusting entries, financial statements, closing entries and income tax returns, or to help with preparing a budget. You may also decide to have your accountant set up your books when you first open your business. It helps to find an accountant who’s familiar with, and happy to use the software you prefer.

If you’ve been in business for a while, your accountant could give your bookkeeping procedures and records a one-off or periodic check-up. At a minimum, you will need your accountant to help you review the books annually because you have to file an income tax return every year. If you are having financial statements prepared, you will want them done at least annually. However, annual financial statements may not be enough to help you keep tabs on your business. You may want financial statements every quarter, or even monthly. Depending on the size of your business, you may want to have your accountant review the books every month, particularly if you need to submit monthly sales tax to the state government.

Identify Financial Information Requirements and Obtain Specialist Services, as Required, to Profitably Operate and Extend the Business in Accordance with the Business Plan Think of your business expenses as broken into two categories; your start-up expenses and your operating expenses. All the costs of getting your business up and running go into the start-up expenses category. These expenses may include: • Business registration fees • Business licensing and permits • Starting inventory • Rent deposits • Down payments on property • Down payments on equipment • Utility set-up fees.

These are only a few of the many possible start-up expenses.

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Element 1: Implement Financial Plan

Operating expenses are the costs of keeping your business running. These are the things that will have to be paid each month. Your list of operating expenses may include: • Salaries (yours and staff salaries) • Rent or mortgage payments • Telecommunications • Utilities • Raw materials • Storage • Distribution • Promotion • Loan payments • Office supplies • Maintenance.

This is just a partial list to get you started. Once you have completed the Operating Expenses list, total it up and divide it to show your business running expenses each month. If you multiply this number by 6, you will have a six month estimate of your operating expenses. Then add this to the total of your start-up expenses list, and you’ll have a rough approximation of your complete start-up costs.

Some people decide to do their own business financial planning, but you may want to seek help from a professional if you: • Want to better manage your finances, but aren’t sure where to start • Don’t have time to do your own financial planning • Want a professional opinion about the plan you’ve developed • Don’t have sufficient expertise • Have an immediate need or unexpected event.

You can save yourself some cash by doing as much of your own bookkeeping as possible. Your accountant would prefer that you not drop a shoe box full of receipts and records in their office. Such a strategy will cost you a lot of money in accounting fees; you don’t want to pay your accountant for routine clerical work.

You should be able to keep track of the day-to-day transactions, and have a preliminary general ledger ready for your accountant. If you keep good records, your accountant will produce more accurate financial statements and/or tax returns, and will do it faster and cheaper.

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Get your records ready and set up an appointment with your accountant as early as you can. Don’t wait until you are close to an upcoming deadline. If you get your records to your accountant early, they will give you better service for your money. Too many people wait until the last minute – don’t be one of them!

It cannot be stressed enough: Bookkeeping and accounting software is much better than your homemade spreadsheets (or your print notebooks). Shop around. Some options are more sophisticated than others, and some are written specifically for certain industries, such as retail, construction, or service-oriented organisations. But don’t be swayed by fancy packaging – many software packages ‘tailored’ to your industry are the same product as any other ‘tailored’ software, just with different packaging and a few minor changes.

Always discuss the selection of computer software with your accountant. They may want you to use a program that is compatible with the system they use. In many cases, you may be able to keep most of your records on your computer, and simply transfer the files electronically to your accountant, never having to leave your office.

There are records and documents that you may require such as: • Staff Information This is any information relating to staff leave, what has been accrued and what they are entitled to.

• Assets An asset management strategy is the practical implementation of an entity’s strategic goals and helps in identifying the optimal asset base that is necessary to support program delivery requirements. This will include the choices you make regarding owning, leasing, sharing and syndicating assets.

The fixed asset register is a list of the fixed assets owned by a business. It contains pertinent details about each fixed asset to track their value and physical location.

• Balance Sheets This is a statement of the assets, liabilities, and capital of a business or other organisation at a particular point in time, detailing the balance of income and expenditure over the preceding period.

• Bookkeeping/Accounting/Stock/Job Costing Records to Enable Journals and Profit and Loss Accounts to be Kept to Produce the Balance Sheets There are a number of items that will be required to make journal entries that can be used to document inventory transactions. In a modern, computerised inventory tracking system, the system generates most of these transactions, so the precise nature of the journal entries is not necessarily visible. Nonetheless, you may find a need for some of these entries from time to time, to be created as manual journal entries in the accounting system.

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• Business Activity Statements (BAS) BAS is a form submitted to the Australian Taxation Office by all businesses to report their taxation obligations. These include pay as you go withholding (PAYGW), pay as you go instalments (PAYGI), fringe benefits tax (FBT), wine equalisation tax (WET) and luxury car tax (LCT).

• Business Capital Capital is the money or wealth needed to produce goods and services. All businesses must have capital in order to purchase assets and maintain their operations.

• Cash Book The cash book is generally a record of payments and receipts from and into the bank account. Receipts are debited here and credited to the appropriate ledger.

You should be able to trace them back from bank statements through paying-in books to the cash book entries for cheques and cash received.

• Cash Flow Forecasts A cash flow forecast is an estimate of the amount of money you expect to flow in and out of your business and includes all your projected income and expenses.

A forecast usually covers the next 12 months; however it can also cover a shortterm period such as a week or month.

• Financial Budgets Financial budgets are financial plans that are structured to detail projections on incomes and expenses on both a long-term and a short-term basis. Budgets of this type normally incorporate aspects of other types of budgeting strategies, including the preparation of a detailed budgeted balance sheet, a section that functions as a cash flow budget and addresses the receipt of income and the flow of expenses on an annual, semi-annual, and a monthly basis. It typically covers a period of at least one year, although it is not unusual for some businesses to prepare this kind of budget to cover anywhere from two to five years at a time.

• Financial Indicators, which may be Short-, Medium- and/or Long-Term These are monitoring indicators used to assess progress in terms of annual commitment and payment of the funds available for any operation, measure or program in relation to its eligible costs.

• Payroll Records, Superannuation Entitlements In a business, payroll is the sum of all financial records of salaries for an employee, wages, bonuses and deductions including superannuation. In accounting, payroll refers to the amount paid to employees for services they provided during a certain period of time. From an accounting perspective, payroll is crucial because payroll and payroll taxes considerably affect the net income of most companies and they are subject to laws and regulations. From an ethics in business viewpoint payroll is critical as employees are responsive to payroll errors and irregularities. The primary mission of the payroll department is to ensure that all employees are paid accurately and in a timely way with the correct

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Element 1: Implement Financial Plan

withholdings and deductions, and to ensure the withholdings and deductions are remitted in a timely manner. This includes salary payments, tax withholdings, and deductions such as superannuation. All employee and contractor records must be kept for five years.

• Profit and Loss Statements A Profit and Loss Statement (P&L) measures the activity of a business over a period of time – usually a month, a quarter, or a year. This financial report may have several different names: profit and loss, P&L, income statement, statement of revenues and expenses, or even the operating statement.

• Ratios For Profitability, Liquidity/Efficiency/Financial Structure Financial ratios are indicators used to measure the performance and financial situation of a business. They can be also used to analyse trends and to compare a firm’s financial figures to those of competitors or those of the business sector in which it belongs.

• Risk Management Risk management is the identification, assessment, and prioritisation of risks (defined in ISO 31000 as the effect of uncertainty on objectives) followed by coordinated and economical application of resources to minimise, monitor, and control the probability and/or impact of unfortunate events or to maximise the realisation of opportunities. Risks can come from uncertainty in financial markets, threats from project failures (at any phase in design, development, production, or sustainment life-cycles), legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attack from an adversary, or events of uncertain or unpredictable root cause. Methods, definitions and goals vary widely according to whether the risk management method is in the context of project management, security, engineering, industrial processes, financial portfolios, actuarial assessments, or public health and safety.

The strategies to manage threats (uncertainties with negative consequences) typically include transferring the threat to another party, avoiding the threat, reducing the negative effect or probability of the threat, or even accepting some or all of the potential or actual consequences of a particular threat, and the opposites for opportunities (uncertain future states with benefits).

• Statements/Forecasts Financial statements are historical and show how a business has been operating (i.e. in terms of profitability, cash flow, assets and liabilities etc.). Financial forecasts look to the future through projecting the financial situation that should be aimed for. Financial statements and forecasts are valuable reference tools to help guide business planning. They are also key documents for attracting funding.

Investors and creditors will use them to assess the health of your business’s finances.

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• Taxation Returns including Goods and Services Tax A tax return is a form (paper or online) on which you report details of your taxable income. The net income you receive from carrying out your business is assessable income and you need to declare it correctly: ○ ○ Income as a sole trader – Income is treated as your individual income and you show your income on your individual tax return. ○ ○ Income from a partnership – A partnership does not pay tax on its income, but must complete a partnership tax return. Each partner shows their share of the partnership’s net income in their individual tax return and pays tax on that share. ○ ○ Income from a trust – A trust is not a separate taxable entity, but the trustee is required to lodge a tax return for the trust. Generally, the trust income is taxable to the beneficiaries who are entitled to receive that income, and the income is shown in their individual tax returns. You may also receive a wage or fees from a trust, which is also shown in your individual tax return. ○ ○ Income from a company – A company is a separate taxable entity and a special tax rate applies. The money the business earns belongs to the company and your company lodges an annual company tax return. You may have received salary, wage, director’s fee, dividends or other forms of benefits which you may have to show on your individual tax return.

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Accessing Specialist Services The biggest problem that affects people wishing to establish a business is the limited amount of financial resources available to them. Trying to raise funding is much easier said than done. It is important that all aspects of establishing a business are properly understood, and the business case must be presented professionally when trying to raise funding.

One area in which some business owners look to save money is the use of outside experts and paying for professional assistance. Unfortunately this can all too often be a false economy. Professional assistance can make the difference between success and failure in raising funding or in the business itself.

What professional advice is needed will clearly depend upon the areas of expertise of the management, the type of business and a range of other issues, but there are a number of core areas such as accounting and legal issues.

Financial advice is often needed to build up the detailed financial forecasts and to ensure that they are accurate and realistic, and that all the issues have been properly considered. Mistakes are most commonly found in areas such as tax and GST. Missing out costs or not timing cash flows properly can totally undermine the economic viability of a business case, and at the very least does not instil confidence in the business or management as a whole.

Someone in your business must take on the responsibility of keeping an accurate set of financial records. Fortunately bookkeeping software makes this task easier than you might have thought. However, as stated earlier, there are occasions when you need to have an accountant produce certain financial information.

There are a number of professionals who can be useful in your small business. These include: • Accountants • Business brokers/business consultants • Government agencies • Industry/trade associations • Lawyers and providers of legal advice • Mentors • Online gateways • Providers of training in accounting software.

Most commonly accountants are the ones chosen to be professional advisors. So, finding the right accountant is an essential element of monitoring and managing the financial well-being of your business. Having an expert third-party review your records means you’ll be alerted to problems with your recordkeeping methodology or just plain computational errors. Better to have your accountant tell you this, than the ATO.

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An accountant can help with things like financial advice and managing growth. You can also appoint them as an ‘agent’ to deal with your tax affairs, submit your GST returns.

The Institute of Chartered Accountants Australia is the professional accounting body representing Chartered Accountants in Australia. From 1st July 2014 the Institute of Chartered Accountants in Australia and the New Zealand Institute of Chartered Accountants have decided to operate jointly under the trading name of Chartered Accountants Australia and New Zealand. You can search for a suitably qualified accountant on their website http://www.charteredaccountants.com.au/.

You should also consider getting legal advice when setting up your business. This is particularly important if you want to sell shares. Each state has a branch of the Law Society where you can again, search for a suitably qualified solicitor.

Make sure you get an estimate from any advisors you work with, and agree in advance what they will do. Some advisors will charge an hourly fee, and others may offer a fixed price for a piece of work. It’s always worth getting several quotes before you decide who to use, so you can compare prices and make sure you’ll be able to work well together.

If you don’t have an accountant, you should shop around for one just as you would for any other service provider. Talk with your peers in the business community about their accountant. Interview several. And ask yourself the following: • Do they specialise in small businesses of my size? Some firms specialise in and look for large clients.

• Do they recommend software I like? Can they help me set up my bookkeeping system or optimise my current system?

• Do they adequately understand my business and its unique problems?

• Do they specialise in income taxes?

• Are other local business people familiar with this accountant?

• Have they received positive recommendations from peers in the business community?

• Did the accountant explain the fee structure to me? Am I comfortable with it?

• Do they communicate in the way I like to conduct business (via email, text, phone, etc.)?

• Am I comfortable using this person as a business advisor?

Don’t wait for an upcoming deadline to begin looking for an accountant. Try to do it well in advance of your need for their services. Also, the worst time to shop for an accountant is during the ‘busy season’ (June through October). Accountants generally don’t have time for ‘interviews’ during that time of year.

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Produce Financial Budgets/Projections, Including Cash Flow Estimates, as Required for each Forward Period, and Distribute to Relevant People in Accordance with Legal Requirements The most basic objective of financial accounting is preparation of general purpose financial statements, which are financial statements meant for use by stakeholders external to the entity, who do not have any other means of getting such information, i.e. people other than the management. These stakeholders will be dependent on the business structure but may include: • Investors Investors need the information to estimate the intrinsic value of the entity and to decide whether to buy, hold or sell the entity’s shares.

• Employee Groups Employees and their representative groups are interested in information about the solvency and profitability of their employers to decide about their careers, assess their bargaining power and set a target wage for themselves.

• Lenders Lenders are interested in information that enables them to determine whether their loans and the interest earned on them will be paid when due.

• Suppliers and other Trade Creditors Suppliers and other creditors are interested in information that enables them to determine whether amounts owing to them will be paid when due and whether the demand from the company is going to increase, decrease or stay constant.

• Customers Customers want to know whether their supplier is going to continue as an entity, especially when they have a long-term involvement with that supplier. For example, Apple is interested in long-term viability of Intel because Apple uses Intel processors in its computers and if Intel ceases operations at once, Apple will suffer difficulties in meeting its own demand and will lose revenue.

• Governments and their Agencies Governments and their agencies are interested in financial accounting information for a range of purposes. For example, the tax collecting authorities, such as the ATO, are interested in calculating taxable income of the tax-paying entities and finding their tax payable. Antitrust authorities, such as The Australian Competition and Consumer Commission (ACCC), are interested in finding out whether an entity is engaged in monopolisation. The governments themselves are interested in efficient allocation of resources and they need financial accounting information of different sectors and industries to decide on federal and state budget allocation, etc. The bureaus of statistics are interested in calculating national income, employment and other measures.

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• Public In the case of publicly listed companies, the public is interested in an entity’s contribution towards the communities in which it operates, its corporate social responsibility updates, its environmental track record, etc.

To prepare realistic and achievable Cash Flow Projections you need more than a vivid imagination and high hopes. This is needed to demonstrate how cash is expected to flow in and out of your business. It is an important tool to manage your cash flow because it lets you know when your expenditures are too high or when you might want to arrange short-term investments to deal with a cash flow surplus.

You must have: • Clear ideas about the purpose and audience for your projections • Understanding of the key drivers of financial results for the business • Some knowledge of accounting & financial statement analysis • Skill in using spreadsheet software such as Excel • Creativity, attention to detail, and good judgment • A lot of time.

Most people starting new businesses are much too optimistic about the future financial results of their business. Their energy and enthusiasm cloud their judgment. They underestimate the time it takes to get things done, and how much things will cost.

Over-optimistic expectations often lead to underestimating how much money they need to finance initial losses.

Once a business really gets going (in Year 2 or 3), doubling the size of the business each year is about the maximum a good CEO really can achieve. Even growth that fast (double every year) is extremely difficult to manage. Most successful businesses do not grow faster than 100% per year, nor do they need to.

To a bank loans officer, the Cash Flow Projection offers evidence that your business is a good credit risk and that there will be enough cash on hand to make your business a good candidate for a line of credit or short term loan.

Do not confuse a Cash Flow Projection with a Cash Flow Statement. The Cash Flow Statement shows how cash has flowed in and out of your business. In other words, it describes the cash flow that has occurred in the past. The Cash Flow Projection shows the cash that is anticipated to be generated or expended over a chosen period of time in the future.

You will want to show Cash Flow Projections for each month over a one year period as part of the Financial Plan portion of your business plan.

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Cash Flow Projection Cash flow estimates may include: • Anticipated payments • Anticipated receipts • Customer credit policy/debt recovery • Taxation provisions.

There are three parts to the Cash Flow Projection:

1. Cash Revenue

Cash Revenue details what your estimated sales figures expect to collect during the period including customer payments, interest earnings, dividends, sponsorship, grants and so on. Your cash inflows will rely on the method of payment your customers use – cash or credit. Enter the expected cash sales immediately and the credit sales when your customers are likely to pay you.

Your credit sales income will depend on your credit management policy.

Credit management is the process for controlling and collecting payments from your customers. A good credit management system will help you reduce the amount of capital tied up with debtors (people who owe you money) and minimise your exposure to bad debts.

2. Cash Disbursements

To do this take the various expense categories from your ledger and list the cash expenditures you expect to pay each month. These are the items listed in your expenses forecast including supplier payments, salaries, loan repayments, credit card payments and taxes. Consider regular, irregular, and seasonal payments such as rent, repairs and maintenance as required, and inventory purchases.

3. Cash Flow Projection

This is the reconciliation of Cash Revenues to Cash Disbursements. As the word ‘reconciliation’ suggests, this section starts with an opening balance which is the carryover from the previous month’s operations. Simply add the opening bank account balance and the revenue. Then subtract the expenses for each weekly or monthly period to find out your likely cash position.

You may not have any revenue for the first few months – as you build the system, sign up customers, etc. – but you will still have expenses. Include these. Don’t forget to include one-time start-up costs (tenancy/lease bond, statutory requirements such as licences, power connection, equipment, fixtures, start-up stock etc.)

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If you have more than one product or service, calculate them separately, then total them. Be sure to include the total staff number and include cost of benefits (20-25% of salary, typically). You should allocate personnel costs into Cost of Goods Sold, Marketing and Sales and General and Administrative, based on function.

The Business Victoria website provides an excellent template for Cash Flow Statements that you can download from http://www.business.vic.gov.au/moneyprofit-and-accounting/financial-processes-and-procedures/how-to-create-a-businessbudget-plan. A copy of this is shown following:

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Remember that being over optimistic about your projected sales is dangerous. There are many ways to estimate sales revenue for the purpose of sales forecasting. It is important that you work with several different methods so that you can have more confidence in the results.

Once you have completed your estimates, there will be primarily two sets of people who are interested in your cash management – you and your backers (both potential and existing). The latter group may be analysing your accounts with some standardised ratios, so that they can compare your business with the others they may invest in or lend to. These may include: • Family members • Financial backers • Franchise agency • Owner/operator • Partners.

However, from a compliance perspective, regulatory bodies such as the ATO must also be kept informed and their requirements met through the use of a timely and accurate system. Trade or industry associations may also require feedback and information to keep you, and others current in your industry.

Clearly, it is in your best interests to make sure that your business keeps your stakeholders informed in a timely manner and if remedial action is necessary, there is time to prepare and consult.

Budgets Earlier we discussed cash flow revenue, disbursements and estimating which will form the core information that helps you to create your budget or cash flow forecast.

Essentially, your budget will tell you whether your plans allow you enough working capital to actually run the business, and if so how much you will have to play with. The ‘how much you have to play with’ element will show you what is available to use for marketing, product development, training and so on.

The budgeting process is often one where you can try out different ‘what if’ levels of investment in your budget model and see the different outcomes. An obvious example of this is if you increase the advertising budget. Does the estimated increase in sales revenue suggest this to be money well spent or not?

For obvious reasons developing your budget on a computer spreadsheet or specialist software allows you more flexibility and complexity in trying out these different scenarios. Time invested before you start the business (when you are likely to have more time) in building up as sophisticated and accurate a cash flow model as you can will be time well spent. Your backers and the bank will require cash flow forecasts as a first step before being able to consider whether they will help you or not.

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Poorly constructed budgets can be dangerously misleading. It is always desirable to have your professional advisor go over your figures to see if you have overlooked any costs. Another problem with these models is that they are inevitably built on a series of assumptions. With an entirely new business you may not have ‘current experience’ to project from, so your assumptions will be based on observations and guesswork.

This may be reasonably accurate (or not) for your first week’s or month’s projections, but a small error can be compounded into a significant one by the twelfth month. It is therefore best to always err on the side of caution with your assumptions – the entrepreneur’s natural optimism needs careful controlling at this stage.

The Business Victoria website provides an excellent template for Budgets that you can down load at http://www.business.vic.gov.au/money-profit-and-accounting/financialprocesses-and-procedures/how-to-create-a-business-budget-plan.

Negotiate, Secure and Manage Business Capital to Best Enable Implementation of the Business Plan and to Meet the Requirements of Financial Backers There are a number of specific areas on which funders will ultimately require a professional opinion. Matters such as intellectual property rights, copyright, certain employment and tax-related issues, asset and property values, environmental impact and other areas may all require specialist knowledge.

Independent professional advice or corroboration of parts of the business plan will greatly increase its impact and demonstrate that a thorough approach has been undertaken in its preparation. For all these reasons, careful expenditure on advisors should reap dividends.

If your financing requirements are modest, say less than $25,000 in normal times, your own or another bank may be able to accommodate you. In any case, if you are looking for a substantially larger sum involving equity investment there will probably be a debt finance requirement too, and you and your financial advisor will need to open discussions with a bank at an early stage in your negotiations.

It may also be useful to explore how much of your funding needs can be secured by loans and an overdraft.

• Current account Whatever your funding requirements your business will need a current bank account to deal simply with day-to-day transactions such as: floats, cash takings, expenses, paying suppliers and petty cash.

Subject to status, an overdraft facility is usually available to help you address any short-term cash flow issues.

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• Business Loans They may also favourably consider a loan to kick-start your business when you need to buy new equipment, move into new premises, take on more staff to meet demand or incur other heavy expenditure related to the development of the business.

For small businesses, banks may offer a loan package which may include, or allow to be negotiated: ○ ○ Optional up-front capital and no interest repayments for the first 6 months after the loan is received. (Interest accruing during this period will likely be included within subsequent repayments.) ○ ○ Loan duration of up to 10 years. (When the loan is being used to purchase an asset, the term of the loan cannot exceed the life of the asset acquired.) ○ ○ No early prepayment fee. ○ ○ Choice of fixed or variable interest rates.

A number of sales financing packages may also be generally available from the banks, such as factoring and invoice discounting, which enable businesses to release funds that are tied up in their sales ledgers.

A bank providing invoice discounting may agree to immediately advance up to 80% of the value of approved outstanding invoices.

Factoring is mainly aimed at businesses that are unhappy with their internal credit management and administration systems. It enables them to sell off up to 80% of their debtors, at a discount, to a factoring company or financial institution in return for a one-off payment. The factoring company is then more directly involved in collecting outstanding debts than with invoice discounting.

• Business Grants The Australian Government Business website http://business.gov.au – search Grants and Assistance has information on funding available to start-up business.

Their programs are designed to help Australian businesses of all sizes and industries improve productivity and competitiveness, and create jobs.

The programs include incentives for research and development, support for small businesses, tax and duty concessions, and assistance for industries in transition.

They support invention and technology development in businesses by fostering collaboration between industry and researchers.

• External Equity Sources There are a number of different sources of equity available, from individuals to investment companies. They may include: ○ ○ Financiers/banks/lending institutions discussed earlier ○ ○ Leasing and hire purchase financiers ○ ○ Providers of venture capital ○ ○ Shareholders/partners/owners/family/friends.

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While not all of these potential sources of equity are members of an association, the majority tend to be. Identifying individual sources of equity funds can be a slow and painful process, but this can be made much easier by identifying the associations first. Your financial advisor will be able to make introductions and recommendations.

Probably the largest such organisation in Australia is the Australian Private Equity and Venture Capital Association Limited (AVCAL). This is a national association which represents the private equity and venture capital industries.

AVCAL’s members comprise most of the active private equity and venture capital firms in Australia. These firms provide capital for early stage companies, later stage expansion capital, and capital for management buyouts of established companies. More information is available at http://www.avcal.com.au All investment funds provide an outline of the type of investment that they consider, which stage, sector, size of investment and similar details, but this should be viewed more as marketing material than as something that should be relied upon. Relatively few investment funds advertise that they invest in startups, and experience shows that even fewer will be interested in doing so when contacted.

Once possible sources of funding have been identified, there is no substitute for making direct contact in order to discuss whether your requirements fit with the funders’ present requirements. In order not to waste too much of your or their time, it is generally preferable to have an initial conversation and then if a funder is interested in principle, send a written executive summary. If the funder remains interested, it is then necessary to exchange a confidentiality agreement and, once this is returned, to send the full business plan and arrange a meeting.

Angel Investors are those who provide financial backing for small start-ups.

Angel investors are usually found among an entrepreneur’s family and friends.

The capital they provide can be a one-time injection of seed money or ongoing support to carry the business through difficult times.

Angel investors give more favourable terms than other lenders, as they are usually investing in the person rather than the viability of the business. They are focused on helping the business succeed, rather than reaping a huge profit from their investment. Angel investors are essentially the exact opposite of a venture capitalist. Many of the business angel networks provide a service that allows the business looking for funding to prepare a brief presentation, which is then circulated to the association members by way of a regular newsletter.

Alternatively they may hold investment fairs where businesses are invited to meet with potential investors. The whole procedure with business angels is rather less formal than with investment funds, and as the decision is often made partly with the heart, the process is rather more ‘hit and miss’.

A Google search of ‘Australian Angel Networks’ will provide contacts in your state.

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Like most aspects of starting a business, identifying external equity sources can take much more time and effort than you may expect. Once potential sources have been identified, the next steps also drag on, and the whole process can take many months, so it is best to accept this and to allow for it at the outset, rather than hope that matters will progress very quickly.

As with any other ‘quote’, it is best to obtain more than one initial offer in order to ensure that the best possible deal is obtained. A decision will need to be made as to which offer looks most suitable, prior to spending any time or incurring any costs.

First-Round Finance First-round finance, as the name would suggest, is the first infusion of investment into a new business. As with many definitions, though, it can mean different things to different people. Does the capital put in by the founders and their friends and family count as first-round funding or not? Here we will look at first-round funding as the first time a business has sought to attract external equity in order to establish a new business.

Of all the times that a business will look to raise outside investment over its life, none will prove to be more difficult than first-round funding. This is because there are very few sources of such funding and a lot of demand for the limited supply. The reason that there are so few investors prepared to invest in start-ups is because the risks are much higher and there is no real track record. From the investors’ viewpoint, of course, when they get it right the rewards can also be much higher.

In addition to the difficulties of raising first-round finance, raising small amounts (i.e. less than $1 million) of equity is often more difficult than raising larger amounts. The most common source of funding for start-ups and lower levels of funding is ‘Angel Investment’.

Once a potential investor has been found, any investment decision will be subject to due diligence. Due diligence is the process that covers all aspects of the funder getting comfortable with checking out what they have been told about the business, the marketplace, legal titles, ownership of assets and so on.

Investment funds will have a well-practised, comprehensive procedure for making these enquiries, but business angels are likely to be rather less formal. The due diligence procedure will often include external accountants and lawyers as well as other specialists able to provide an unbiased, detailed report. The better prepared you are for this process, the quicker and easier it will be. It is worth noting that while the due diligence process will be run by the potential funder, and all experts will be appointed by, and report to, the funder, the costs will be borne by the business requiring the investment.

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Negotiation and Closing There many different variations on how the equity can be structured and, as such, plenty of scope for negotiation. As with any negotiations, there needs to be a degree of flexibility on both sides and a desire to find the middle ground.

It is important for the small business proposer to work with trusted advisors to assist with the negotiations, as the investor will have much more experience in such matters, and it is easy for the small business proposer to fail to push for the best deal simply through lack of knowledge.

The structure of the deal and the negotiations will shape the future cooperation of the parties, and can also lead to a massive difference in the value the founders get for selling a stake in their business.

The final closing meeting will almost inevitably involve more people, take longer and be more fraught with last-minute issues than is often imagined. Not only will the small business proposer and the investor be present, but so too will accountants, lawyers and other advisors from both sides, as well as any other funders (such as banks) that are involved. Once all the documentation has finally been signed, the management team will be free to concentrate on complying with the loan conditions and growing the business until the next stage of funding is required.

Develop and Maintain Strategies to Enable Adequate Financial Provision for Taxation in Accordance with Legal Requirements Tax planning should form an integral part of the overall plan of every business. In order to plan effectively it is necessary to take advantage of every possibility the law allows for reducing the burden of taxation. Efficiently organising a business’s tax affairs helps to reduce reliance on external finance and to maximise the business’s existing resources.

There are two golden rules in tax planning: pay only the minimum amount of tax due, and pay tax on the latest date permissible. Simple as the strategy may sound, carrying it out is one of the most complex challenges in the life of a business, starting even before the business comes into existence. It begins with the decision as to what kind of organisation to create in the first place, in order to realise the best tax position for the owner(s).

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Develop, Monitor and Maintain Client Credit Policies, including Contingencies for Debtors in Default, to Maximise Cash Flow By extending credit to your customers, you give them the option to purchase products or services today and pay for them at a later date. When your business accepts credit card payments and personal cheques or invoices customers, it is essentially extending credit on the assumption that customers have the funds to pay for the transaction.

If you are going to offer credit, you must document credit policies. The details of this policy will need to at least match the standards that prevail in your market for your business to be competitive. Financial policies could include specific policies for: • Collateral • Credit limits • Credit references • Debt collection • Payment options • Proof of indigenous identity • Trading terms.

Policies and Procedures are developed from Strategies. The Victorian Government website, relating to business, has excellent explanations, examples and templates on preparing accounting and financial policies and procedures for the small business owner,

at

http://www.business.vic.gov.au/money-profit-and-accounting/financial-

processes-and-procedures/accounting-and-financial-policies-and-procedures.

When you offer credit card facilities to customers, the credit card company manages the risk. When you extend credit through invoices or personal cheques, you are responsible for verifying and accepting payments and managing the risks that come with them.

Extending Credit through Invoices Extending credit through invoices is common in some industries such as construction or manufacturing, but may not be practical for every business. To decide if extending credit is right for your business, weigh the associated rewards and risks, taking into account the following points: • The option of credit enables customers to focus less on prices, enhances customer relations, and has the potential to generate more sales.

• Extending credit costs money. When you sell something on credit, you will not have payment on hand and will need to temporarily recoup the cost from other areas of your operating capital.

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• If customers don’t pay, you could be in for a long settlement process that may not end in your favour.

• Ask yourself if you have a significant business need to extend credit. Extending credit could be the factor that keeps your business afloat if it makes it easier for your customers to buy from you. Nevertheless, if it isn’t necessary it may not be worth the extra time and paperwork.

Establish Credit Practices Before you extend credit to customers, be sure to establish detailed policies and understand consumer protection laws.

• Determine to whom you will extend credit such as individual customers or other businesses. Run credit checks on all customers before you agree to extend credit.

• Develop clear, consistent payment guidelines. Your bills should indicate when payment is due, when it will be considered delinquent, and who to contact with questions.

• Determine how you will bill or invoice customers. Will you or your employees mail requests for payment yourselves, or will you hire another company to handle invoicing?

• Create a plan for collecting late or defaulted payments. Regardless of the type of application or documents you use for credit transactions, be sure to get all of your customers’ information in writing. In return, provide them with a copy of your payment policy, which spells out how penalties will be applied to late payments and how you will handle unpaid bills. It’s important to have this documentation in case a fraudulent or delinquent credit transaction occurs.

Comply With Consumer Credit Laws If your business extends credit to customers, you should become aware of consumer laws. The Australian Competition and Consumer Commission (ACCC) enforce Australian consumer protection laws.

Another aspect is that information about an individual’s finances and credit worthiness is one of the most sensitive categories of personal information. The Privacy Act 1988 has strict provisions that apply to the handling of this type of personal information.

Credit

providers

(including

banks,

building

societies,

utility

companies

and

telecommunications carriers) provide information about individuals’ activities in relation to consumer credit to central databases managed by credit reporting bodies (CRBs). CRBs are then able to include that information on the individual’s credit report. A credit provider can obtain a copy of an individual’s credit report from a CRB to assist them in deciding whether to provide an individual with consumer credit, or to manage credit that has been provided to an individual.

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The Privacy Act 1988 sets out the specific types of personal information that credit providers and CRBs are permitted to collect about an individual for the purpose of inclusion in that individual’s credit report. It also determines who is permitted to access an individual’s credit report and for what purposes. It also provides privacy safeguards in relation to the handling of the information.

There are risks involved in offering credit including: • Reduced Cash Flow Your ability to purchase replacement products from suppliers may be reduced if you must wait for customer payments. Many businesses consider debtor finance or factoring to reduce this risk.

• Reduced Profit Margin Offering credit also reduces your profit margins which often only show up in your profit and loss statement. Keep this in mind when you are pricing your products and services.

• Large Debts Unpaid debts can pose a risk to your business particularly if you are exposed to large single transactions.

Establish the Terms of Sale There are commonly two kinds of credit that predominate in the business-to-business world. Open credit requires no down payment and levies no interest or carrying charges. The payment is simply due in full on the specified date, usually 30 days after the goods are delivered.

Revolving credit, on the other hand, sets a limit on how much a customer can borrow.

The customer pays interest only on the principal actually borrowed; as the debt is repaid, the credit available increases. (Credit cards are the most common example of revolving credit.)

These basics are among the ‘Terms of Sale’ stipulated in a purchasing contract. In addition, the terms may include discounts for early payment or you may demand a penalty or interest payment when a due date is missed.

You will also want to stipulate other aspects of the transaction, such as delivery obligations or remedies if a customer fails to pay the debt. Conditions typically include the right to pass on legal fees and collection costs to the customer, as well as the right to establish the venue and jurisdiction for legal action. You may also require the customer to inspect merchandise upon delivery and make objections promptly. If you document your policies you may get some greater legal protection.

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Establish Clear Rule for Allowing Credit The amount of credit you grant and who gets it is dependent on your tolerance for risk.

To do so may increase your market share or win customers that will eventually bring you more business. And if the profit margin is high enough, you might come out ahead even if the customer later defaults.

Standardise your evaluations and always check the customer’s history.

The easiest way to check a customer’s creditworthiness is to call two or three of their other trade creditors, preferably in your industry, and ask how promptly the customer pays. Ask the customer’s banker if the business’s lines of credit are in good standing.

You will get permission for this in the credit application. Then look at credit reports and scores. If you are talking about a very large credit limit, require financial statements and written bank and trade references.

A credit check is another strategy you can use to manage the risk of bad debt. Before you offer a customer credit, have them complete and sign a credit application form or agreement. Ensure that the information collected includes: • A signature confirming that they have read and understood all terms and conditions and have agreed to abide by them • Identification and contact details • Approval to conduct a credit check where necessary.

If they are business customers include: • Comprehensive details of all directors, partners or owners • At least 3 trade credit references • Signature of the applicant to ensure they have read and understood all the terms and conditions and have agreed to abide by them.

The final decision to offer credit should be based on all the data collected, in particular: • The references • The length of time they have been operating (for businesses) • Guarantees signed in full.

Applicants should be required to authorise other business employees permitted to use credit on behalf of their business. You should have a policy about how your business customers can authorise other people from their business to use their business’s credit.

After receiving a completed credit application, provide a written response approving credit, declining credit or requesting further information.

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The response should specify: • The amount of credit given • Credit terms • Guarantors (including guarantee forms) • Penalty and default terms • Any other terms and conditions.

If you deny credit, the law requires you to give an explanation if asked using the objective data that was used to evaluate the credit risk.

When you grant credit, keep the limit low initially and monitor the transactions in the first year. If the customer is purchasing on a regular basis and makes timely payments the credit limit may be be increased in graduated increments.

Managing the Books Use a good filing system to keep track of customers who owe you money. This will help you follow up overdue payments and control your cash flow.

The Queensland Government Business and Industry portal has made available a sample debtors and creditors analysis table to allow you to see the impact of debtors on your cash flow. It can be downloaded http://www.business.qld.gov.au/business/ running/making-and-managing-money/managing-debtors/offering-credit-managingrisk.

The key metric in managing accounts receivable is how long, on average, it takes your customers to pay their bills. In general, be concerned if your average collection period is a third longer than the period established in your credit terms. In the case of a 30 day credit period, concerns should be noted if it often goes to 40 days. For a quick snapshot of the average collection period (also called days sales outstanding), divide outstanding accounts receivable by average daily credit sales. This does not account for fluctuations over time, and there are more precise (and complicated) calculations for average collection period, but it is a good rule of thumb.

All credit activities, including those of individual customers, should be tracked regularly to monitor purchase patterns, average days to pay, and a change in the payment pattern. Early intervention can pay big rewards in either limiting exposure or getting paid sooner. Not only may problems be spotted and resolved, but a strong relationship with the customer may smooth the intervention. Play it safe by updating and reviewing credit files for all accounts at least semi-annually. If you require financial statements, get new ones every two years.

In the case of delinquency, be prompt and persistent. Your written policy should specify contact at regular intervals, starting with a reminder five to seven days after the due date. Further notice should escalate. A second written reminder might be

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BSBSMB406 Manage Small Business Finances Trainer Manual © Precision Group (Australia) Pty Ltd

Element 1: Implement Financial Plan

followed by a phone call, followed by a final legal notice. If you still haven’t been paid 30 days after the due date, it’s probably time to turn the matter over to your solicitor or a collection agency.

Non-payment by customers can put pressure on a business when it needs to pay its suppliers. Treating suppliers fairly and paying on time is important in keeping the flow of cash going.

Good record keeping helps you to better track and manage your debtors. The Australian Taxation Office also requires you to keep records of your debtors and creditors.

Select Key Performance Indicators to Enable Ongoing Monitoring of Financial Performance Key performance indicators are metrics used to help a business define and measure progress towards achieving its objectives or critical success factors. They are quantifiable measures that can be expressed in either financial or non-financial terms and reflect the nature of your business.

KPIs can be measured for any area of the business, from finance and operations to administration and HR. The challenge smaller businesses face is finding the right metrics and ensuring that you will be able to create the discipline needed to actually use your selected KPIs. Common KPIs include financial metrics like your net profit, revenue growth rate or debt-to-equity ratio. In production, common KPIs include things like your order fulfilment cycle time, quality index or product cost variance (PCV).

Examples of KPIs that may be useful to a small business include: Accounts receivable (AR) ageing If you give your customers credit, focusing on this KPI can help your cash flow. Most accounting packages will generate an AR report and you can use this to find the average days to pay for each customer. You can then set goals to reduce the time it takes your customers to pay and measure your success on a monthly basis. As a small business, focusing on this particular KPI can help you mitigate the risk of bad debts while also directly strengthening your bottom line.

Year-Over-Year Revenue Growth Rate This is a relatively simple, yet powerful KPI that is particularly helpful for retail businesses. Depending on your business you may want to track growth daily, weekly or monthly. Creating the report can be as simple as generating a report of the previous year’s sales from your accounting software and then adding data to the spreadsheet as you close new sales. This report not only helps you see if sales are increasing, but it can help you identify important trends as they emerge, giving you the time to respond proactively.

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Element 1: Implement Financial Plan

Cash Conversion Cycle (CCC) This KPI is a measurement of how much time (measured in days) and money (referred to as a ‘net input dollar’) is tied up in sales or production before being converted into actual cash. This can be an important measurement for a small business, because a long cash cycle can wreak havoc on the cash flow of the business. It is very useful to understand your actual cash cycle and then set targets for improvements.

Inventory Turnover Ratio (ITR) This is another ratio that is important for retailers and any company that holds inventory. The calculation is straightforward: divide the cost of goods sold by your average inventory.

Inventory Turnover = Cost of Goods Sold

Average Inventory

The higher the dividend, the better. Here are two examples.

A local furniture store sells $250,000 in stock in one year, often holding inventory so that on average, they had $30,000 in stock at any given time. Their ITR is therefore: Inventory Turnover = $ 250,000 = 8.3

$

30,000

A local hairdresser holds very little inventory, only ordering stock when it is required.

At the end of the year the company sells $40,000 in hairspray and at any given time has an average of $550 in stock. Their ITR is therefore: Inventory Turnover = $ 40,000 = 72.7

$

550

There are many other KPIs businesses can use to track their performance and create a framework for intentional improvement. The key is to get started and build on what you learn.

KPIs are goals for the business and therefore must conform to the standard for setting goals. They must be: SMART!

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BSBSMB406 Manage Small Business Finances Trainer Manual © Precision Group (Australia) Pty Ltd

Element 1: Implement Financial Plan

Record and Communicate Financial Procedures to Relevant People to Facilitate Implementation of the Business Plan Comprehensive, written policies and procedures provide management with tools to communicate financial management practices and techniques. They provide assurance that key business processes are executed in a consistent manner, across the agency. Accounting policies and procedures are necessary to establish strong internal controls, reliable financial information and support clean audit opinions.

BSBSMB406  Manage Small Business Finances Trainer Manual  Š Precision Group (Australia) Pty Ltd

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Element 1: Implement Financial Plan

Once you have established your business and collected your data, the next step is to monitor. Benchmarking is when you compare your business processes and performance to best practices from other businesses. Quality, time and cost are all measured. This practice identifies the best firms in a particular industry, or in another industry where similar processes exist, and compares the results and processes.

Doing this reveals how well the businesses perform and, more importantly, why these firms are successful.

This then allows businesses to develop plans on how to make improvements or adapt specific best practices, usually with the aim of increasing some aspect of performance.

Benchmarking may be a one-off event, but it is often treated as a continuous process in which organisations continually seek to improve their practices.

Executing financial operations in a controlled and consistent manner is key to providing sound and reliable financial information to decision makers and stakeholders. Well documented policies and procedures provide a script for repeatable processes that help to provide the assurance that financial operations are operating in a controlled and efficient manner and the resulting financial information is accurate.

A program for assessing existing key business process policies and procedures against laws regulations, and industry best practices to identify gaps must be developed and implemented.

When planning your communication strategy to communicate financial procedures: • Consider who will be impacted by the new policies and procedures, looking not only at personnel within your business but external populations affected by any new measures, as well. Knowing all parties that will be affected helps determine the means by which you communicate.

• Designate a staff member with a strong grasp of technical writing and communication to announce the new policies/procedures. Selecting such a person to handle communication of the new measures ensures that all levels of the business, regardless of technical knowledge or expertise, will understand the new policies and procedures.

• Announce the new policies and procedures, using multiple avenues of communication to reach all intended audiences. A one-size-fits-all approach does not work. The business can notify customers and other audiences by letters, email or advertisements. Memoranda, staff meetings, pamphlets and manuals can be used to notify staff members. Communication to staff members should not only articulate the new measures being taken, but also announce any new training programs and explain how the new procedures will affect existing operations. Management should also provide staff members with information on where to get answers to any questions or concerns they have about new policies and procedures.

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BSBSMB406 Manage Small Business Finances Trainer Manual © Precision Group (Australia) Pty Ltd

Element 1: Implement Financial Plan

Activity One For this Activity you will begin to work on the development, implementation and review of strategies for the on-going management of finance in your business. You may need to discuss this with your advisors. The feedback provided by your Assessor on this Activity will also prove beneficial.

Using

the

template

http://www.business.vic.gov.au/money-profit-and-accounting/

financial-processes-and-procedures/how-to-create-a-business-budget-plan or your own template in your preferred format, complete a Cash Flow Statement and Budget for your business.

If you have already prepared these for your Financial Plan, you may use those for this task. ......................................................................... ......................................................................... ......................................................................... ......................................................................... ......................................................................... ......................................................................... ......................................................................... ......................................................................... ......................................................................... ......................................................................... ......................................................................... ......................................................................... ......................................................................... .........................................................................

Trainer’s Notes for Activity One As these will form the basis of the Assessment and contribute to the Learner’s Financial Plan, give careful thought to the credibility and usefulness of the submission by the Learner. It needs to be complete, practical and encompassing.

BSBSMB406 Manage Small Business Finances Trainer Manual © Precision Group (Australia) Pty Ltd

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Element 1: Implement Financial Plan

Key Points Element 1 • Financial information requirements must be identified and specialist services obtained as required, to profitably operate and extend the business in accordance with the business plan.

• Financial budgets/projections, including cash flow estimates, must be produced as required for each forward period, and distributed to relevant people in accordance with legal requirements.

• Business capital must be negotiated, secured and managed to best enable implementation of the business plan and to meet the requirements of financial backers.

• Strategies must be developed and maintained to enable adequate financial provision for taxation in accordance with legal requirements.

• Client credit policies must be developed, monitored and maintained, including contingencies for debtors in default, to maximise cash flow.

• Key performance indicators must be selected to enable ongoing monitoring of financial performance.

• Financial procedures must be recorded and communicated to relevant people to facilitate implementation of the business plan.

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BSBSMB406 Manage Small Business Finances Trainer Manual © Precision Group (Australia) Pty Ltd

Element 1: Implement Financial Plan

Element 1 – ‘True’ or ‘False’ Quiz True

Q

You should be able to keep track of the day-to-day transactions, and have a preliminary general ledger ready for your accountant.

Q

Profit and Loss Statements (P&L) are financial plans that are structured to detail projections on income and expenses on both a long-term and a short-term basis.

False

Financial budgets are financial plans that are structured to detail projections on incomes and expenses on both a long-term and a short-term basis.

Q

Financial advice is often needed to build up the detailed financial forecasts and to ensure that they are accurate and realistic, and that all the issues have been properly considered.

Q

If you've been in business for a while, your accountant could give your bookkeeping procedures and records a one-time or periodic check-up.

Q

Financial budgets measure the activity of a business over a period of time – usually a month, a quarter or a year.

Profit and Loss Statements (P&L) measure the activity of a business over a period of time – usually a month, a quarter, or a year.

Q

The cash book is generally a record of payments and receipts from and into the bank account.

Q

Someone in your business must take on the responsibility of keeping an accurate set of financial records.

Q

Creating a financial plan helps you see the big picture and set long and short-term business and in some cases, life goals, a crucial step in mapping out your financial future.

Q

Cash Flow Statement shows the cash that is anticipated to be generated or expended over a chosen period of time in the future.

The Cash Flow Projection shows the cash that is anticipated to be generated or expended over a chosen period of time in the future.

Q

The business financial plan is a section of the overall business plan for a small business.

BSBSMB406 Manage Small Business Finances Trainer Manual © Precision Group (Australia) Pty Ltd

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