Management & Small Business Program Area

BUSINESS & PUBLIC ADMINISTRATION DIVISION MANAGEMENT & SMALL BUSINESS PROGRAM AREA

LEARNER GUIDE

Manage Finances

NSW TAFE Module No. 9787E Learner’s Guide Manage Finances

 TAFE NSW Business & Public Administration Division February 2002 Learner Guide 9787E Manage Finances

Learner Guide

Conditions of Use

This product is the property of the NSW TAFE Commission and its use is subject to the provisions of the Copyright Act. It is intended to be used by learners for study purposes. It may not be reproduced by whatever means or used or modified for the purpose of generating income through sale or licensing without the prior written permission of TAFE NSW.

Any inquiries concerning use of the product, for purposes other than its stated intention, should be directed to:

The Director Business and Public Administration Division (B&PA Division) Level 2, Building C Mary Ann Street ULTIMO NSW 2007 Ph: (02) 9217 4400 Fax: (02) 9217 4015

 TAFE NSW Business & Public Administration Division November 2002 Learner Guide 9798E Manage Finances

Table of Contents Learner Guide...... 3 Conditions of Use...... 3 Introduction to the Learner Guide...... 6 About this Module...... 7 Module Purpose...... 7 Learning Outcomes and Assessment Criteria...... 7 Relationship to National Competency Standards...... 10 Module Content...... 11 How to approach study in this Module...... 29 Useful references and texts...... 29 Assessment...... 32 Glossary...... 37 Student Evaluation of the Learner Guide...... 39

 TAFE NSW Business & Public Administration Division February 2002 Learner’s Guide Manage Finances

Introduction to the Learner Guide

Welcome to the module Manage Finances. The small business operator and manager is required to keep financial records which meet legal requirements. Not only should such records meet legal requirements they should also provide the basis for making informed decisions about the performance of a business.

There are many issues to consider in developing and managing a financial record system. These include:

 What records is the business required to keep to meet legal requirements?

 What information will be required to keep such records up to date?

 How will the financial records of a business allow the operator/ manager to assess performance of a business?

The purpose of this learning guide is to allow you to consider these questions.

About this Module

Module Purpose

The purpose of this module is to:

Enable learners to identify, the financial records that need to be maintained in an accurate and timely fashion by organisations and to enter appropriate financial data into those records that meets legal requirements and provide useful information for decision making.

Specifically, the learner should be able to:

1. Identify the requirements for keeping financial records, the financial records that should be kept, the purpose of those records and the value of the records to informed organisation decision making 2. Describe the elements of a record keeping system 3. Carry out the functions of a typical financial recording system of an organisation. 4. Carry out the financial reconciliation functions for an organisation 5. Utilise financial information to plan cash flow requirements of an organisation 6. Develop and apply appropriate performance criteria for measuring the operations of an organisation and assess the impact of operational performance on the financial plan of the organisation

Learning Outcomes and Assessment Criteria

Learning Outcome 1 Identify the requirements for keeping financial records, the financial records that should be kept, the purpose of those records and the value of the records to informed organisation decision making

Assessment criteria 1.1 List and describe the legal requirements for a small business in keeping financial records

1.2 Identify the financial records to be kept

1.3 Describe the purpose of each of the financial records to be kept

1.4 Explain the use of internal controls for financial business records and the importance of updating and maintaining financial records

Learning Outcome 2

Describe the elements of a record keeping system

Assessment criteria 2.1 Identify the features of an effective financial recording system

2.2 Define and describe source documents for general business transactions

2.3 Explain the importance and relevance of the various source documents for an organisation record keeping system

Learning Outcome 3

Carry out the functions of a typical financial recording system for an organisation.

Assessment criteria

3.1 Describe the components of both single entry and double entry record keeping systems for an organisation

3.2 Compare and contrast single entry and double entry approach to recording transactions

3.3 Demonstrate the use of a single entry system for a cash receipts journal, cash payments journal and petty cash book

3.4 Demonstrate the functions of a double entry system for a cash receipts journal and cash payment journal

Learning Outcome 4 Carry out the financial reconciliation functions for an organisation.

Assessment criteria 4.1 Prepare and reconcile a simple debtors / accounts receivable ledger, age the accounts and identify strategies for recovering long over due accounts that would be used by a small business

4.2 Prepare a bank reconciliation system for checking the accuracy of cash journal entries

Learning Outcome 5

Utilise financial information to plan cash flow requirements of an organisation

Assessment criteria 5.1 Determine operational cash flows and the timing of those cash flows

5.2 Develop a simple cash flow budget, which supports the business plan of an organisation

5.3 Determine operating and capital cash flow requirements and identify any potential shortfall or surplus in cash flow

5.4 Develop a plan for obtaining adequate cash flow to support organisation activities, which meets financing bodies’ requirements

5.5 Negotiate to secure business capital, which underpins the business plan

5.6 Manage the organisation cash flow to best enable the meeting of organisation financial targets

Learning Outcome 6 Develop and apply appropriate performance criteria for measuring the operations of an organisation and assess the impact of operational performance on the financial plan of the organisation

Assessment criteria

6.1 Identify the financial ratios, which are appropriate for measuring the operational performance of an organisation

6.2 Access industry information, which allows for industry comparisons to organisation financial performance

6.3 Describe the performance criteria that would be applied to operational activities

6.4 Apply performance criteria to the marketing and operational strategies of an organisation and identify their effects on the financial plan

6.5 Assess whether the operational performance of an organisation meets the financial plan of the organisation

6.6 Determine whether there should be variations and/or changes to the financial plan after reviewing performance

Relationship to National Competency Standards

Competency standards are set by industry. They describe skills, knowledge and attitudes required to perform specific activities.

This module partially addresses the following unit of competency from the Business Services Training Package (BSB01)

Unit Code: SBMB406

Name of unit: Manage Finances

Module Content

1. Legal requirement for keeping financial records Description of topic Legal reasons for keeping financial records content Key aspects of this Legal reasons for keeping financial records topic It is important that each small business keeps records that meet legal requirements. Government departments may need evidence of a particular transaction having taken place. You will need evidence of a transition occurring if a customer takes action against you. The following are some of the key reasons for keeping accurate financial records

Taxation requirements Each day we all have transactions, i.e. buying and selling goods, using the telephone, renting premises etc There is always a need in business for people to prove what has happened. The taxation department expects each business to document the events that have occurred within their business. Your memory is not good enough and you will be asked to supply written proof of any claims you make.

Customer claims against you Documentation is not just required for taxation purposes but also in relation to possible legal claims by customers such as warranty claims.

Claims by staff You are required to keep detailed records of salary and wage payments made to staff. Payments to staff should be in line with wage awards or agreements. Information on the relevant awards or agreement should be held by the business

You are required to keep information on time worked, rates of pay, gross payment that is payment before income tax and net payments which is payment to staff after income tax is deducted. You are required to pay money deducted from staff wages and salaries to the Australian Tax Office on a regular basis. It is important to keep detailed records of this information.

Information should also be available that will allow the business owner or operator to attend to matters pertaining to employees who may claim against the business or whom the business may

claim against.

Supporting documentation in relation to legal action There may be legal action against your business such as for non- payment of account. It is important to ensure you have accurate documentation of financial transactions to support your case against any legal claim made against you. Equally as important is that you might need documentation to support a legal claim made by you against someone else.

It should be noted that keeping detailed financial records should not only be to meet legal requirements but also to allow the small business owner/ manger to make informed business decisions Each small business owner and/or managers needs to be able to make informed decisions. Each business owner should manage by facts, not by intuition

2. Internal Controls Description of topic The importance of internal controls, Controls on cash content Key aspects of this The importance of internal controls topic For a business to keep effective records there must be operating controls in place. Every record system needs to have standard processes and procedures that are followed by everyone involved in the transactions of the business or in keeping business records. Two key areas of control relate to the stationery used by a business and having the appropriate people to sign cheques

Using standard stationery - Each small business should go to the trouble of ensuring they have a standard set of stationery. A small business should have all correspondence on the approved business letterhead. Pre printed/ pre numbered forms should be used for bank deposit slips, cheques and tax invoices. Use of preprinted forms will readily show a record of forms used and can readily show whether any forms are missing.

Designated cheque signatories - It is important for a small business to determine who should be able to sign cheques issued by the business. If staff members are allowed to sign cheques it is important to ensure that the staff know any limits on amounts of cheques up to which they can sign. It may be important to have two people signing each cheque to reduce the risk of a single person defrauding the business. It is important to ensure that only those people who are delegated to sign cheques are those who are signing cheques.

Controls on cash

Procedures for receipting cash / cheques should ensure that the person who is opening the mail is recording all items received and that there is a supporting record of cheques/money received. With many small businesses the person opening the mail and often receiving payments from customers may also be the person who banks cheques/money. However its is important to ensure that money received has been correctly banked. The business owners should ensure that all money has been recorded correctly and banked appropriately. Though this may be a time consuming process it helps to ensures that a business does not face extensive problems of staff using cheques/cash of a business for their own means. It is better to safeguard against an employee defrauding a business rather than trying to recover losses they have sustained.

3. Effective financial record keeping systems Description of topic Key characteristics of useful financial information, Tips for content keeping useful records Key aspects of this Key Characteristics for useful financial information topic If a record keeping system is to provide useful information, it needs to have certain characteristics/ features. The following are a list of things to consider when determining whether your record keeping system meets your needs

Simplicity in that the system is easy to access and enter information as well as providing a ready process for the reporting of the data entered. The system should be in a form such that it can be converted into information that can be used for decision making by the businesses owner(s) and manager(s)

Comprehensive in that the record keeping system covers all the key aspects that are legally required as well as those which are needed for internal decision making. When deciding on what your record system should do, you should ensure that besides meeting legal requirements it should also be sufficiently comprehensive to provide you with useful information for decision making.

Relevant in that it needs to be designed to suit the needs of the business. You can buy many computerized record systems off the shelf but you may need to modify the system to meet your needs. It is important to ensure that the information that comes out of the record system is relevant to decisions being made in your business

Accurate in that the information that comes from the record

keeping system really represents the activities of your business. It is essential to ensure that information being entered into the system is accurate. If you have inaccurate information being entered into a record keeping system the reports you get from the system will also be inaccurate.

Complete in that all data is entered. It is important at least monthly to ensure that you have entered all the key information into the record keeping system.

Consistent in that the information that is entered into the record system is presented in the same format each time a transaction occurs. If you are always changing how the system processes information the results you get at the end of one trading period can not be readily compared to results at the end of other trading periods

Readability in that the information is in terms that the reader understands and can use for informed decision-making. If you buy a system off the shelf and you do not understand what it is telling you, then the system will not be useful.

Timely in that it is up to date. There is no point in using a record keeping system that only allows you to produce or receive reports months after the end of a trading period

Legal in that the information complies with the relevant legislative requirements

Tips for keeping useful records When designing your record system consider the following issues

Storage Do not clog up your filing system for current transactions with source documents going back for many years. Keep you filing system current by keeping source documents from previous periods in a secondary filing system

Retrieval Tailor the filing system for your use. Keep it simple, up to date, and ensure that you, and other members of your staff, can access information when required, with a minimum of effort.

For your correspondence, documentation and communication

matters Set up a simple filing system, grouped into key sections, e.g. customers, sales, taxation, employees, etc.

Personnel Make one person responsible for your record system. Give them the authority, time and support to set up and run the system. Ensure it is up to date at all times.

Computers When computerizing your record keeping system, seek advice and run parallel systems, i.e. manual and computer systems, for at least three months until all records have been transferred and the system is operating effectively.

If your are starting your business using a computer then check manually that your computer is giving you the required results

Ensure staff is trained before the computerized systems start. Regardless of the systems used, you will still require hard copy of source documents as proof that transactions have occurred.

4. Financial records and their purpose Description of topic Key records of the small business record keeping system, content Approaches to keeping financial records Key aspects of this Key records of the small business record keeping system topic There are many different records which a small business may keep. The following are the key records kept by most small businesses

 Cash Payments Journal which lists the payments made

 Cash Receipts Journal which lists cash received

 Cash Book which is a record used by many small business operators where the cash in and cash out of the business is kept in one record so that the cash position of the business is clear at a glance

 Petty Cash Book that records small expenses paid for by the business such as postage, milk and coffee, etc.

 Bank Reconciliation Statement that is used to reconcile your Cash book with statement in your books Approaches to keeping financial records

Different approaches may be adopted to keeping financial records. Businesses will decide whether to keep a:

 Single Entry book keeping system or a  Double Entry Bookkeeping system

Single Entry System - Most small businesses will use what is known as single entry book keeping approach. This means they will generally work on a cash only basis. As a transaction occurs they will only be interested in how that transaction affects the cash flow of a business.

Double Entry systems – Double entry accounting systems work on the basis that when a transaction occurs there are two things that happen. For example, for a cash sale, cash comes into a business and stock leaves the business.

The double entry system also takes into account non-cash transactions that are not involved into the day-to-day concerns of the small business owner or operator. This includes items such as depreciation. Depreciation is the amount you can claim from the tax department each year for wear and tear on long-term assets such as cars or equipment. Once you make a claim for wear and tear on an asset, the book value of the asset is reduced.

Most small business will be concerned with just looking at their cash flow situation. They will leave the things that do not concern the day to day running of their business to an accountant. However, with many new computerised accounting packages available it is possible to look at the impact of all transactions on a business. 5. Source Documents Description of topic Evidence of transactions, Source Documents content Key aspects of this Evidence of transactions topic The first written proof of any transaction is called a Source Document. Not all transactions have receipts or tax invoices. There are a few exceptions, such as the cost of using parking meters. In these cases, it is necessary to keep a diary of such expenses.

The records we keep provide us with control over our operations. For example you need to check the delivery docket with the goods against your purchase order. You should check your purchase order against the invoice. You should check your invoice with the statement issued by the supplier if one has been

issued.

Source Documents

Source documents are evidence that a transaction has occurred. They provide information which is used to write up the records of a small business.

Receipts – Record the payment of money. Necessary for the proof of payment if asked to pay again and for taxation returns.

Bank slips – Provides a record of bank deposits which allows you to check your records against the bank statement.

Bank Statements – Shows bank transactions and allows you a basis for checking your records against theirs.

Cheque Butts – Record of payments made.

Diary – This is used to record minor expenses where a tax invoice or receipt may not be provided.

Petty Cash – Record of small cash purchases.

Tax Invoices – The most important item under GST legislation. They record purchase information and taxation paid.

Statements – Issued by suppliers recording purchase and payments. These documents are now not used by many organisations where payments are being requested on tax invoices.

Purchase Orders – Records the details of orders for such items as stock and equipment.

Delivery Dockets – Records receipt of deliveries to be matched against orders and invoices.

Time Sheets – Records employee work time.

Job Cards – Used by businesses doing one off work such as building projects or repairs to record the cost of each unique job.

6. Accounts

Receivable/ Debtors Ledger – and Accounts Payable / Creditors Ledger Description of topic Debtors/ Accounts Receivable, Outstanding Accounts, Creditors/ content Accounts Payable Key aspects of this Debtors/ Accounts Receivable topic Debtors are people who owe money to a business. There are several aspects of debtor management that every business should be aware of.

Debtor’s Records - Before allowing credit to any customers, either individuals or businesses, a credit application should be completed. This application should request full personal details, bank details and at least 3 referees. This application can be used to assess a customer’s ability to pay their accounts.

An individual record, called a debtor's ledger/card must be kept for each debtor showing all sales, returns, receipts and discounts allowed. The following is an example of the information that might be stored on a Debtor’s/ Ledger card:

 Date  Name of Customer  Customer Number  Address  Credit Limit  Particulars including special requirements of customers  Balance outstanding from the previous period  Sales this period  Payments this period  Balance outstanding at the end of this period  Information as to when payments are due such as the account must be settled by a certain date

Debtors Control Account - Many businesses will have what is known as a debtors control account. The purpose of the control account is that as each entry is made in an individual debtor’s account the same entry is entered in the control account. The control account provides a running total of the total amount of debtor’s balances outstanding at a particular point in time. If the individual debtor balances are added up any point in time the total of those balances outstanding should equal the total, of the debtors control account.

Aging your debtors - It is important to regularly age your debtor

accounts. Each month debtors balances should be broken down into:  Current amounts owing  Amounts owed for over 30 days  Amounts owed for more than 60 days  Amounts outstanding for 90 days or more

We should endeavor to ensure that the business’s credit polices do not result in amounts being owed 90 days or longer. Unpaid accounts mean our debtors who use our products or services and do not pay for them when payment is due are indirectly receiving a loan from us. They are using our valuable operating funds to fund their business. Follow up of overdue accounts should be a regular feature of financial controls undertaken by small businesses.

Outstanding Accounts

It is important to ensure that debtors pay their accounts on time. If accounts are not paid on time then the cash flow of the business is affected. When accounts are not paid the following are some of the strategies you might employ to collect overdue amounts.

 Attach reminders to debtors statements- You might print a message on a debtors statement or attach a sticker to the statement advising them that the account is overdue and asking them to bring their account up to date

 Contact the debtor to establish why their account has not been settled. By taking it up with them directly you can often get a prompt response to an overdue account.

 Stop supply- By not continuing to supply a customer you have limited the amount of debt you have to carry and it indicates to the debtor that you are serious about being paid

 Send a debt collection letter- Debt Collection agencies print standard letters that can be bought by a business and sent to their debtors. A business can insert their name and the name of the debtor on the letter and post the letter to the debtor. By using this approach you have indicated that a debt collection agency may become involved in collecting the outstanding debt

 Hand the matter to a debt collection agency- Debt

collection agencies can be employed to collect overdue debts. However this approach can cost up to half the amount collected by a debtor as most agencies work on a commission basis

 Take out a summons- You can lodge a complaint at your local courthouse in relation to outstanding debts. A summons can be served on debtor to obtain payment. The debtor can attend court to dispute the debt or pay the debt plus any costs involved in serving the summons before a court date is set.

If all else fails you can apply to have your debtor placed into receivership. However by the time you reach this point it may be clear that the debtor is able to pay only a small amount of the debt or nothing at all. It is better to keep a strict control on debtor limits and follow up over due accounts early than trying to recover overdue accounts.

Creditors /Accounts Payable

It is important to keep good records on the amount of money owed to us. It is also important to keep track of money we owe other people. The record of amounts we owe to other people is known as accounts payable (creditors accounts). We need to ensure we meet the payment requirements by our creditors to ensure we can secure supply of products and services as required. Creditors will supply us with the account information we keep on our debtors. It is essential to agree information recorded on delivery dockets and/or acknowledgements of services with invoices from our creditors before we pay money owed.

7. Petty Cash Description of topic Managing Petty Cash, Balancing the petty cash content Key aspects of this Managing Petty Cash topic Petty cash is for minor expenses. There is no limit to the amount that might be classified as petty cash transaction, though possibly a figure of expenditure s of $100 or less would be regard as minor expenses and should be considered petty cash expenses. Though petty cash is for small items it can get out of hand with some businesses running petty cash records up to some thousands of dollars. In the main payments should be made by cheque so there is a ready record on the cheque butt of the details of the payment rather than paying expenses by cash.

Standard format petty cash vouchers can be bought from

stationery stores. The use of such vouchers allows standard information to be recorded on each voucher rather than having tax invoices and receipts from different suppliers that may all have differing information. The vouchers provide a standardized approach to recording information. Petty cash should be kept in a lockable tin, only accessed by the person who is to balance the petty cash.

When establishing a petty cash system consider the following issues:

1. Evaluate the need for a Petty Cash system and decide on the value of a petty cash float. 2. Make one person responsible for the petty cash system. 3. Organise a float (i.e. draw and cash a cheque for the amount you want to hold in petty cash) and organise a container (tin or box) for the float. 4. Arrange the Petty Cash stationery (i.e. Petty Cash Vouchers or Petty Cash Summary sheets. 5. Manage the system so that your float always equals your vouchers plus your cash.

Balancing the petty cash

It is important to keep a record of petty cash expenditure. Every petty cash system should have a petty cash book/record that shows the amount of cash drawn for expenditure and purchases made. From time to time a check should be made to ensure that the cash in the petty cash tin and the receipts, tax invoices or petty cash vouchers for purchases add up to the cash that was advanced to pay for petty cash expenses. Headings for the petty cash record could include the following:

 Date of transaction  Particulars of transaction  Amount spent including GST  Columns should be established for different types of expenditure including stationery, cleaning, travel as well as a miscellaneous column for expenses which are not catered for by the other columns  Owners expenses where there is personal expenditure by the owners which is not part of business expenses should also be recorded  GST payments should be recorded  The cash balance which is the opening cash less the amount spent on each transaction should be recorded after each transaction

The cash in the tin plus all the tax invoices, receipts or vouchers

should add up to the opening cash figure 8. Bank reconciliation

Description of topic Bank Reconciliation, Cash Receipts and Payment records used in content a bank reconciliation, Undertaking a Bank Reconciliation

Key aspects of this Bank Reconciliation topic It is important to compare our cash records with the records held by our bank. The two key reasons for carrying out a bank reconciliation are:

Establish your real bank balance, that is, determine your real cash balance after bank fees etc. and Check against errors made in either your books or more importantly, the bank's books

Reconciliation between the records of a small business and the statement supplied by the bank should be completed monthly. This amounts to checking your cash in and cash out information against the bank’s records. The reasons that this activity is important are:

 To establish all payments have been entered in the cash payments book.  To establish all receipts have been entered in the cash receipts book.  To identify any outstanding deposits or cheques not presented at the month's end.  To establish whether any fees or charges have been made against your account of which you are not aware

Cash Receipts and Payment records used in a bank reconciliation The information for bank reconciliation comes from the bank statement provided by the bank and the records of cash in and cash out kept by a business. The cash records kept by a business are generally the Cash Receipts Book and the Cash Payments Book

Cash Receipts Book - It is important for a small business to keep a good record of cash coming in and going out. The Cash Receipts Book records all receipts of cash by a business from all sources. This would include:

 Cash sales

 Debtors payments, debtors being people who owe you money for supply of stock  Investment income  Asset sales, such as the sale of old equipment  Borrowed funds, from financial organisations  Capital contribution by the owner of the business, which is money, put in by the owner to allow the business to operate.

Cash coming into the business going into a bank account is documented on the bank deposit sheets. The Bank Deposit Book represents a record of the deposits made by the business. Where you may have deposits being made electronically then you should check these on your bank statements and tick off against invoices you have issued. Receipt books or cash register tapes represent summaries of all receipts coming in from cash sales, or payments of debtor’s accounts.

Cash Payments Book- Just as it is important to keep a good record of cash coming into a business, it is equally important to keep a record of payments made. The Cash Payments Book records all cash paid out by a business. This includes:

 Purchases of stock for cash for production and/or for resale  Payment of operating expenses  Payments to creditors, people to whom you owe money  Bank charges  Loan repayments, including interest payments  Drawings by the owner of the business for living expenses  Purchase of assets such as equipment and vehicles

The key source documents that support cash payments made would be cheque butts and bank statements. Though the butts often have a place for an account balance to be entered, it should be remembered that it does not include bank charges or information on clearance times on cheques deposited and may be overstated.

Undertaking a Bank Reconciliation

The following are the steps taken to complete a bank reconciliation statement

Step 1

Compare your cash-book records and the bank statement

 Tick off all common entries that appear in the bank statement and in the Cash Receipts Journal and the Cash Payments Journal  Circle the remaining entries which do appear in either your Cash Receipts or Cash Payments Journals and the bank statement  Investigate why they do not appear in both places  Make any adjustments that are required in your journals or contact the bank to query information

Step 2

Determine the correct final cash figure for the trading period

Opening Cash for the period $

Plus Total of Cash Receipts Book $

Total $

Less Total of Cash Payments Book $

Gives Closing cash for the period before adjustments $

Less any adjustments in relation to fees and charges shown on the bank statement that is not in the cash books $

Adjusted closing cash balance for the period $

Step 3

Complete the Bank Reconciliation Statement

Adjusted closing cash balance for the period $

Less cheques that have been written but have not been presented to the bank $

Sub Total

Add any direct deposits that appear on the bank statement that do not appear in cash books $

Equals the balance as per the bank statement $

9. Cash flow Description of topic Simple Budgeting for cash flow-Cashbook, Planning your cash content flow and knowing when you may be short, Ensuring you have enough cash to meet operating and capital requirements Key aspects of this Simple Budgeting for cash flow- Cashbook topic It is essential for all small businesses to ensure they have enough cash on hand. It will be important to develop a simple process to keep check of their cash flow. Though a detailed cash flow budget might be developed for the business for each year or each month there is a need to keep a daily record of cash flow.

Many small businesses keep a progressive record of cash received and cash spent. This is the Cashbook of the business. The importance of completing the daily cashbook is that where the cash in and cash out of the business is kept in one record the cash position of the business is clear at a glance. However, you do not see fees and charges in your Cashbook. You will need to adjust your cashbook each month once you get your bank statement to allow for fees charged by your bank.

Planning your cash flow and knowing when you may be short

Though many small businesses will use a simple cash book approach to planning their cash flow, its important to use the information available to you for future cash flow planning.

Take time to develop a cash flow budget. It is important to anticipate times where your cash flow may be tight and there may be not enough cash available to meet commitments. It is important to be aware of the timing of cash flow in and out so that you prepare your cash budget as accurately as possible.

The following are the headings that could be used for a cash budget:

Time period for the budget

Plus Opening Cash (cash you have in the bank at the start of the trading period)

Plus Cash you anticipate receiving (Cash to come in from cash sales and payments by customers of outstanding accounts)

Gives total cash available for payments

Less Cash Out (the expenditure you must pay to supplier, for taxation etc. during trading period)

Gives Closing Cash (which is the cash on hand at the end of the budgetary period)

By planning ahead you can anticipate times of shortage and make arrangements with your bank manager to cover you during those periods. If the shortages occur without the bank manager knowing in advance then it is less likely that the bank will be supportive of your business.

Ensuring you have enough cash to meet operating and capital requirements

Cash is the lifeblood of a business. Though there may be tight controls over expenditure and money owed to a business is collected as quickly as possible, a business may still not have enough cash to sustain it. It will be important then to look at ways of securing long term cash to support a business.

The various sources of finance available to businesses generally fall into one or the other of these two categories.

 Equity Financing and  Debt Financing

Equity Financing -Equity financing represents the owner’s contribution to the business. It is the money or equipment put into a small business by the owners. It will be important for any small business to have a large proportion of its financing coming from equity capital. New businesses find raising cash to fund operating capital for day to day activities and for capital expenditure which usually is for purchase of long term assets difficult to secure and often expensive to service

Debt Financing

This is money which is lent to an organisation to finance its operations. The amount of debt versus equity within an organisation will reflect the owner’s decision as to how much debt that they believe is appropriate to financing an

organisation’s operations. The ability of a business to service a loan that is to make interest payments will affect how much a business is able to borrow 10. Performance measures

Description of topic Non financial measures of performance, Financial measures of content performance Key aspects of this Non-financial measures of performance topic Keeping good records allows a small business to have information that will allow it to make informed decisions. There are many areas of an organisation which might be termed “areas of performance”. Our records give us information on aspects of our business that are not measured in dollar terms but contribute to the business being profitable. Some of the areas we should report on include:

 Absenteeism and reasons for staff being absent  Injuries in the work place and reason for those injuries  Customer complaints  Labour turnover  Returns of products  Warranty claims

All these items should be reviewed and measured against a predetermined standard. Though these items are not measured in dollars, they may have an effect on the financial performance of the organisation.

Financial measures of performance

Our financial records allow us to determine how well the business is going. If we keep poor records the information that comes from those records will be valueless in terms of making informed business decisions. Some simple ratios can be computed from our financial records that allow us to see how our business is going. Several simple ratios are listed below

Gross Profit Margin

This ratio looks at the return on the sale of stock. We compare the purchase cost of stock to the sale price of stock. Many small businesses will have expectations as to what should be an appropriate ratio based on industry figures or past experience.

Gross Profit

------Sales

(Expressed as a percentage)

Operating Expense Ratio

The operating expense ratio looks at the relationship between income earned and expenditure on every day operating expenses. This ratio can tell us how much of our sales revenue is being eaten up by administration costs.

Total Operating Expenses ------Sales

(Expressed as a percentage)

How to approach study in this Module

Your teacher or learning facilitator will discuss a learning program that will cover the learning requirements for each of the learning outcomes for this module. In this section, you will find a list of resources and a suggested approach to the prescribed assessment event that will assist you with your learning.

Useful references and texts

The following is a list of learning resources. This is not an exhaustive list and your teacher or learning facilitator should point you to available resources in your TAFE College and/or your workplace.

ASEERVATHAM A, Accounting Essentials, Prentice Hall, 1995 ISBN 0 7248-0380-7

ANANDARAJAH, D, ASSERVATHAM A, REID, H. Managing Finance (2nd edition), Prentice Hall, 2001 ISBN 1-74009-269-4

BIRT I, Record Keeping and Financial Control in Your Business, Prentice Hall, 2000 ISBN 0 –7248-1051-X

MAXWELL R, ONUS, P and FOX P. Introductory Accounting, Prentice Hall, 2000 ISBN 0 –7248-0623-7

PIETSCH J, Financial Record keeping for Small Business Eastern House 2001 ISBN 0 86458 011 8

SAVAGE, W, REYNOLDS, W and WILLIAMS, Record keeping For Your Own Small Business, Nelson, Melbourne 2000

SUTHERLAND E, Book Keeping an Integrated Approach Prentice Hall 2000 ISBN 0 7339 9896 8

Internet references - World Wide Web sites

The following Internet addresses provide sites, which feature applications of the content covered in this module, additional information or examples of organisations that relate to measuring organisational or wok team performance.

Note: As a matter of course Internet sites change content and focus regularly. Sites were selected because of their content at the time of selection. Sites often contain information on various groups to join or they give purchase information for products and services. The listing of these sites does endorse any products or services for sale or support any groups mentioned.

Note: These sites provide information on a variety of issues covered in this module. No one site relates to particular topic

1 http://www.becnsw.com.au/ This site list all the business enterprises centres in NSW. You can access each site for assistance in respect to resources, which aid you in developing your financial control system

2 http://www.botanybec.com.au/ This is one o the leading business enterprise sites. It has 200 hundred of the most frequently asked question in relation to establishing an enterprise including financial information. There is a series of fact sheets and a format for developing a business plan. There is also a live news service for small business, which is, updated daily

3 http://www.afr.com.au/ This is the "Australian Financial Review Site" which has an on line edition of newspaper and an archive.

3 http://www.smh.com.au/ This site is the "Sydney Morning Herald" site with sections on money management and business performance. There are also articles relating to non financial performance measures

4 http://www.themanager.com.au This site is from the Royal Melbourne Institute of Technology. It provides up to date articles on management and specific areas on financial performance

5 http://www.ac.com This is the official site for "Accenture Consulting" who is an international management consulting organisation. They have amongst their pages articles on financial performance and areas of non-financial performance

6 http;//www.asx.com.au This is the official Australian Stock exchange site which has not only share information but information on financial performance of organisation an don general economic performance

Resource Materials

1. Open Training and Education Network

The Open Training and Education Network (OTEN) is the distance education . They develop and publish distance education materials, which are developed specifically for modules taught in NSW Tafe programs. Materials can be in the form of hard copy learning guides, videos, CDROM, DVD or online learning sites. Your college library may have sets of materials from OTEN. You can purchase material from them.

There contact details are

Address: 51 Wentworth Rd. Strathfield 2135

Telephone: 9715800 and 97158222

Fax: 97158333

2. Open Learning Australia

Open Learning Australia is the learning program, which uses The ABC television stations as its learning platform . Most of the education programs developed for this medium are for university programs. However, some of these programs and some, which have been made for VET programs, may be a useful resource. You may wish to contact them to ascertain whether there are any forth-coming programs related to content in this module. Your college library may have copies of Open Learning programs.

There contact details are:

Address: 300 Collins St. Melbourne 3000

Telephone: 03 99038900 and 1300363652

Fax: 0399038966

Assessment

The following is the prescribed (formal) assessment event which determine the learner’s results for this module.

Assignment/ Report on a Small Business

 Financial record keeping system  Cash Flow budget  Measurement of operation performance and impact on financial plan

Suggested Approach:

Financial record keeping system

When establishing or reviewing a financial record keeping system of a small business it is important to consider the records that need to be kept and the source documents that will used to enter information in those records.

Records

Records that you might set up include the:

 Cash Receipts Journal which list the payments made

 Cash Payments Journal which list cash received

 Cash Book which is a record used by many small business operators where the cash in and cash out of the business is kept in one record so that the cash position of the business is clear at a glance

 Petty Cash Book that records small expenses paid out by the business

 Debtors Accounts ledger which shows sales to and payments made by your customers and the balance of what each debtor owes you at any one point in time.

Source Documents

You will need the appropriate source documents from which information can be entered into your record keeping system

Receipts – Record the payment of money. Necessary for the proof of payment if asked to pay again and for taxation returns

Bank slips – Provides a record of bank deposits which allows you to check your records against the bank statement

Bank Statements – Shows bank transactions and allows you a basis for checking your records against theirs

Cheque Butts – Record details of cheque used to make payments

Diary – Your diary can be used to record expenses where no tax invoice or receipt is provided

Petty Cash – A record of small cash purchases usually up to $100

Tax Invoices – The most important item under GST legislation. Records purchase information and taxation paid

Statements – Issued by suppliers recording purchase and payments.

Purchase Orders – Records the details of orders for such items as stock and equipment

Delivery Dockets – Records receipt of deliveries to be matched against orders and invoices.

Time Sheets – Records time worked by employees

Job Cards – Used for businesses doing one off work such as building projects or repairs to record the cost of each unique job

Cash flow budget

Though you might have a detailed cash flow budget that maybe developed for a trading year, it is important to keep of track of your cash flow on a daily basis. Using a Cashbook that shows you where you are at a particular point of time and allows you to make a decision as to whether you have sufficient cash available to pay up coming accounts can do this

The following are some headings that could be used in your cashbook

Cash Book for Month of : Date Opening Deposits Payments Balance Balance (Only include (Includes cheques you deposits you have written out but are certain are may not be in the bank) in your bank account)

Remember the Cash Book does not do not show you fees and charges. You will need to amend your cashbook at the end of each month once you have your bank statement.

After you have determined where you are at then you could use the following headings to help budget your cash flow for the next week

Balance of cash on hand as shown in the cashbook

Plus cash I know I will receive next week gives

------Total cash available

Less payments, I must make next week gives ------Total cash I should have on hand at the end of next week

Measurement of operational performance and impact on financial plan

It is important to consider how well a small business is going in relation to the non financial aspects of its performance as well as how well it is meeting its financial outcomes.

Non Financial Measures

Some non-financial measure of performance you might review and what they may tell you are:

 Absenteeism including reasons for staff being absent that might highlight problems with how staff are being recruited that is they are not the right people for the job and/or expose issues with the management of staff

 Injuries in the work place and the reason for those injuries that could indicate unsafe work practices which could lift insurance premiums

 Customer complaints may indicate that staff may not be listening to customers, or the business is not providing the level of service that was promised.

 Labour turnover which may be related to better opportunities for staff to work elsewhere or indicate a shortage of labour in particular area

 Returns of products may indicate that the product does not fit the requirements for which it is sold, that possibly it is faulty and/or that

not enough information on the use of the product has been provided and/or incorrect information on use of a product has been given

 Warranty claims which may relate to lower than expected performance levels on the product

Financial Measures

 Gross profit margin which looks at the return on sale of stock before other expenses that could be compared to expectations

 Operating expense margin which looks at the level of administrations cost coming out of each dollar of revenue that could be compared to expectations

What is expected of me?

Your Teacher is required to give you the Student Assessment Guide on your first attendance at classes and discuss the requirement for submission including dates required.

You should check particular features of your assessment task with your teacher. These include:

· Should my assignment be typed? · How long is the assignment expected to be? · Should it be handed in a folder? · Can I get progressive comments on my efforts before the due date ? · What form should the assignment take, e.g., a written report as series of short answers, dot points, etc. ?

What if I am running out of time with my assignment?

It is important to plan the steps required in your assessment tasks and calculate the time needed, to complete any assignment before you commence. Your first point of call should be to talk to the teacher in respect to what is required. If you have not been involved in formal learning for some time the Student Association at most colleges can help with courses on study skills and writing assignments. The Individual Learning Centre in most colleges can also provide similar assistance and can help you get started on your assignment. All colleges have Educational Counselors who can point you in the best direction to gain any necessary skills or assistance.

You should also check with your teacher or the policy for late submission. Many colleges and individual teaching sections have policies in respect to late submission that should be explained to you at your first class.

Who can I contact if I have problems?

Always remember if there is some reason why you can not submit your assignment on time your first reference point should be your teacher. The class teacher can grant you an extension of time and help overcome any blockage you may have in getting your assignment completed. The student association and the individual learning centre in each college are a valuable resource in helping you get started.

Glossary

This section contains an explanation of words and phrases used commonly throughout the module

Phrase / Word Description Accounts Receivable Debtors – People who owe the business money Accounts Payable Creditor – People to whom the business owes money Bank Reconciliation The process of reconciling the bank to statement to the cashbook of the business Cash flow budget This budget shows the flow of cash into and out of a business Journal The book of first entry of a financial transaction Source Documents The documents such as invoices and cheques which provide the information for the financial transactions of a business

 TAFE NSW Business & Public Administration Division February 2002

Learner Guide 9787E Manage Finances

Student Evaluation of the Learner Guide

In this section we ask if you would take a few minutes to tell us what you think of this Guide. Your feedback is welcome and will be used to improve the Guide. Please complete the questions below and give to your Teacher (who will pass it on to the relevant Program Manager) or post to the address at the bottom of the page. How useful was the guide to you? Put a cross in the box to show how useful you found each section.

About this Module Very useful Not at all useful      Module Content Very useful Not at all useful      How to approach study in this module Very useful Not at all useful      Glossary Very useful Not at all useful     

What did you find most useful? Why? ______

What did you find least useful? Why? ______

How do you think we can improve the guide? ______

Note to Teacher/s: Please return the “Student Evaluation of Learner Guide” form, to Program Manager, Management & Small Business, Business & Public Administration Division, SIT, Level 2, Blg C, Mary Ann Street, ULTIMO NSW 2007, Fax: (02) 9217 4015.

Thank you for your assistance!

 TAFE NSW Business & Public Administration Division November 2002