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BSBFIM501 Manage budgets and financial plans

Learner Instructions 1

(Plan financial management approaches)

Performance objective

The candidate will demonstrate the ability to plan financial management approaches.

Assessment description

In response to the scenario provided, you will clarify budget plans with your manager and negotiate changes to the budget. You will then identify and analyse a risk to the budget and prepare a contingency plan to prevent or minimise the risk.

Procedure

  1. Read the scenario provided in Appendix 1 to this assessment task and tasks A and B.
  2. Prepare to meet with your manager (assessor) to clarify budget and negotiate changes:
    1. identify areas of the budget that are not achievable, inaccurate or unclear
    2. prepare to negotiate necessary changes to the budget
    3. set up a time with your manager to meet.
  3. Meet with your manager (assessor) to clarify budget and negotiate changes:
    1. identify at least two issues for clarification
    2. negotiate at least two changes
    3. include discussion of basic accounting principles
    4. refer to relevant legislation and ATO requirements
    5. refer to principles and techniques of managing budget items
    6. take and keep notes of agreed changes.
  4. Use the template provided in Appendix 3 to this assessment task to prepare a contingency plan document for persistent risks after budget changes
  5. Submit all documents required in the specifications below to your assessor. Ensure you keep a copy of all work submitted for your records. Specifications

You must:

  • meet with your assessor to clarify budget and negotiate changes
  • provide a contingency plan submit your notes.

Your assessor will be looking for:

  • numeracy skills to read and understand a budget and negotiate budget reallocations
  • knowledge of basic accounting principles to identify and use account balances
  • knowledge organisational requirements related to financial management such as contained in organisational policies and procedures
  • knowledge of principles and techniques involved in budgeting.

Appendix 1 –Scenario

Big Red Bicycle Pty Ltd is a bicycle manufacturer based in Bendigo, Victoria. The company produces bicycles which it sells to retailers in the domestic Australian market.

The senior management structure of the company appears below.

Person

Position

Michelle Yeo

Chief Executive Officer (CEO)

Tom Copeland

Managing Director

John Black

Chief Financial Officer (CFO)

Stuart LaRoux

Operations General Manager

Pat Roberts

Senior Accountant

Sam Gellar

Sales General Manager

Charles Pierce

Production Manager

Holly Burke

HR Manager

According to company strategic plans, the company aims to achieve a net profit before tax of $1,000,000. The chief risks to this goal are:

  • poor sales due to economic downturn
  • increases in expenses such as wage expenses.

In addition to Australian operations, the company is considering manufacturing overseas to take advantage of reduced costs. The company is also considering diversifying its product range to reduce exposure to poor sales of one product.

Role

You are the manager of Sales Centre A, based in Adelaide. The centre has achieved great success over the last year and consistently outsells other sales centres. In fact, due to the large number of accounts managed by your sales team and larger staff, your centre is expected to sell as much volume as the other two sales centres put together. Naturally, you expect cost allocations to reflect the both the needs and importance to the business of Cost Centre A.

Task A

The Sales General Manager, Sam Gellar, has asked you to review the master budget and cost centre budgets prepared by the Senior Accountant. She would like you to meet with her to discuss the whether the budget projections are achievable, accurate, understandable and fair.

She would like you to look closely at the budget for your cost centre, note any changes you think are necessary, develop an argument for the changes and negotiate those changes with her. Information you are aware of includes:

  • Sales in the first quarter (Q1), third quarter (Q3), and the fourth quarter (Q4) are generally 30% less than the second quarter (Q2).
  • Sales in Q2 depend on completion of 90% of repair and maintenance.
  • Sales for Q2 have been estimated to be $1,000,000.
  • Commission negotiated with members of the sales team is now at 2.5%.

Task B

It has come to the attention of the Managing Director, Tom Copeland, that due to the current economic climate, sales volume may be 20% below target this financial year. Tom is worried that this may severely impact profit projections. The company can accept as much as a 10% variance in profit projections; however, more than this could severely affect the company’s ability to pay obligations and invest. Reliable data to determine whether the risk has eventuated should be available by mid Q2, when sales data for the company’s product are in.

As a special project, the Managing Director has asked you to perform a risk assessment and develop a contingency plan to manage the risk of sales falling 20%.

As per organisational policy you should use the contingency plan template provided.

Appendix 2 – Budgeting and finance policy

Budget preparations

  • The business plan will set the key parameters for all financial budgeting.
  • Variations to the business plan must be approved by the CEO and senior management strategic committee.
  • Prior period results are to be analysed to identify the profit level of cost centres, identify correlations between financial statistics and to set key performance indicators and benchmarks for future budgets.
  • The budget planning committee will meet prior to budgets being developed and agree on budget parameters. The committee will consist of all department managers plus the CEO and CFO.
  • A CAPEX budget will be developed from the approved business plan.
  • A detailed sales budget must be completed before completing the profit budget for the year.
  • A cash flow budget covering the first three months will be prepared after the profit budget is completed.
  • A master budget including profit projections will be completed from which cost centre allocations will be made.
  • Budget notes that contain all the assumptions used in the budgets should accompany the master budget or be made available as a separate document. Where possible, the notes should justify the basis on which the estimates were made.
  • Overheads (non-direct expenses) will be apportioned across the cost centres equally. Exceptions need to be negotiated with relevant authorities.
  • All expenses and income will be spread equally throughout the year unless otherwise required by business needs or business environment.
  • The financial cycle for budgeting purposes will be yearly ending 30 June.

Financial delegations

  • Each manager is responsible for achieving the revenue budgets agreed to by the budget committee.
  • Each manager is responsible to approve, by signing the necessary paperwork, all expenditures that fall within their area of responsibility.
  • Expenditures must be within the budget guidelines for the individual departments.

Format for budgets and reports

All budgets must include the following details:

  • name of the person who prepared it
  • cost centre (if applicable)
  • name of the budget/report, i.e. sales, expenses, CAPEX, cash flow, budget variation report
  • period of the budget.

Appendix 3 – Budgets and templates

Master budget with profit projections

Big Red Bicycle Pty Ltd

Master Budget FY 2018/2019

FY

Q1

Q2

Q3

Q4

REVENUE

Commissions (2% sales)

60,000

15,000

15,000

15,000

15,000

Direct wages fixed

200,000

50,000

50,000

50,000

50,000

Sales

3,000,000

750,000

750,000

750,000

750,000

Cost of Goods Sold

400,000

100,000

100,000

100,000

100,000

Gross Profit

2,340,000

585,000

585,000

585,000

585,000

EXPENSES

General & Administrative Expenses

Accounting fees

20,000

5,000

5,000

5,000

5,000

Legal fees

5,000

1,250

1,250

1,250

1,250

Bank charges

600

150

150

150

150

Office supplies

5,000

1,250

1,250

1,250

1,250

Postage & printing

400

100

100

100

100

Dues & subscriptions

500

125

125

125

125

Telephone

10,000

2,500

2,500

2,500

2,500

Repairs & maintenance

50,000

12,500

12,500

12,500

12,500

Payroll tax

0

0

0

0

0

Marketing Expenses

Advertising

200,000

50,000

50,000

50,000

50,000

Employment Expenses

Superannuation

47,500

11,875

11,875

11,875

11,875

Wages & salaries

500,000

125,000

125,000

125,000

125,000

Staff amenities

20,000

5,000

5,000

5,000

5,000

Occupancy Costs

Electricity

40,000

10,000

10,000

10,000

10,000

Insurance

100,000

25,000

25,000

25,000

25,000

Rates

100,000

25,000

25,000

25,000

25,000

Rent

200,000

50,000

50,000

50,000

50,000

Water

30,000

7,500

7,500

7,500

7,500

Waste removal

50,000

12,500

12,500

12,500

12,500

TOTAL EXPENSES

1,379,000

344,750

344,750

344,750

344,750

NET PROFIT (BEFORE INTEREST & TAX)

961,000

240,250

240,250

240,250

240,250

Income Tax Expense

(30%Net)

288,300

72,075

72,075

72,075

72,075

NET PROFIT AFTER TAX

672,700

168,175

168,175

168,175

168,175

Sales cost centre expense budget

Sales Centre A

Sales Centre B

Sales Centre C

Commissions

$20,000

$20,000

$20,000

Wages

$100,000

$100,000

$100,000

Telephone

$3,000

$3,000

$3,000

Office supplies

$1,000

$1,000

$1,000

Contingency plan template

Contingency Plan Company name: Big Red Bicycle Pty Ltd Person developing the plan:

Name: Position:

Risk identified:

Strategies/activities to minimise the risk

By when

By whom

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