Q1: Establish the capacity of existing financial systems and document this in a report
A: A set of procedures to track the ongoing financial activity within an organization are known as financial systems. These financial systems are critical towards developing a viable working structure for better financial management within the firm. These systems enable the easy transfer of information related to financial activities within the organization and also facilitate managers and top management to induct better practices.
Existing systems need to be consistently analyzed to ensure that they are in line with the firm’s requirements. This analysis is powered by two main triggers i.e. internal and external changes/requirements.
Internal factors are as follows:
• The need to improve the collection of consistent, timely, comprehensive and reliable information
• The need to improve reporting at an organisational and departmental level
• The need to improve policy design and implementation at all levels of management
• The need to improve the process of preparing and executing budgetary allocations
• The need to improve the process of preparing annual and interim financial statements and nonfinancial
• The need to improve statements in accordance with accounting standards
• The need to improve the process of analysis and reporting consolidated financial reports
• The need to improve access to a compressive audit trail to enhance reliability of audit procedures
External factors are as follows:
• Changes in statutory procedures and norms
• Changes in industry benchmarks and norms
Q2: Forecast and document the data and business system requirements
A: To properly forecast financial data, you need to have access to access to two main things. The first one is the tools from which data is derived while the second one is the methods through which data is extracted from the tools of data and forecasted.
Here are the tools from which financial information is gathered from information:
• Australian Bureau of Statistics (ABS) economic data
• The balance sheet
• Benchmarks or trend analysis
• Budget variances
• Budgets and forecasts
• Cash flow/profit reports
• Financial/operational statements and reports (such as expenditures and
• receipts, profit and loss statements)
• Financial markets monitoring services (such as Reuters)
• Income statements
• Market valuations
The methods through which data is derived from the tools of data and forecasted are listed below:
• Top-down forecasting – This technique involves viewing in detail the existing market trends and then deploying the generated information to develop a sustainable and achievable goal.
• Bottom-up forecasting – Based on real time sales forecasts, this system involves the spending plans being developed by the departments themselves acting on sale forecasts.
• Projection – Using past data to analyze the past trends in performance and then using the results from the analysis to project future performance figures.
• Model building – Built on mathematical reasoning, this method is based on inputting data or variables in computer analysis to seek answers.
• Survey of intentions – Conducting target market surveys in order to determine future buying patterns
• Delphi technique – Trying to build consensus by involving experts to opinioate on the matter
• Scenario planning – Involves brainstorming by pitting different scenarios and analyzing what outcomes could come from them
Q3: Analyze the forecasted requirements. Provide the analysis
A: Forecasting is immensely helpful for the management as it allows them to prepare beforehand for any impending crisis or boom in the firm or in external factors that might be affect it. These can include but are not limited to sudden fluctuations in demand or glut of supply, economic crisis of the country, new competition entering the market among others.
Forecasting is done through different techniques but which technique should we use depends highly upon what we need to forecast for e.g.
• Cost of Goods Sold
• Cash Flow
• Labor Costs
Now, furthering narrowing it down, we need to understand the firm’s unique forecasting requirements. This can be done more easily by posing questions like:
• Is there anything we need to determine to prepare for the future?
• Are there any business areas that actually require this forecasting and what is their order of priority?
• How much time to do we have to respond to our requirements through forecasting?
• Will be there historical patterns that we need to take in to account or prohibit or assist their re-occurrence?
• What kind of performance should we likely be evaluating?
Q4: Prepare and plan a comprehensive financial plan of the budget forecasts over the full planning cycle according to organizational and statutory requirements?
A: Budget forecasts are related to predicting in detail, the cash requirements for future expenses and how much income will come in to satiate these expenses in a proper manner. These budget forecasts are necessary to create accurate projections for the business pertaining to different revenue generating or consuming areas of the business like expense and sale forecasts, cost of required goods and services and even cash flow forecasts.
Historical financial data compiled from past financial reports and prevailing trends are used together to create accurate budget forecasts. Budget forecasts serve a highly important function in the business as they allow it to assess the future viability of a business and know more about the risks involved. However, these budget forecasts should not remain static rather, they should be evaluated and updated to accommodate any alterations to the business that mandates these changes to take place.
If we are building our own budget forecasts, we need to take into account the following statutory requirements:
• Internal control procedures – These are the processes developed by firms to monitor and assure that the goals/ objectives of the firm are sustainably achieved.
• Limits on volumes and types of transactions – Mostly, this pertains to abiding by government regulations on the business that are aimed at protecting the customer like subsidies and consumer protection laws.
• Reporting of duty, excise and other overseas government charges – When goods move internationally or regionally from and to, they need to obey these taxation practices and rules.
• Reporting periods – Preparing reports as per the required standards and requirements
• Audit requirements – Requirements that are necessary to fulfill if we are to run a proper audit when the time comes. Usually these requirements are imposed.
• International, national and local trade and trade agreements
Q5: Prepare, document and present your recommendations for budget expenditure or the modification of the existing projections
A: Budgets are critical towards achieving viable financial planning for the future. Budgets are made so that we can find out just how much we can spend and are these spending streams in line and reasonable with the income that is going to be generated by the business. These targets or projections must be achievable. Once the initial budget is made, it is always open to recommendations or modifications which can be based on problem identifications such as:
• Unrealistic costs cited in the budget plan
• The timing in which expenditure might be exhausted is not correct
• There needs to be new categories added to the budget or some unnecessary ones might need to be removed
• The projections are not within the acceptable range
• The income, against which the budget is cited, might be too low or too high
However, these recommendations will only stand valid if the data used in the analysis is valid as well. Incorrect data might lead to problematic projections which might not bode well for the firm in the long run. The data must be as accurate as possible and you also, must identify the sources through which it is derived and whether they are reliable or not.
The following financial information is highly important for preparing an accurate budget plan:
• All the actual costs that the business has incurred till today
• Timeline of costs incurred by the business that might be used to improve cash flow performance
• Each category through which expense was incurred
• Comparison of the budget with current income and expenditure data
Once you arrive at an accurate budget plans after all the modifications and recommendations have been taken care of, you can now present it through the following means:
Q6: Using standard accounting techniques, conduct a balance sheet analysis, Analyze the cost of assets and liabilities, and the returns from them, to identify the extent of debt and equity financing
A: Complying with standard accounting techniques, we can easily analyze the cost of assets, liabilities and equity of a company by conducting a detailed and through analysis of a balance sheet. This analysis can easily signify the firm’s overall financial viability and even past performances of the firm. This analysis can be carried out either on a monthly, quarterly or yearly basis and include the following core steps:
For the first step, you will need to add up the paid up equity capital with the sum of total liabilities and then ensure that it tallies with the sum of total assets. Now you will need to subtract/contrast the sum of total assets with the sum of total liabilities (excluding issued share amount). If the total sum of assets is exceeding the sum of total liabilities, then your business is good financial health and is viable for now
Now, to judge the short term financial viability of the business or inherent liquidity, you need to contrast the sum of total current liabilities with the sum of total current assets.
• For calculating the ROA or Return on Assets, you will need to divide your net income by assets. Whether a high ROA is good for your firm or a low ROA, depends highly upon the kind of business your firm is involved in
• Now you need to determine whether your investment in research is achieving the desired returns or not. For this, you need to look at the total valuation of all of your copyrights and patents
• To check the financial viability of the business even further, you now need to calculate the debt to asset ratio which is done by dividing total liabilities with total assets
• Another important step in balance sheet analysis is calculating the receivables turnover ratio. If you have a high amount of receivables, then your investment in sales is worthwhile at the moment
• You also need to conduct an inventory turnover ratio calculation in order to determine whether or not the firm has the ability to keep production going with the existing assets in hand
• The last step of balance sheet analysis involves checking for other disparate but important features of the firm and may include things like goodwill and credit ratings.
Q7: In consultation with relevant organizational staff, establish and document the management responsibilities and legal requirements for reporting
Reporting requirements by the management need to be maintained and generated within due time as many of them are legally binding and necessary for the firm’s official validation. Prepared in accordance with Corporation Act, these financial reports need to be in full compliance with required accounting standards like International Financial Reporting Standards or IFRS.
The companies that are required to build their financial reports in compliance with procedures and lodge them are the ones that:
• Have high sums of money involved in sustaining them including investor capital
• Are using public share capital as a capital generating stream
• Are non profit and not for profit organizations
The financial reports that need to be lodged include the following:
Document Section of Corporate Act
Statement of financial position as at the end of the year (if
consolidated accounts are not required by Accounting
Standards) 295(2) & 296(1)
Statement of comprehensive income for the year (if
consolidated accounts are not required by Accounting
Standards) 295(2) & 296(1)
Statement of cash flows for the year (if consolidated
accounts are not required by Accounting Standards) 295(2) & 296(1)
Statement of changes in equity if consolidated accounts are
not required by Accounting Standards) 295(2) & 296(1)
Consolidated financial statements, if required by accounting
standards– which may include parent entity financial
information where CO10/654 conditions are met 295(2) & 296(1)
Notes to financial statements (disclosure required by the
regulations, notes required by the accounting standards, and
any other information necessary to give a true and fair view) 295 (3)
Directors’ declaration that the financial statements comply
with accounting standards, give a true and fair view, there
are reasonable grounds to believe the
company/scheme/entity will be able to pay its debts, the
financial statements have been made in accordance with the
Corporations Act 295 (4)
Directors’ report, including the auditor’s independence
Declaration 298-300 A
Auditor’s Report 301-308
To ensure that reporting responsibilities that are to be divided within the staff are reflective of the firm’s internal values and goals, you need to consult all the major stakeholders before settling on the final responsibilities.
These responsibilities may include:
• Making and ensuring the implementation of organizational policies
• Ensuring that organizational procedures and SOPs are being followed
• Ensuring that all guidelines for reporting are maintained according to legal and compliance requirements
• The reporting is not misleading and is always ethical
• The reporting is as per the professional standards previously stipulated
Q8: Analyze and interpret the financial reports and key information. Document the analysis
A: To properly analyze first and then interpret financial reports, we need to conduct proportion analysis. This involves identifying the relationships and the ensuing trends between various financial accounts that are hosted in the financial reports.
Two methods that the key to better analyzing the financial reports in hand are as follows:
1: horizontal and vertical analysis
In conducting a horizontal analysis, we compare the financial information between different reporting periods directly with each other. It’s quite a basic method and shows the overall picture of the firm’s progress as each financial period passes onto another.
In a vertical analysis, we resort to listing each item on the financial report as a percentage of another item. Simply put, comparing or reviewing the proportion of accounts to one another. This method allows us to check the health of the firm be seeing how much each account is actually contributing to the overall figures that have been generated.
2: Use of Ratios:
Ratios are immensely useful to determine the relative size of one related aspect or account to another. The results are then compared to the ones belonging to previous financial periods and even with the prevalent acceptable averages in the industry the firm is operating one.
Below are listed, some of the most highly used ratios:
• Liquidity is immensely important in a business as it allows the management to determine whether the business can sustain itself and meet its obligations easily or not.
• Cash Coverage Ratio: Used to determine the ability of the business to pay of its interest on loans
• Current Ratio: Signifies whether the business will be able to successfully satiate its current liabilities or not
• Quick Ratio: It can be calculated in the same way as current ratio but by excluding inventory in summing up the total assets
• Liquidity Index: This allows the business to know just how much time will it take to convert the existing assets into cash
These ratios are used as an indicator to determine just how well the company’s resources are being organized and utilized by the management.
• Account Payable Turnover Ratio: This ratio is used to measure the firm’s turnover speed when it comes to clearing its account’s payables or creditors
• Accounts Receivable Turnover Ratio: This ratio is used to measure the firm’s ability to liquidate its accounts receivables
• Fixed Asset Turnover Ratio: This highlights the firm’s ability to generate sales with a given number value of fixed assets available to it
• Inventory Turnover Ratio: Used to highlight just how much inventory is required to achieve or sustain a given level of sales
• Sales to Working Capital Ratio: Used to highlight just how much working capital is required to achieve or sustain a given level of sales
• Working Capital Turnover Ratio: Used to measure the firm’s ability to generate a particular amount of sales from a certain working capital base
• These ratios show just how much the firm’s ability to sustain itself is derived from debts and whether the firm is in the capacity to pay off those debts or not.
• Debt to Equity Ratio: Signifies the amount of debt the firm is willing to use to fund the firm’s operations as compared to using capital to do the same
• Debt service coverage ratio: Shows the ability off the firm to pay off its debts in time
• Fixed charge coverage: Signifies the ability of the firm to meet its regular fixed costs from period to period
These ratios are there for determining the firm’s actual ability and those of core business areas to generate maximum profits.
• Breakeven Point: The level of sales where the actual total casts become equal to it. This is the boundary beyond which, profit lies.
• Contribution Margin Ratio: Signifies the leftover profits, when variable costs i.e. costs which fluctuate with the amount of sales, are deducted from sales
• Gross Profit Ratio: When the revenues are subtracted from the cost of goods sold, it is known as gross profit, which is then used to determine gross profit ratio by showing it as a proportion of sales
• Margin of safety: It allows the firm to calculate the level of cushion it has before sales can drop to a point where breakeven lies
• Net Profit Ratio: It is used to calculate just how much profits remain after we deduct all expenses and taxes from net sales
• Return on Equity: Shows profits as a proportional ratio of total capital
• Return on Net Assets: Shows Net Profits as a proportional ratio of total assets including working capital
• Return on operating assets: Calculates the proportional ratio of net profits to total operating assets
As shown in the ratios above, some key information that can be used for proper analysis of financial reports is as follow:
• Gross Profits: This is used to analyze or determine the amount of money required to produce/manufacture the goods or procure services as compared to the total revenue
• Net Profits: This is used to check whether the firm is able to satiate all of its given expenses as compared to the generate revenue and whether there is a profit margin or not
• Return on investment: This metric is highly crucial, especially to investors, as it determines whether or not an investment generated profitable returns. This can be further used to calculate the viability of the venture.
Q9: Analyze and evaluate the effects of the financial decisions on the organizational ability to meet planned outcomes. Document the analysis.
A: To evaluate your organization’s ability to meet planned outcomes, you need to first measure your organization’s planned outcomes and compare it with your financial ability and achievements during that period or concerning to relevant planned outcomes.
Most of this depends on the type of decisions you take that can have financial implications for the firm. These decisions are as follows:
Investing Decisions: Determining just how much investment is required to sustain your planned outcomes, investing decisions have high financial implications because it is through them that we make use of the firm’s funds by reallocating them to other avenues.
Financing decisions: These decisions are the ones that are taken to measure just how much financing is required and from where this financing will take place. Finance options available the firm is mostly used to take financial decisions pertaining to determining the best capital mix for the firm.
There are some critical elements you need to consider before making financing decisions and they include:
The nature of the business that the firm is involved in and the inherent riskiness of the business
The capital structure that the firm is looking to build for itself
The time for which the assets are going to be needed?
How much will alternative financing cost the firm?
Dividend policy: This policy pertains to deciding which type of dividend alternatives the firm is going to opt for from the following three:
Stable dividend policy
Constant payout ratio
Regular low dividend policy
Now, to analyze the effects of financial decisions the firm is going to make, you will need to conduct an in-depth review of the following kinds of information:
How much the decisions cost the organizations in terms of the following metrics:
Expenses incurred for e.g. in the execution of the task and time and effort of the employees
The inherent financial benefits or growth as a direct result of financial decisions taken
Q10: Collect comparative and trend information, use this to confirm and document needs for future budget and associated resources.
A: Comparative and trend information are both used to chart out better decisions on future budgeting and associated resources. Comparative statements signify the performance of the firm in terms of finances over previous periods. They are immensely useful towards acquiring proportional analysis on past expenses and revenues over multiple periods and then compare them to current allocations.
Trend information, on the other hand, is used to spot regularities or commonalities in existing information by analyzing them. It is useful to chart out better predictions for budgetary forecasts as it allows the firm to compare present and past financial performances.
Both of these types of information may include:
• How much and what type of funding is actually available to the firm from external funding sources?
• Benchmarks to provide a standard for executing and evaluation of future and current work
• Business activity comparisons to adjudge the level of business activity for the budget
• Comparative and trend based evaluation of expenses to be used for forecasting the budget
• Liquidity of the firm in terms of its ability to satiate its financial obligations by selling off its assets
• Profitability, which is analyzed to predict how much certain products or areas of the business, may be in the future
• Comparison and trend analysis of sales to check whether it is increasing or decreasing and make allocations accordingly
Trend and comparison analysis are integral towards making the upcoming budget much more in line with actual data. This allows the budget to be able to meet needs of the organization in the future to a very high extent. A properly prepared budget can only be made if the data through which the trend and comparison analysis is taken is accurate.
Q11: Complete negotiations to secure resources in accordance with relevant short term and long term need. Document the outcome of these negotiations.
A: The resources which are required by the different areas of the business are finite in number and therefore, its not guaranteed that you will secure enough for your long and short term business requirements if you don’t engage in negotiations for them. Negotiation allows business to chart out a due course of plan to ensure that everyone is satisfied with the amount of resources they are getting. Only when everyone’s needs are duly met, can the organization move forward together towards success.
Good negotiation skills are required to secure the resources on your side that are good enough to meet your overall requirements. These good negotiations skills constitute persuasive verbal skills and better listening skills. You also need proper documents for initiating and completing the negotiation process which include, a resource proposal, which contains all the resources and the amount in which you require them, and a full fledge plan on how you intend to put to use these resources once you acquire them.
Negotiations are best done in stages that include the following steps:
The preparation stage involves planning exactly when and where the meeting for the negotiations is going to take place. It can also include the list of people who need to be in attendance by priority of importance.
In the discussion stage, the resource seeking party and the resource allocating party, both put forward their ideas on how these resources should be shared. This stage should also include the common points on which both parties agree and disagree.
In the goal clarification stage, it should be ensured that each part understands what the other party looks to gain from the negotiations
In the next stage, one should look for a win-win outcome, which can only come when both the parties involved agree to a high extent on the other’s views and chart out better alternatives if they don’t.
In the agreement stage, both of the parties reach on a comprehensive agreement over the points discussed
In the final stage, a course of action is charted out for the proper implementation of the agreement
In negotiations that are successful, both parties return satisfied having reached a win-win outcome and on top of that, having built long lasting, trustworthy relationships on personal and working levels.
12: Maximize the organization’s performance by allocating the required resources against the budget. Document the resource allocation, and maintain accurate and up to date records of the resource allocation and usage throughout the cycle according to organizational and legislative requirements.
A: To allocate the required resources against the budget, we need to list down all the categories that were of critical importance. They included:
• Travel Costs
• Consumables and supplies
In the budget that is made, a financial value is duly placed against each of the identified resource and then we get down towards further identifying exactly how much will be allocated to each one.
To do this properly, we need to ensure that the following things are taken into consideration:
How much a certain resource is required in its most minimal form? This is done to ensure that we know exactly just how much is important to keep running the business without affecting sales or other performance metrics
Exactly how much can we allocate the budget for the resources? Doing this makes it a whole lot clearer to understand the amount of budget that we can allocate at the most.
The priorities of the organization. This pertains to those resources that must be allocated for in order for the organization to properly run and perform.
If the amount allocated for the resource is not up to the requirements, are there any external financing sources through which we can increase the amount of capital we have.
One important thing to remember here is that you always to keep a cushion in the budget for any contingencies that may arise due to sudden changes in laws or working conditions. If the budget is in line for the department it is allocated for, it will help that department in functioning much more properly because then, it is meeting its requirements.
Q13: Develop, review and document the management systems which enable timely collection, management and processing of information.
A: Management systems are the mechanisms through which an organization intends to realize its goals and objectives within a stipulate period of time and with high reference to effectiveness and efficiency. These systems are based on a broad spectrum of policies and processes that provide the framework on which these systems function.
So, when we review management systems, we need to scrutinize the very policies that constitute its framework and whether or not they are reliable enough in informing the timely collection, management and processing of information.
Some of the core policies include the following things:
• The core purpose of a certain policy
• What areas does the policy exactly cover i.e. its sphere of influence
• Who is responsible for the implementation of these policies?
• What kinds of legislation are applicable on the policies and what exactly are its codes of practice?
When reviewing policies, you need to pose certain questions to check their effectiveness, like:
• Is the policy covering the aspect of allocation of information collection responsibilities?
• Is the management system allowing easy access to information for the parties who require it the most?
• Is the policy good enough to ensure that the forwarded information is accurate at all times?
• Is the information reliable enough or is the information being collected through the means stipulated within the policy?
• Is the management in know of the different responsibilities of different areas or people of the business?
Q14: Accurately complete the records of the budget performance and expenditure, ensuring to report these in accordance with organizational procedures and statutory requirements?
A: Monitoring the budget is an important activity for all kinds of businesses as it allows to re-check from time to time whether everything is going according to plan and verify it along with seeing whether there are any discrepancies that need to be accounted for or even if some new categories need to be added or previous ones removed.
To monitor the budget, there are stipulated procedures which are to be used at regular intervals at the discretion of the management.
The following information is required to monitor the budget in the best possible manner:
The expanded budget activity for the year, in which you should check for planned expenditures and whether are in line with projections or not.
• The total amount of expenditure that has been done up till now
• The amount allocated for meeting future expenditure commitments
• The remaining balance of the annual budget
• Your expected position against budget at the term end after accounting for all types of expenditures that have been anticipated. Also known as forecast outturn
• The explanation for all the types of variances, whether positive or negative
• The plan of due course of action to accommodate and neutralize any negative variance identified
As far as the statutory and regulatory requirements are concerned, you are required to lodge a number of reports with the ASIC or other relevant bodies.
Q15: As required, evaluate and improve budget audit mechanisms and compliance requirements. Document all evaluations and provide the updated and improved mechanisms and compliance requirements.
A: When planning to improve on budget audit mechanisms we need to audit and scrutinize the procedures and policies through which the budget was compiled in the first place. This audit includes multiple procedures but the foremost among them are interviewing the staff which actually developed the budget and secondly, carrying out a detailed scrutiny of all the policies involved.
Following are the questions used in audits of budgeting mechanisms:
• Was the budget in line and integrated with the actual plan of the business?
• Did they base the budget on the targets of output delivery?
• Are the workforce plans reflected in the budget?
• The processes through which internal budget were made, adequate?
• Was there a team dedicated for budget development?
• Did they have a formal policy in place for handling budget development?
• Did they produce guidelines that were adequate for the task?
• Were the responsibilities allocated accordingly?
• Were the tools used for budget appropriation, appropriate?
• Are the budgets being managed adequately or is there a problem in execution?
• Are adequate reviews done?
• Is the monitoring of revenue and expenditure being done accurately with regards to the budget?
• Is the external reporting of performance adequate and is being done in line with budgetary requirements?
With regards to compliance, the firm needs to follow local laws, statutory requirements, requirements of regulatory bodies and tax mandates.
These requirements sometimes differ from region to region while sometimes remaining same wherever you are situated like tax laws.
The budget needs to account for these compliance requirements and if not, then the budget needs to accommodate specific conditions for the fulfillment of criteria laid down in these stipulations.
Q16: Identify and analyze the financial risk factors. Provide the analysis.
A: All types of financial risks are related to finding out ways through which investors could lose their invested resources. Every firm needs to conduct an analysis of financial risk factors involved in its undertakings and take steps to mitigate their impact on the business in any form. Although there are numerous types of financial risks, we can categorize them in to these broad categories:
Market Risks: Includes direction and non-directional risks. Mostly related to volatility of the economy and external factors along with increase in share or stock prices
Credit Risks: These risks are mostly related to obligations of the firm which are at failure of not being duly fulfilled. Includes sovereign and settlement risks like difficult foreign exchange policies or when one party fails to fulfill its commitment despite receiving the full payment
Liquidity risks: These risks are related to the scenario where the company is unable to undertake any sort of transactions.
Operational risks: One of the most common types of risk, these are the ones related to managerial incompetency and technical failures. Furthermore, these risks can be sub divided into fraud risks and model risks. Fraud risks are related to lack of monitoring on the business and its activities thereby resulting in losses related to frauds, while model risks are those where the firm’s business models are inadequate to achieve organizational goals.
Q17: Manage and document the financial risks as they arise, according to organizational policies and procedures.
A: Financial risks can only be managed properly if there are preset policies and procedures defining how to do so. Mostly, these policies and procedures are made and managed by financial risk management committees. These policies should be comprehensive enough to include all aspects of managing financial risks as they arise and they include:
• Risk management rationale
• Objectives behind risk management
• The relationship between the firm’s strategic plans and how risk management is done
• Properly formulated guidance on what are the parameters through which we can identify accepted risks
• Identifying on whom exactly is responsible for undertaking the task of managing these financial risk factors
• How much documentation is required for it?
• Regular review of risks management procedures and policies governing it
If you recommend any sort of financial risks that are within acceptable range and propose the firm to undertake them, you must know how to compile a report outlining your justification for it. Such reports include the following things:
• All the details of the risks you want the firm to undertake
• How will you neutralize all the risks you recommended to your firm, i.e. the methods through which this is going to be done
• Any alternate plans of action to avoid or neutralize these risks
• The areas of the firm most likely to be affected by these risks
Q18: Develop and implement procedures to regularly review the financial risk management activities. Provide the procedures and document the regular reviews conducted.
A: Those kinds of risks wont be undertaken by many firms that could expose and make them vulnerable against the following kinds of things:
• The losses are out of bounds and out of acceptable limits relative to the targets of the firm
• Breaches of any sort either in legislative or regulatory non-compliance
• The firm’s reputation being put at stake
• The provision of services or goods to the consumer are disrupted or stopped
• Relationships with key stakeholders and business partners being damaged
• The metrics for health and safety do not remain within stipulated limits
Whether it is financial risks management or any other sort of risk management, the activities involved in their management are all the same. To ensure that these risk management activities are good enough, there should be a regular audit conducted by risk management committees. For this, you need to conduct thorough research on such risks through the following means:
• Talking to people who were the first ones to identify a risk and check what they think on how this risk could affect the firm in the worst possible case
• Using statistical evidence and other forms of data to adjudge the extent of damage these risks can bring to the business
• Engage teams of people who work in the business area where a certain risk affects the most and check what their views on the risk are and how they think this could affect them
• Checking for any past or historical information on the same or similar risks and how much they impacted businesses in their wake
Q19: Identify and document the deviations from budgets that generate and adverse effect on the budget objectives.
A: Variances can either be favorable or unfavorable and in actual they signify the difference between planned and achieved outcomes. Conducting a variance analysis is critical towards managing budgets and financial plans as it allows you to identify and control any adverse effects on the budget before it gets out of hand and harms the business and its interests further.
Unfavorable variance in budgets can be easily identified by conducting a variance analysis and these might include the following things:
• Variance in costs due to the higher unit price than was estimated in the planned budgets
• Stock turnover rate is over the expected limits
• Sales variance, in which the sales prices are not up to the mark as per estimations
• Sales numbers were not generated as expected
• The sales emanating from different product categories was not in line with historical data and predictions
Q20: Promptly document and develop action plans to remedy significant deviations from budget objectives and projections.
A: Action plans are the best remedy to address significant deviations from budget objectives because they will allow you to bring things on track much more easily and in a systematic manner. Action plans are widely used in all organizations to provide roadmaps for achievement of all types of objectives.
• For developing a well crafted action plan that includes all the relevant details on how much resources are required for goal fulfillment as well as the timeline for the due completion of the goal, here are the steps you need to follow:
• Identify and list down all kinds of objectives you need to fulfill in order to meet budgetary requirements
• Classify each task into a separate category and ensure that the people with the relevant skill sets are given the tasks matching their abilities
• Now, chart out how many resources would be required for proper implementation and completion of each task
• Create a timeline that identifies the time on which each goal should be completed
• Conduct a final in-depth review of all the objectives you just mentioned and the way you will carry out their execution within stipulated time limits and the given resources.
Q21: Monitor and review the financial documentation against organizational objectives, revising and renewing the budget priorities as required meeting the operational contingencies and risking management, and managing the costs to targets set in the budget. Document the monitoring, managing and reviewing activities and provide all the revised/reviewed budget priorities.
A: Financial documentation presents all the financial data generated by the firm in different areas and aspects in an organized form. There are various types of financial documentation and they include the following:
• Balance Sheet: This financial document is perhaps the most important of them all as it identifies all the figures related to total assets, liabilities and equities at the end of a financial period
• Income Statement: This financial document presents the data on expenses generated, revenues earned and the overall profitability of the venture.
• A Statement of changes in equity: This financial document records the change in owner’s equity over a period of time by including the profits and losses incurred within a financial period in to the owner’s equity.
• Cash Flow Statements: This financial document records the changes in cash inflows and outflow as a result of changes in balance sheet accounts and income.
Budgets are one of the most important financial tools used in financial management as they allow the management to exactly understand and specify where and how much resources will be spent. They also determine other important things like which person should be made responsible for a certain action or implementation to take place.
However budgets are not stationary, as they need to be revised and renewed in relevance to new data that may arise. This data may include the following things:
• The reporting period
• How are these reports going to be used?
• The needs of the organization on communication
• Planning requirements
• Statutory, legislative and taxation requirements
A review of budget priorities can also be conducted based on any sort of operational contingencies or risk management processes. To address these risks properly in a review of budget priorities, we need to formulate a plan which may include the following things:
• Defining the goals and objectives of the organization
• Setting time periods
• Identifying the exact triggers to execute contingency plans
• Determining just how restriction there is on the use of resources
• Reducing, neutralizing the new risks
• Identifying and managing inefficiencies in operational tasks
Cost management is an important aspect of financial controlling and budgeting as it allows the firm to accurately predict the expenditures that may be impending therefore allowing the firm the chance to be safe as much as they can from going past the stipulated costs contained in the budgets.
All cost records need to be maintained and evaluated from time to time in order to check whether they are in line with planned values.
One important document that helps in achieving these goals is the cash flow budget. It is used to predict the balance in the bank after a certain time period and the costs included in it, can be easily categorized in to four main types:
• Operational expenses
• Cost of Goods sold
• Debt payments
• Major purchases
If a business plans to ensure that proper means of monitoring and reviewing its budgets are in place, it needs to take the following course of action:
• A budget timetable needs to be built, communicated and implemented. This comes in handy in generating regular reports, ensuring activity and financial data is accurate and all of this is easily accessible to the management
• Such reports need to be generated within quick time intervals, such as on a monthly basis
• The reporting needs emanate from the lower tiers of management while the upper management needs to ensure that it is proactive in monitoring the budget from time to time
• In the monitoring of such reports, the management needs to ensure that the monitoring includes financial statements on expenditure in actual terms as well as the forecasts that were initiated at the start of the plan on such expenditure