BSBFIM601 Manage Finances – Financial Management Assessment Answer

Assessment Task 2 Monitor and review budget

Performance objective

This assessment task requires you to monitor the implementation of a budget and report on the variances, trends, and performance of the established budget for a fictional business, and provide recommendations for ongoing financial viability.

Assessment description

You will need to review the provided current case study information and compare it to the budget you established in Assessment Task 1. After evaluating these you will need to report on the following:

  • significant issues
  • variances from budget
  • comparative performances
  • recommendations for ongoing financial viability
  • evaluation of financial management processes.

Procedure

  1. Read the case study.
  2. Develop a variance report based on the format and template provided by Howzit.
  3. Complete a cash flow analysis on the average length of time it takes Houzit to collect funds from its debtors to determine the trend based on the financial reports in Assessment Task 1.
  4. Examine the sales budget, profit budget, cash flow budget, and debtor aging summary to identify the following in a report:
    1. Issues:
      1. Identify, describe and prioritize significant issues that are evidenced in the provided case study information and describe reasons or causes of these issues. Include in this issues of financial probity that you have identified or considered when monitoring these budgets.
    2. Variances:
      1. Complete an actual-to-budget variance report, using the template provided in the case study.
      2. Identify variances by comparing actual results with the established budget, and provide reasons why these variances may have occurred.
    3. Performance:
      1. Compare the financial performance of the organization (according to financial information provided) to industry benchmarks for this organization in line with the retail trade sector.
      2. Respond to the performance questions provided by the CEO, as provided by the board of Howzit,
      3. Determine a trend of the average debtor days and the impact on the cash flow of Houzit.
    4. Recommendations:
      1. Outline your recommendations for ongoing financial viability for the organization, based on your assessment of the issues, reasons for variances, and organizational performance you have identified (Steps 1–3).
      2. Include in this section your plans for a revised budget, effectively managing contingencies and issues that have been identified in feedback and monitoring of the budgets.
    5. Evaluation:
      1. Provide a summary review of the financial management processes in place for the organization, in light of your assessment of the issues, reasons for variances, and organizational performance you have identified. Include in this section any recommendations you have for modifying management processes.
  5. Prepare for and undertake the role-play presentation:
    1. Arrange a time with Jim Schnieder, CEO of Houzit Pty Ltd (your assessor), to present an oral explanation of your variance report. Ensure that your assessor has copies of or access to documents you will be referring to.
    2. Deliver the presentation of your variance report
      1. Summarise your findings (issues, variances, financial performance)
      2. Prioritize and present your recommendations.
    3. Ask for questions, either during or at the end of the presentation, to:
      1. demonstrate your oral communication skills
      2. use questioning and listening techniques
      3. demonstrate competent exchange of information
      4. use appropriate conventions and protocols
      5. ensure the manager/CEO is clear about budgets
    4. Seek approval (or discuss as required) of your recommendations in the report.

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    Specifications

    You must submit:

    • a complete actual-to-budget variance report
    • a completed report detailing the issues, variances, performance, recommendations, and evaluations identified from the financial information for Houzit Pty Ltd.

    Your assessor will be looking for:

    • Evidence that you reviewed the provided case study information to develop an evaluative report concerning the progress of the budget.

    Adjustment for distance-based learners

    • No changes to the task are required.

    Case study: Houzit Pty Ltd

    Soon after the end of the first quarter, Jim Schneider the CEO of Houzit, asked you to follow up with Celina Patel, Houzit’s accountant, to see how the actual results compared with the budget you had prepared three months ago. You explained that you had a meeting with Celina that afternoon to get the results and that you would report back as soon as you had done some analysis.

    The key questions that the board was most interested to have answered from the budgets and the variance reports were:

    • ‘To what extent do the reports support the view of the board that Houzit is financially viable?’
    • ‘Will we be able to maintain our gross profit margins in the predicted downturn?’

    Jim and you both agreed that it had been a tough quarter with the economy still in recession and the impact this was having on the retail sector. Banks are raising interest rates in line with the increased upward international pressure and Houzit has a significant part of their loan funds on a variable interest rate which changes directly with market conditions. Jim was pleased that the sales seem to be holding up reasonably well as first-quarter results are generally impacted by factors relating to public and school holidays but he was concerned about the discounts that had to be given to generate these sales.

    That’s going to hurt us at some point Jim said. ‘Just a pity we could not get into some national magazines this quarter to promote the store offers. I’m sure that would have helped us exceed the budgets you set. I guess we will just have to spend that advertising money in the next quarter’ Jim said. ‘I still think we are running our wages and salaries a bit high. The industry benchmark for wages and salaries is close to 11% of sales’

    Jim went on to explain, ‘One of our contingency plans in a slowing economy is to reduce our exposure to debt by applying our profits to the repayment of the long term debt. This will help reduce the interest burden on the business and take some pressure off the diminishing profits. It would also be of interest to determine the impact that our debtors have on the cash flow of the business from 2010/11.’

    You are a beneficiary of the company’s profit bonus scheme that is based on the profitability of the company’s financial reports which you are required to prepare. You also prepare the departmental reports that form the basis of the performance review of the managers. You are the manager of the finance/administration and prepare this department’s report as well.

    You met that afternoon with Celina and she provided you with the following report on the actual results for the quarter ended 30 September 2011.

     

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    Houzit Pty Ltd
    Actual ResultsQtr 1
    Revenue
    Sales3,371,200
    – Cost Of Goods Sold1,955,296
    Gross Profit1,415,904
    Gross Profit %42%
    Expenses
    – Accounting Fees2,500
    – Interest Expense28,150
    – Bank Charges380
    – Depreciation42,500
    – Insurance3,348
    – Store Supplies790
    – Advertising150,000
    – Cleaning3,325
    – Repairs & Maintenance16,150
    – Rent660,127
    – Telephone3,100
    – Electricity Expense5,245
    – Luxury Car Tax12,000
    – Fringe Benefits Tax7,000
    – Superannuation37,404
    – Wages & Salaries410,500
    – Payroll Tax19,741
    – Workers’ Compensation8,312
    Total Expenses1,410,572
    Net Profit (before tax)5,333
    Income Tax1,600
    Net Profit3,733
    GST cash flow – Actual

    Cash flow analysis – GSTQtr 1
    GST Collected337,120
    Less GST Paid279,988
    GST Payable57,132
    Aged debtors – Actual

    AGED DEBTORS BUDGETQtr 1
    Sales3,371,200
    % Debtors Sales22%
    Total Debtors741,664
    Current585,915
    30 days111,250
    60 days37,083
    90 days7,417
    Total Debtors741,664

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    Budget variance report template

    According to the organizational policy and procedures, the following format is to be used when preparing a budget variance report.

    Houzit Pty Ltd
    Variance to Budget
    xxx Quarter ended mmm-yyyy
    Actual ResultsBudget-QxActual-Qx$
    Variance
    % VarianceF or U
    Salesx,xxxx,xxxx,xxxx%F or U
    – Cost Of Goods Soldx,xxxx,xxxx,xxxx%F or U
    Gross ProfitCalculationCalculationCalculationx%F or U
    Gross Profit %%%%x%F or U
    Expenses
    – Accounting Feesx,xxxx,xxxx,xxxx%F or U
    – Interest Expensex,xxxx,xxxx,xxxx%F or U
    – Bank Chargesx,xxxx,xxxx,xxxx%F or U
    – Depreciationx,xxxx,xxxx,xxxx%F or U
    – Insurancex,xxxx,xxxx,xxxx%F or U
    – Store Suppliesx,xxxx,xxxx,xxxx%F or U
    – Advertisingx,xxxx,xxxx,xxxx%F or U
    – Cleaningx,xxxx,xxxx,xxxx%F or U
    – Repairs & Maintenancex,xxxx,xxxx,xxxx%F or U
    – Rentx,xxxx,xxxx,xxxx%F or U
    – Telephonex,xxxx,xxxx,xxxx%F or U
    – Electricity Expensex,xxxx,xxxx,xxxx%F or U
    – Luxury Car Taxx,xxxx,xxxx,xxxx%F or U
    – Fringe Benefits Taxx,xxxx,xxxx,xxxx%F or U
    – Superannuationx,xxxx,xxxx,xxxx%F or U
    – Wages & Salariesx,xxxx,xxxx,xxxx%F or U
    – Payroll Taxx,xxxx,xxxx,xxxx%F or U
    – Workers’ Compensationx,xxxx,xxxx,xxxx%F or U
    Total ExpensesCalculationCalculationx,xxxx%F or U
    Net Profit (Before Tax)CalculationCalculationx,xxxx%F or U
    Income TaxCalculationCalculationx,xxxx%F or U
    Net ProfitCalculationCalculationx,xxxx%F or U

    Note: F = Favourable, U = Unfavourable

    Debtor aging ratio template

    2009/102010/112011/12
    Trade Debtors
    Sales
    Debtor Days

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