NEW
Year 9 Business - Term 2 - Week 8
Maintaining Financial Records
Purpose and use of financial records
By law, all Australian businesses are required to keep business records
Creating and keeping good records will help you to manage cash flow, demonstrate your financial position when applying for a loan, complete and lodge your tax return and superannuation records, and make informed decisions about the operation of the business
The table on the following slide lists the range of business records that Australian businesses are required to keep
Electronic records are generally accepted by government departments such as the Australian Taxation Office (ATO) and ASIC, but hard copies may be requested, particularly if the electronic data is lost or corrupted
Profit and Loss Statement
Also known as a Revenue Statement - an accounting report showing the amount of revenue (sales) earned, expenses incurred and the resulting profit or loss over a period of time
Does not show the cash movement of a business
Includes purchases made on credit and sales for which money has not yet been received. It also includes items that have been used but not yet paid for or even charged. e.g. electricity bills only arrive every three months, so a profit and loss statement would include an estimate for the electricity used even if the business hasn't yet been charged for it
Measures whether the the costs of the business are greater or less than its income (Revenue - expenses = profit or loss)
If revenue is greater than expenses then you make a profit
If expenses are greater than revenue then youmake a loss
Usually completed for a financial year for the ATO and monthly to monitor its performance. Due to high set-up costs, most businesses make losses for months or years before seeing a profit
Balance Sheet
Lists all the assets, liabilities and capital of the business
It is a financial snapshot of the business that canbe taken at any point in time
Assets are the equipment, stock (inventory), bank deposits and anything else the business owns
Liabilities are what the business owes to lenders and suppliers (creditors, if they sell to the business on credit instead of cash)
Capital is the money or other assets that have been contributed to the business by the owners. It is what the business owes the owners
The assets are listed on the left side of a balance sheet and the liabilities and capital on the right side
Ideally, the balances on the right and left should balance. Assets = Liabilities + capital
Cash Flow Statement
Differs from a profit and loss statement in that it simply shows the movement of cash into and out of a business
It enables the business to know whether there is enough cash to cover payments when they are due, or whether more borrowing is required
Businesses need to avoid having too much cash on hand. The extra cash is worth more if it is put towards making a profit instead of being idle
A cash flow statement starts with the amount of cash that was available at the beginning of a time period, such as the first day of a month. The cash coming in (receipts) are then listed, followed by the cash going out (payments). The total should then be the cash that is available at the end of a time period, such as the last day of the month
If cash is operated from one bank account, the closing cash position should be the balance of the bank account on that day
Taxes
The tax system in Australia is quite comprehensive
The goods and services tax, in particular, can be a deterrent for entering business
However, if the business maintains records as well as it should, tax records only require a little more work
Cash flow statements are easily adapted for GST reporting in the Business Activity Statement (BAS)
The profit and loss statement and balance sheet are required for income tax purposes
Wages records are needed to deduct tax from employees' pay
Other records are required for fringe benefits tax, customs duty (tax on goods bought from other countries), payroll tax, land tax, stamp duty and council rates
This statement lists the assets, liabilities and capital of the business
Business Activity Statement
This statement lists the income and expenses of the business
This statement lists the taxes to be paid by the business
This statement lists the flow of cash through the business
Strategies to minimise risk and avoid insolvency and bankruptcy
As a business becomes more established, it is necessary to keep an eye on the future to avoid bankruptcy or insolvency
Insolvency occurs when the business can no longer pay its debts. Once a business is declared bankrupt by a court, its assets are sold. The money received from the sale allows creditors to be paid at least some portion of what they are owed
Maintaining good records enables the business to keep track of growth. If the business is growing, it could mean it can expand. However, expansion needs to be done carefully so that the business does not overextend itself; that is, so it doesn't have too much debt compared to its income
A business needs to budget for the replacement of ageing equipment and for changing the appearance of the business as fashions change. e.g. a clothing store needs to keep up with fashion not only with its clothes but with the design, lighting and general layout of the store. It also needs to ensure the clothes racks, shop counters and cash register are kept in good condition
Stock or inventory management can make or break a business. As sales volumes increase, it is important to have stock ready to meet demand. On the other hand, if sales are dropping, it is important not to have stock that the business will be unable to sell
The table on the next slide lists additional strategies that businesses can put into place to minimise risk and avoid insolvency and bankruptcy
Look for warning signs
Is the bank indicating insufficient funds?
Are your suppliers sending you reminders for payment?
Are you finding it hard to get credit?
Take action early and seek professional financial advice to review your business's finances
Risk management and insurance
All organisations face events that cause disruption to their business. Fire, flood and technological failures are some of the most common
Risk management can be defined as the processes involved in identifying, controlling and minimising the impact of uncertain events. Well managed businesses act to minimise potential sources of risk
Insurance is one of the most common ways businesses seek to protect themselves. Insurance provides protection against unexpected financial loss. Legislation requires workers compensation insurance for employees and compulsory third-party insurance for motor vehicles owned by the business
It is also advisable to have:
building insurance (if the building is owned by the business) and contents insurance
comprehensive insurance for motor vehicles
public liability insurance (protects the business from claims made in regard to negligence)
Ways businesses respond to changing economic conditions
Economic circumstances in which businesses operate can change rapidly and it is important that they have the flexibility to respond to these changes
Periods of reduced economic activity occur from time to time
Consumer confidence falls, spending declines and unemployment increases
In these circumstances, businesses need to review and update their business plan
This might involve undertaking a SWOT analysis and a review of the business's financial situation - its sales, cash flow and the rate at which its stock is moving
It may also be necessary to review its debtor and creditor terms
Other strategies include a review of its pricing and the rate at which it innovates
Businesses should always be aware of the following:
Exchange Rates: These rates can impact on the general trading environment and not just direct costs. Exchange rates could affect how easy or profitable it is to do business with another country. A depreciating exchange rate makes it easier to sell goods and services into foreign markets. An appreciating exchange rate makes it more difficult
Interest Rates: High interest rates increase the cost of raising capital that entrepreneurs can invest in their business. Low interest rates makes it more affordable
Competitors: What are their strengths and weaknesses?
New Technologies and innovations: These could change the nature of the market and increase or reduce the demand for existing products and services
The pricing strategies of competitors: The only way a business can compete against discounting by competitors is to compete on the basis of quality. Supplying a superior product provides some protection against discounting
To counter the impact of any downturn, businesses can develop new marketing strategies, especially those that promote consumer loyalty
Loyalty cards and points systems (especially those linked to airline loyalty schemes such as the Qantas Frequent Flyer Program) are particularly effective
Government assistance is often considered a last resort but can be justified in situations where competition is limited
Government interventions can ensure that there is a 'level playing field' where businesses can compete fairly
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