Manage Small Business Finances
BSBSMB406A
INTRODUCTION ................................................ 4
1. Implement the Financial Plan .................................... 4
2. Monitor Financial Performance ................................... 4
1. Implement the Financial Plan...................................... 5
1.1 Identify Financial Information ................................... 5
Specialist Services ............................................ 6
1.2 Produce Financial Budgets/Projections ............................ 6
Cash Flow .................................................. 7
Relevant People ............................................. 7
1.3 Negotiate, Secure and Manage Business Capital ................... 7
1.4 Legal Requirements for the Australian Taxation Office (ATO) ............ 8
Taxation Requirements ........................................ 9
Key Records of the Small Business Record Keeping System ............. 9
Setting Up a New Business .................................... 10
1.5 Credit and Debtors ......................................... 11
Debtors/Accounts Receivable ................................... 11
Creditors/Accounts Payable .................................... 11
Activity 5a ................................................. 11
Source Documents .......................................... 11
Activity 5b ................................................. 12
1.6 Key Performance Indicators (KPIs) .............................. 12
What are Key Performance Indicators? ............................ 12
Lag, Lead and Stable KPIs ..................................... 13
Types of Effective KPIs ....................................... 14
Choosing Good KPIs ......................................... 14
Monitoring Financial Performance ................................ 15
Activity 6 .................................................. 15
The Financial Performance of your Business: ....................... 15
1.7 Implementation of the Business Plan ............................ 15
Activity 7 .................................................. 16
2. Monitor Financial Performance ................................... 17
2.1 Financial Performance Targets ................................. 17
Financial Measures of Performance .............................. 17
Gross Profit Margin .......................................... 17
Operating Expense Ratio ...................................... 17
Activity 8 .................................................. 17
Breakeven Analysis .......................................... 17
2.2 Marketing and Operational Strategies ............................ 18
Assessing the Market Plan ..................................... 18
Activity 9a ................................................. 19
Non-Financial Measures ...................................... 19
Activity 9b ................................................. 19
2.3 Financial Ratios ............................................ 20
Financial Ratios ............................................. 20
Activity 10 ................................................. 22
2.4 Assess Financial Plan ....................................... 22
Cost-Benefit Analysis ......................................... 23
Monitoring Budgets .......................................... 23
Auditing a Budget ........................................... 23
Non-Financial Measures ...................................... 23
Activity 11 ................................................. 24
Texts and References (by author) ................................ 25
Activities Completed for: Manage Small Business Finances BSBSMB406A ... 26
The following information has been developed or obtained from the following:
TONI&GUY International School of Hairdressing
NEW SOUTH WALES TECHNICAL AND FURTHER EDUCATION COMMISSION
UNIT GUIDE
How to use the learner guide
The learner guide delivers the learner with the basic structure of each required unit
of competency. Extended in depth information is provided in the student notes
sections for each competency on the soft wear provided by your educator.
INTRODUCTION
Unit Purpose
At the end of this unit learners should have the skills and knowledge required to implement, monitor
and review strategies for the ongoing management of a small business’s finances, including the day-today financial management. Specifically, learners should be able to:
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Implement the financial plan
Monitor financial performance
This unit applies to existing small business owners/managers, and to those wishing to set up a new small
business. It could also apply to managers of a department in a larger organisation.
Elements of Competency and Performance Criteria
1. Implement the Financial Plan
1.1 Identify financial information requirements and obtain specialist services, as required, to profitably
operate and extend the business in accordance with the business plan
1.2 Produce financial budgets/projections, including cash flow estimates, as required for each forward
period, and distribute to relevant people in accordance with legal requirements
1.3 Negotiate, secure and manage business capital to best enable implementation of the business plan
and to meet the requirements of financial backers
1.4 Develop and maintain strategies to enable adequate financial provision for taxation in accordance
with legal requirements
1.5 Develop, monitor and maintain client credit policies, including contingencies for debtors in default,
to maximise cash flow
1.6 Select key performance indicators to enable ongoing monitoring of financial performance
1.7 Record and communicate financial procedures to relevant people to facilitate implementation of the
business plan
2. Monitor Financial Performance
2.1 Regularly monitor and report on financial performance targets and analyse data to establish the
extent to which the financial plan has been met
2.2 Monitor marketing and operational strategies for their effects on the financial plan
2.3 Calculate and evaluate financial ratios according to own/industry benchmarks
2.4 Assess financial plan to determine whether variations or alternative plans are needed, and change as
required
NOT FOR SALE. PROPERTY OF TONI&GUY AUSTRALIA
1. Implement the Financial Plan
1.1 Identify Financial Information
Financial information is essential information you require when setting up a business or assessing an
existing business’ profitability.
Financial plans can include:
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analysis of sales by product/service, identifying where they were sold and to whom
cash flow estimates for each forward period
current financial state of the enterprise (or owner/operator)
estimates of profit and loss projections for each forward period
financial performance to date (if applicable)
likely return on investment
monthly, quarterly or annual returns
non-recurrent assets calculations
profit, turnover, capital and equity targets
projected profit targets, pricing strategies, margins
projections of likely financial results (budgeting)
projections, which may vary depending on the importance of such information and the stage in the
life of the business
resources required to implement the proposed marketing and production strategies (staff,
materials, plant and equipment)
review of financial inputs required (sources and forms of finance)
risks and measures to manage or minimise risks
working, fixed, debt and equity capital
working in conjunction with external consultants e.g. investment analysts, accountants, financiers
accrual of staff leave/entitlements
asset management strategies which may include:
 owning, leasing, sharing, syndicating
 maintaining and deploying assets
asset registers
balance sheets
bookkeeping/accounting/stock/job costing records
business activity statements
business capital
cash book
cash flow forecasts
financial budgets
financial indicators, which may be short, medium and/or long term
payroll records, superannuation entitlements
profit and loss statements
ratios for profitability, liquidity/efficiency/financial structure
risk management
statements/forecasts
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012
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taxation returns including goods and services tax
Activity 1a
Select 5 of the above terms and concepts and write a short brief on the benefit they have on the
understanding financial status of the business
Specialist Services
These are service/people that have qualifications or long term experience in business who you may feel
it is necessary to utilise for the short and long term profitability of your business. If you have no prior
business experience it would be advisable to use an accountant and bookkeeper to help with the
accounts and legal aspects of the business even if it’s just for the short term. It is a legal requirement to
have a qualified accountant lodge your business Taxation returns annually.
Specialist services can include:
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accountants
business brokers/business consultants
government agencies
industry/trade associations
lawyers and providers of legal advice
providers of training in accounting software
Additional information can be provided by:
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mentors
business partners
family members
online gateways
Activity 1b
a. Research the type of Accountant you would require for a hairdressing business.
b. Which government agencies are related to a hairdressing business?
c. Research two types of accounting software that would be suitable for a hairdressing business for
accounting/payroll and appointments /client data/stock control.
d. Who could you use as a business mentor and why?
1.2 Produce Financial Budgets/Projections
Prior to starting a business or taking over an existing business it is necessary to have a financial
projection and a budget usually for a three year period. A financial projection would need to include
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012
cash flow estimates on possible turnover for a new business or on pervious turnover of an existing
business. This would be a Profit and Loss Statement (P&LS).
Cash Flow
For a financial plan to work we firstly must understand cash flow.
Cash flow may include:
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anticipated payments
anticipated receipts
customer credit policy/debt recovery
taxation provisions
Relevant People
The financial plan may need to go to the following people or associations:
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family members
financial backers
franchise agency
owner/operator
partners
regulatory bodies
trade or industry associations
Activity 2
Using the Template 1 spread sheet (provided by your educator) forecast your new/existing business 12
month P&LS. This will link to a 3 year forecast spread sheet including the weekly breaking even point.
The information you will require is the estimated values for your new businesses or your previous 12
month P&LS for existing businesses:
 turnover
 wages cost
 cost of goods
 bank loans-repayments
 insurances
 amenities
 sundry’s
1.3 Negotiate, Secure and Manage Business Capital
When setting up a new business or purchasing an existing business you may need to raise business
finance for purchase, setting up, expansion and working capital. This is called financial backing.
Financial backers can include:
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012
 financiers/banks/lending institutions
 leasing and hire purchase financiers
 providers of venture capital
 shareholders/partners/owners/family/friends
(See extended information in student notes Raising Business Finance.pdf)
Activity 3
Research 3 different ways of raising finance to include:
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loan requirements/security
repayments and loan period
interest payable
contracts
1.4 Legal Requirements for the Australian Taxation Office (ATO)
For a business to meet the legal requirements for the ATO it is important to keep the correct
documents. Good business records will help you manage your business, meet your tax obligations and
make sound business decisions.
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012
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.
WHAT GENERAL RECORDS DO YOU NEED TO KEEP?
This is not an exhaustive list and you may have to keep other documents.
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Income and Sales Records - Keep records of all sales and barter transactions, for example, invoices,
receipt books, cash register tapes and records of cash sales.
Expense or Purchase Records - Keep records of all business expenses to include:
 rent
 stock
 equipment
 amenities i.e. electricity – telephone etc.
 Insurances
 Sundry’s
Records could include:
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Receipts, invoices, cheque butts or credit card vouchers, and diaries to record petty cash expenses.
Bank Records - Keep all bank records, such as bank statements and loan documents.
Asset Purchase Records - Keep details of what assets you buy and what you spend on those assets.
An asset register can help you keep track of these expenses.
Contracts and Agreements - Keep copies of contracts and franchise or other agreements.
Year-end Records - These include creditor’s lists, debtor’s lists and worksheets for depreciating
assets.
GST records - The main GST records you need to keep are tax invoices and adjustment notes
(remember you need a tax invoice to claim GST credits). Also keep any other document that records
an election, choice, estimate, determination or calculation made for the purposes of GST law.
Payments to employees - If you have employees, you need to keep:
 records of wages, allowances and termination payments made to them
 records of superannuation payments
 records of fringe benefits tax calculations
 copies of tax file number declarations or withholding declarations
 copies of any contracts you have with contractors
Stock Take Records - Businesses that sell goods usually have to do a stock take (a physical count and
valuation) on 30th June each year because changes in stock levels are taken into account in working
out taxable income for the year.
Motor Vehicle Records - You may have to keep logbooks; lease or loan documents or yearly
odometer readings for motor vehicles you use in your business.
Key Records of the Small Business Record Keeping System
There are many different records, which a small business may keep. The following are the key records
kept by most small businesses:
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012
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Cash Payments - a journal which lists the payments made.
Cash Receipts - a journal which lists cash received.
Cash Book - 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 - a book that records small expenses paid for by the business such as postage, milk and
coffee, etc.
Bank Reconciliation Statement - used to reconcile your Cash Book.
Payments to the RTO required from the business:
 BAS – Business Activity Statement
 PAYG – with holding
(See extended information in student notes)
Activity 4a
Research the following and explain what there benefits are to the business:
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a single entry system
a double entry system
Setting Up a New Business
Whether you are starting a business from scratch or you are purchasing an existing business you will
need to do some of the following:
 apply for a business name
 decide on the business structure
 apply for an Australian Business Number (ABN)
 apply for a Tax File Number (TFN)
 apply for an Australian Company Number (ACN)
 register for Pay As You Go tax (PAYG)
 register for Goods and Service Tax (GST)
 join a superannuation company
 register with workers compensation insurance
 apply for business insurance
 open a bank account
 register for Fringe Benefits Tax (FBT)
 register for payroll tax
 register for intellectual property
 register with Australian Security Investment Commission (ASIC)
Activity 4b
Research the above subjects and find out:
a. how and where you apply for them
b. which ones would you require for your small business as a sole trader
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012
1.5 Credit and Debtors
Credit and debtor accounts need to be closely monitored, as they are critical to the cash flow of a small
business
Debtors/Accounts Receivable
Debtors are people/companies 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, 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.
(See extended information in student notes Debtors and Creditors)
Creditors/Accounts Payable
Creditors are the people/companies who a business owes money too. It is important to keep track of
money we owe other people/companies.
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.
(See extended information in student notes)
Activity 5a
Develop the following:
a. a credit/debtors policy for your business
b. a credit and debtor ledger on excel
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.
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Receipts - records the payment of money.
Bank slips - provides a record of bank deposits, which allows you to check your records against the
bank statement.
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012
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Bank Statements - shows bank transactions and allows you a basis for checking your records against
theirs.
 Cheque Butts - record of payments made.
 Diary - records minor expenses where a tax invoice or receipt may not be provided.
 Petty Cash - record of small cash purchases.
 Tax Invoices - records purchase information and taxation paid. Please note that this is the most
important item under GST legislation.
 Statements - issued by suppliers recording purchases 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.
(See extended information in student notes)
Activity 5b
Develop a source document system for your business to include:
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order forms
tax invoice
petty cash in/out recept form
daily reconciliation form
1.6 Key Performance Indicators (KPIs)
What are Key Performance Indicators?
Key performance indicators are simply measures that track the performance of a business against given
goals or objectives. They measure the performance of a given continuous (such as manufacture) or a
discrete repeated process (such as sales or customer service) and must be closely related to the
objectives of that process. They should not be measures of project timelines or product specifications as
these are not measuring the achievement of the overall objectives of the process but rather a very
limited perspective of it.
Key performance indicators will vary from business to business and will depend on what the overall
goals of the business are. For example, an electricity provider service centre whose goal is to provide the
best possible customer service to its’ clients must use ‘the number of clients phoned that are answered
in less than 30 seconds’ as a KPI to measure progress towards the particular goal. A small business
whose goal is to ensure satisfied clients may use ‘the number of sales made to previous clients’ as a KPI.
It is important that key performance indicators are easy to understand, specific, able to be measured
and achievable in order to be effective indicators of a business’s progress. KPIs such as ‘to be the most
well-liked businesses are useless because there is no clear way to measure that. Likewise, a KPI such as
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012
‘gaining new customers’ is too vague because there is no clear way to distinguish when a customer
becomes an old customer. You can’t get realistic sense of the situation if you cannot measure it
accurately and get a clear understandable result.
Lag, Lead and Stable KPIs
The timing of the measurement of the KPI is important. There are three types of KPI timing with
different functions which will relate to the process being measured. These are:
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lag KPIs, which measure the past result
lead KPIs, which predict outcomes on the basis of their results
stable or current KPIs, which measure current performance
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012
Types of Effective KPI’s
AREA
Financial Performance
Internal Operational Performance
Customer Orientation
Learning and Growth
Environment and Community (*)
Employee Satisfaction (*)
SPECIFICS
Utilisation of assets
Optimisation of working capital
Focus on top 10% of customers, etc.
Delivery in full, on time
Effective relationship with key
stakeholders
Optimising technology
Seamless service
Increased customer satisfaction, etc.
Empowerment
Increasing expertise
Adaptability, etc.
Supporting local business
Community leadership
Environmental compliances and
leadership
Positive company culture
Retention of key staff
Increased recognition
Choosing Good KPIs
If key performance indicators are chosen and measured well, they can give a clear and detailed picture
of the financial health of the business. This will indicate any problems and wastage, which will allow
specific responses to the underlying causes. However, a poorly chosen KPI will result in a lot of wasted
time and possibly resources as well.
Choose KPI’s that:
 Reflect business goals
 Relate directly to process performance
 Can be measured
 Are measured by the process
 Are readily understood by everyone
For small businesses, KPI’s would be ideal in tracking net profit, sales revenue, production efficiencies,
and market positions. Key performance indicators assist you to have the best possible understanding of
your business which will mean that you can plan its growth and respond to its market effectively.
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012
Monitoring Financial Performance
The financial performance of any business changes with the market and the circumstances it finds itself
in. It is important to know how healthy the business is financially to make the most of changes that
occur. The financial plan should contain some ways of measuring the financial performance as well as
some targets for each of them. These targets will indicate whether the business is on target to achieve
the goals in the financial plan or not.
Financial ratios may include:
 current ratio
 days debtors outstanding
 days stock on hand
 expense percentages
 gross profit percentage
 liquid ratio
 net profit percentage
 proprietary/debt ratio
 return on investment/return on total assets
 staff productivity measures
 stock return rates
(See extended information in student notes)
Activity 6
Identify four financial performance targets that are written in your financial plan and write them in the
left hand column of the table below.
Calculate the measures using the profit and loss statement or balance sheet data for your business that
you brought with you or have produced for your new business and write the results in the right hand
column of the table below.
The Financial Performance of your Business:
FINANCIAL PERFORMANCE TARGETS
FINANCIAL PERFORMANCE RESULTS
1.7 Implementation of the Business Plan
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012
Record and communicate financial procedures to relevant people to facilitate implementation of the
business plan.
For the business plan to be effective it is important that the relevant people within the business know
the business goals and KPIs .They also need to know how they are going to be implemented and
recorded.
Content could include developing procedures and assigning responsibilities (with appropriate separation
of duties) for:
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cash management – balancing till, receipting of money, banking, petty cash, bank reconciliation
invoicing, managing Accounts Receivable
paying accounts
ordering, receiving and checking stock
recording stock movements
recording stock on hand
financial record keeping, and preparation of reports
meeting taxation obligations
preparation of Board/management reports
Activity 7
From your business plan and KPIs in the last section produce a plan to include:
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how will they be implemented
who will implement them
how will they be recorded
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012
2. Monitor Financial Performance
2.1 Financial Performance Targets
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.
From your business plan you have set out KPIs to assess the business performance and profitability. It is
vital that we measure the actual performance against these targets. 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/services. Many small businesses will have expectations as to what should be an
appropriate ratio based on industry figures or past experience. This is known as industry benchmarks.
This is calculated by dividing:
Gross Profit
-------------Sales
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.
This is calculated by dividing:
Total Operating Expenses
----------------------------Sales
Activity 8
Identify four financial areas you would need to monitor that would have a major effect on your profit &
loss from your business plan.
Breakeven Analysis
Breakeven analysis identifies the level of output or production needed to reach the point where sales
revenue equals total costs. This is the breakeven point where there is no profit or loss.
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012
2.2 Marketing and Operational Strategies
Within your business plan you will have set a budget that can be used for marketing the business .You
could have the most beautiful salon in Australia but if no one knows you are there you will not have a
successful business.
Most industries who deliver products and services direct to the general public can gain clients via word
of mouth however we need to attract a client base from day one.
Assessing the Market Plan
Content could include:
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Pricing strategies and effect on profitability
Changes in sales mix and effect on GP%
Effect of sales promotions and other discounts
Advertising cost versus benefits
Monitor actual expenditure against marketing budget
Product returns and warranty claims
Effect of excessive stock levels
Monitor freight costs, ordering frequency, EOQ
Monitor staffing levels & rosters
How much should you spend on your Marketing???
This is obviously a never-ending question that most business owners continue to ask every working
day.
In an ideal world, there would be a reference book that would give you the answer. Yes there are
Industry benchmarks but do you really just want to compare yourself with "Industry Averages"?
Exactly how much you spend can only be determined by your goals - so you MUST firstly know what
your business and marketing goals actually are.
A couple of questions for you:
How much interest can you earn with your Bank? - Probably about 6.5% per annum (May ‘07)
What average return can you get on property? - Approximately 5% - 15% per annum (depending on
where you buy)
What return can you get on the share market? - 10% - 15% per annum (if you’re lucky and really know
what you are doing.
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012
By effectively marketing your salon what return can you get? - Let’s say you spend $300 on a marketing
piece for your Salon and its distribution. From this you achieve 30 bookings and let’s assume you
make an average of $30 profit from each of these bookings. The Sums:
 30 Bookings x $30 Profit = $900 Profit
 Your marketing exercise cost $300
That’s 300% return on your marketing investment (in about 3 weeks). That doesn’t take into account the
lifetime value of any new clients you attracted.
Activity 9a
Describe how you will monitor your financial spending from your marketing budget.
Non-Financial Measures
To promote the business we need to look at non-financial ways of increasing business without having a
financial cost/out going for the business which is an excellent way to reduce your marketing budget.
Promotions to increase the number of new clients:
 Complimentary products that your product suppliers will give to use as a promotion for new clients
i.e. treatments
Rebooking incentives for staff:
 Contra deals with other businesses to use as incentives for staff
 Gifts from credit card points
 Complimentary products/equipment via product company
Improve Customer Service to insure client’s return:
 Always give to clients a complimentary massage
 Products complimentary from product company
Up selling recommendation for home care and in salon treatments
 Incentives as above for staff to help increase their up selling motivation
Activity 9b
Describe 3 non-financial measures for increasing profit within your business.
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012
2.3 Financial Ratios
Financial Ratios
Financial ratios are helpful ways of checking the financial health and performance of a business. They
can generally be calculated from simple financial data and are used to highlight trends in performance
(benchmarks) and compare financial performance with that of other businesses.
The following groupings of financial ratios are frequently used:


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

Liquidity ratios – short term finance availability
Asset turnover ratios – efficiency of asset use
Financial leverage ratios – long term financial viability
Profitability ratios – success at providing profits
Dividend policy ratios – prospect of future growth
Ratio type
Liquidity Ratios
A business ability to
meet its short-term
financial
obligations.
People who are
lending money to
the business over a
short term are
particularly
interested in this
type of ratio.
Ratio formula
The current ratio is the ratio
of current assets to current
liabilities:
Use
Short-term creditors prefer a
high current ratio since it
reduces their risk.
Shareholders may prefer a
Current ratio = current assets/ lower current ratio so that
current liabilities
more of the firm’s assets are
working to grow the
One drawback of the current
business. Typical values for
ratio is that inventory may
the current ratio vary by firm
include many items that are
and industry. For example,
difficult to liquidate quickly
firms in cyclical industries
and that have uncertain
may maintain a higher
liquidation values.
current ratio in order to
remain solvent during
downturns.
Asset Turnover
Receivables turnover = annual The receivables turnover
Ratios
credit sales / accounts
often is reported in terms of
How efficiently the
receivable
the number of days that
firm uses its assets
or:
credit sales remain in
or how quickly the
Average collection period =
accounts receivable before
firm collects its
accounts receivable / (annual they are collected. This
accounts receivable. credit sales / 365)
number is known as the
They sometimes are or:
collection period.
referred to as
Average collection period =
efficiency ratios, or 365 / receivable turnover
asset management
ratios.
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012
Financial Leverage
Ratios
An indication of the
long-term viability
of the firm.
Unlike liquidity
ratios that are
concerned with the
short-term, financial
leverage ratios
measures the
extent to which the
firm is using long
term debt.
Profitability Ratios
Measures the
success of the firm
at generating
profits.
The debt ratio is defined as
total debt divided by total
assets:
Divided Policy
Ratios
Provide insight into
the prospects of
future growth.
The dividend yield is defined
as follows:
Debt ratio = total debt / total
assets
Gross profit margin = (sales –
cost of goods sold) / sales
Dividend yield = dividends per
share / share price
The dividend payout ratio is:
Payout ratio = dividends per
share / earnings per share
Debt ratios depend on the
classification of long-term
leases and on the
classification of some items
and long-term debt or equity
The gross profit margin is a
measure of the gross profit
earned on sales. The gross
profit margin considers the
firm’s cost of goods sold, but
does not include other costs.
A high dividend yield does
not necessarily translate into
a high future rate of return.
It is important to consider the
prospects for continuing and
increasing the dividend in the
future and the payout ratio
indicates this.
A reminder about the use of financial ratios:
Ratios by themselves don’t mean a lot. They need to be compared with industry averages or with the
businesses previous results or forecasts. It is important that a number of ratios are used to give a broad
perspective on the financial health of the business. Using one ratio is not likely to provide a clear and
helpful perspective.
There is a temptation to use results from the end of the year only as that is the time when the
evaluation is being done. Results that rely on the data from one part of the year only are problematic as
seasonal changes might cause the result to be unreliable as an indication of the business financial health
as a whole. Average values should be used whenever the data is available otherwise a good deal of care
must be taken when interpreting the result
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012
Activity 10
Note three of the more useful financial ratios (that you have industry benchmarks for) in the left hand
column. Use the space in the middle column to show your calculations and note the corresponding
industry benchmarks in the right hand column of the table below:
Financial ratios
Calculate these here
Industry benchmarks
2.4 Assess Financial Plan
Assess financial plans to determine whether variations or alternative plans are needed, and change as
required.
Specialist services such as accountants and bookkeepers are recommended when assessing your
financial plan especially if you do not have any prior experience in reading accounts and producing
P&LS.
The areas to assess include:






Projecting future outcomes based on actual results to date
Review of goals/objectives and underlying assumptions
Assessing ability to take corrective action to counter gaps in performance
Developing an Action Plan to remedy gaps in performance
Revision of budgets where necessary
Development of contingency plans
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012
Cost-Benefit Analysis
Cost-benefit analysis involves comparing the costs and benefits of alternative uses for your business
resources.
It involves determining what the alternative uses are and then identifying what the costs of each
alternative would be. The evaluation should include both direct and indirect costs if you want to be
more exact.
Monitoring Budgets
When you have an operating budget, it is essential that you monitor and analyse the actual performance
of your business against the budget projections/financial plan. Should any deviations occur it is your
responsibility as the manager to address the issues that have caused it.
The first step is to determine if the budget was unrealistic or if the performance of the business needs to
improve, or both.
Auditing a Budget
Auditing generally involves checking financial records to determine their accuracy. Auditing a budget is
more specific; it involves checking to see if the figures represent a realistic view of the business
operations.
The bigger the organisation, the bigger the budget. The bigger the budget, the more potential there is
for incorrect estimates in the budget figures. This situation makes auditing the budget harder,
particularly if the data is incomplete, missing or unavailable.
Effectively auditing a budget requires an estimation process that is acceptable and/or reasonable. Issues
to consider are:
 previous budgets
 profit and loss statements
 balance sheets
 running costs/operating expenses
 payroll figures and inflation rates
Before auditing the budget, you should have the following information from the past three to five years
if they are available to you:
 Projecting future outcomes based on actual results to date
 Review of goals/objectives and underlying assumptions
 Assessing ability to take corrective action to counter gaps in performance
 Developing an Action Plan to remedy gaps in performance
 Revision of budgets where necessary
 Development of contingency plans
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
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012

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
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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
Activity 11
Produce an action plan for areas in the business that may need change and how you would implement
these changes and there monitoring for the future
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012
Texts and References (by author)
Anandarajah, A et al 2005, 3rd ed, Managing Finance, Pearson Education, Sydney, Australia ISBN 1
74103 250 5.
This is a general financial management text used in several TAFE programs that reviews approaches to
effect sound financial management.
Banks, A and J Gilbert 2005, 2nd ed, Budgeting, McGraw Hill, Sydney, Australia
ISBN: 0 0747 1171 7.
This is a sound general textbook, which provides information on and structures for developing budgets.
Birt, Ian. 2006 Manage Finances and Develop Financial Plans 3rd ed. Pearson Education: Australia
ISBN 0 7339 7730 0
This text is written to address this unit and the small business unit ‘Plan small business finance’ and
comes with a CD-ROM Instructor Manual.
Clarke, E. 2005, 5th ed, Accounting: Introduction to Principles and Practice, Thompson Education,
Melbourne, Australia
ISBN: 0 17 012739 7.
This is a widely used accounting text, which covers aspects such as sources of financing and capital
structures.
Hirsch, R 2004, Small Business Solutions, McGraw Hill, New York (USA)
ISBN 0 07 141435 5.
This book examines aspects of small business management relevant to this unit of competency.
Related web sites:
www.smallbiz.nsw.gov.au
www.ato.gov.au
This is the completion of the learner guide the assessment dates will be given to you by your educator.
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.
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.
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012
Activities Completed for: Manage Small Business Finances BSBSMB406A
Student name ___________________________________
Activity
Activity 1a
Activity 2b
Activity 2
Activity 3
Activity 4a
Activity 4b
Activity 5a
Activity 5b
Activity 6
Activity 7
Activity 8
Activity 9a
Activity 9b
Activity 10
Activity 11
Unit of competency
Completed
Sign/date by
educator
1.1 Identify Financial Information
1.1 Identify Financial Information
1.2 Produce Financial Budgets/Projections
1.3 Negotiate, secure and Manage Business
Capital
1.4 Legal Requirements for the Australian
Taxation Office (ATO)
1.4 Legal Requirements for the Australian
Taxation Office (ATO)
1.5 Credit and Debtors
1.5 Credit and Debtors
1.6 Key Performance Indicators KPIs
1.7 Implementation of the Business Plan and
2.1 Financial Performance Targets
2.2 Marketing and Operational Strategies
2.2 Marketing and Operational Strategies
2.3 Financial Ratios
2.4 Assess Financial Plan
TONY&GUY SCHOOL OF HAIRDRESSING/STAFF/ BSBSM406AManageSmall Business Finances/ LEARNER GUIDE/VER1 /JULY 12012