Post on 26-Dec-2015
INTERPRET FINANCIAL STATEMENTS AND REPORTS
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D2.TFA.CL7.02
Subject elements
This unit comprises three Elements:
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2
3Determine action to be taken on the basis of interpretation of financial information
Interpret financial information
Determine the context for financial information
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Assessment
Assessment for this unit may include:
Oral questions
Written questions
Work projects
Workplace observation of practical skills
Practical exercises
Formal report from supervisor
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Element 1:
Determine the context for financial information
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Determine the context for financial informationPerformance Criteria for this Element are:
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Identify the financial statements and reports used by the organisation
Define financial terminology commonly used by the organisation
Identify financial indicators commonly used by the organisation
Identify the frequencies with which financial information is required to be interpreted
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1
Determine the context for financial information
Performance Criteria for this Element are:
Identify the personnel responsible for providing financial information, reports and statements
Describe the non-financial indicators to be considered when interpreting financial information
Describe the operational areas to which the interpretation of financial information applies
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Importance of finance
Aspects of financial success
In order to be successful a good business should:
Earn a satisfactory profit for its owners
Use its short term and long term assets efficiently
Be able to pay its short term debts on time
Maintain adequate cash stocks to meet requirements
Provide a return on investment
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Accounting
Role of accounting
All organisations record their financial activities and consolidate this information:
In reports
That convey their financial achievements
Over arbitrary time periods
Of equal length
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Accounting
Role of accounting
Accounting is often referred to as the “language of business”
Principles and terminology that provide the structure for the information system
Reports that summarise financial activities
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AccountingCommon accounting terms and definitions
Accounting
Asset
Liability
Proprietorship
Debtor
Creditor
Operating cycle
Revenue
Expense
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Accounting
Financial accounting
Financial accounting includes the preparation, review and interpretation of financial reports or statements that accurately represent what the business own and owes
This is called the financial position of the business
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Financial statements & reports
Financial statements/reports
A financial statement is a formal record and summary of the financial transactions of a company.
It is the end product of the accounting process or cycle:
What are examples of commonly used financial statements and reports?
Refer to TM Pages 11-13
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Financial statements & reports
Purpose of financial statements
The objectives of financial statements are to provide information about the company’s:
Financial position
Financial performance
Changes in financial position
Cash flow
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Types of financial information
Range of financial information
The range of financial information potentially available to management is diverse and can be manipulated in many ways to create a variety of reports, statements and documents:
What types of financial information exist in a travel and tourism business?
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Types of financial informationSource documents
Invoices
Receipt books
Cash register audit tapes
Internal vouchers and promotional vouchers
Daily takings sheets
Credit card imprints and vouchers
Time / wages sheets
Purchase orders
Receipts
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Types of financial information
Journals
A journal is any internal book or record-keeping system that records entries and figures of daily financial transactions, in chronological order.
Provide a complete list of all transactions in the one place:
Cash Receipts Journal
Cash Payments Journal
Sales Journal
Petty Cash Journal
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Types of financial information
Accounts
Current Assets
Fixed Assets
Current Liabilities
Long-term Liabilities
Operating Revenues
Cost of Goods Sold
Operating Expenses
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Types of financial information
Trial balance
Lists all the ledger accounts in the following order with their current balances:
Assets (current and non-current)
Liabilities (current and non-current)
Owners Equity
Revenue
Expenses
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Types of financial information
Statement of Financial Position / Balance Sheet
A balance sheet is a financial statement that summarises at a specific point of time a company's:
Assets
Liabilities
Equity
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Types of financial information
Statement of Financial Performance / Profit and Loss Statement
Statement of comprehensive income or profit & loss statement is a financial statement that measures a company's financial performance over an accounting period:
Revenue
Less Cost of Goods Sold
= Gross Profit
Less Operating Expenses
= Net Profit
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Types of financial information
Cash flow reports
Critical in the operation of any business, the cash flow report indicates the present financial liquidity of the property
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Types of financial information
Invoices
These documents come from suppliers and show stock delivered by:
Quantity
Type, size
Unit cost
Total for the particular delivery
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Types of financial information
Budgets
A statement of management’s planned outcomes for the business, expressed in dollars or quantities to achieve its objectives for a precise period of time:
What types of budgets are there?
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Types of financial information
Types of budgets
Sales budgets
Labour budgets
Material budgets
Inventory budget
Overhead budgets
Capital expenditure budgets
Budgeted Financial Performance statement
Cash budgets
Budgeted statement of Financial Position
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Types of financial information
Purchase summary reports
These reports group purchases by supplier and category
Present an overview of where the purchases are being made, and how much is being spent
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Types of financial information
Variance reports
This report provides an overview of all variances that have been identified throughout the property
Variances between ‘budget’ figures and ‘actual’ figures
Cover both the positive and the negative variances, and will present both dollar figures and percentages
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Types of financial information
Wastage reports
These reports will highlight:
Stock that has not been used as intended, to produce revenue
Situations where too much perishable stock is being bought
Storage practices that are sub-standard and thus causing product loss
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Types of financial information
Sales reports
This report condenses revenue figures from all the revenue areas into one detailed document
Set out and compared to budgeted figures
Comparisons with the same time last year, together with a running year-to-date total
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Types of financial informationSupporting information
Number of actual enquiries
Number of customers
Units sold
Types of packages or tours booked
Actual products and services booked
Average spends of customers
Staff wage costs
Productivity
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Types of financial information
Banking information
Bank statements
Bank Reconciliations
Bank deposit documentation
Merchant statements
Cheque books
Credit card transaction statements
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Types of financial information
International Air Transport Association (IATA) reports
The International Air Transport Association (IATA) is a trade association of the world’s airlines:
What topics are covered in their reports?
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Types of financial information
Billing and Settlement Plan (BSP) documentation
IATA BSP documentation includes:
Standard Traffic Documents (STDs
Standard Administrative Forms (SAFs)
Forms raised by airlines
BSP Calendar
BSP Manual for Agents
BSPlink Manuals
COMPLETE ACTIVITY 1
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Financial indicators
Financial indicators or benchmarks
Many business use financial indicators or benchmarks to judge the way the business is performing:
What is a benchmark?
What in an indicator?
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Financial indicators
Types of financial indicators and benchmarks
Financial indicators and benchmarks may be based on:
Costs
Sales
Profit
Operating performance
What are examples of indicators & benchmarks for each category?
COMPLETE ACTIVITY 2
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Frequencies for financial informationFinancial accounting period
Every accounting entity must collate transactions into financial reports in a timely manner
This requires that all organisations set specific time periods of equal length for reporting and measuring financial results
Each financial report must clearly state the time period being reported, known as the accounting period
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Frequencies for financial informationFinancial accounting period
The accounting period is the period with reference to which accounting books of any company are prepared.
It is the period for which accounting books are:
Closed
Balanced
Financial statements are prepared
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Frequencies for financial informationFinancial accounting period
Generally, the accounting period will be:
Daily
Weekly
Monthly
Quarterly
Half-yearly
Annually
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Frequencies for financial informationFinancial accounting period
What impacts the frequency of financial information, statements or reports to be prepared?
COMPLETE ACTIVITY 3
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Financial information personnel
Personnel involved in preparing and using financial information
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It is important to
identify personnel
responsible for:
Providing financial information
Users of financial information
Financial information personnel
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Personnel responsible
for providing financial
information
Accounting staff
Departmental heads
Managers
Supervisors
Head office
Providers, suppliers
and carriers
Financial information personnel
Users of financial information
Managers
Shareholders or current investors
Potential investors
Financial institutions
Suppliers
Customers
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Financial information personnel
Users of financial information
Potential Employees
Existing Employees
Competitors
General Public
Government
COMPLETE ACTIVITY 4
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Non-financial indicators
Importance of non-financial indicators
Whilst financial indicators will be the primary focus on analysing the financial success of a travel and tourism operation, it is essential that non-financial indicators are also taken into account.
What are examples?
How do they differ from financial indicators?
How can they be beneficial?
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Non-financial indicators
Types of non-financial indicators
Customer service levels
Customer satisfaction levels
Safety
Condition of property, systems, equipment and facilities
Ambience of the property
Cleanliness
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Non-financial indicatorsTypes of non-financial indicators
Staff training
Complaints
Community participation
User friendly experience
Employee satisfaction
Repeat customer business
Awards
COMPLETE ACTIVITY 5
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Operational areas requiring financial information Each travel and tourism establishment will have
different structures to meet the needs of their operations and the types of products and services they provide to their customers
Regardless of the organisational structure established, it is essential that financial information is captured and assessed in relation to every unit within the business
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Operational areas requiring financial information
Segments of an organisation
The financial statements are prepared for the company and business units.
Logical element or segment of a company are called:
Business units
Departments
Divisions
Cost centres
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Operational areas requiring financial informationTypes of business units
Outlets
Geographical offices
Specific sales related areas
Types of customers / market segments
Accounting
Production
Marketing
Research & development
Human resources, and Sales and marketing
COMPLETE ACTIVITY 6 Slide 48
Element 2:
Interpret financial information
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Interpret financial information
Performance Criteria for this Element are:
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Review the financial information provided
Verify information contained within the material provided
Undertake statistical analysis of the financial information provided
Draw conclusions from the financial information provided
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Review financial information
Review financial information
From a management perspective there is an ongoing need to review financial information in terms of its day-to-day impact on work operations and the attainment of organisational goals
Why is it important to review financial information?
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Review financial information
Reasons to review financial information
Ascertain accuracy of information collected
Determine importance of information
Meet legally imposed taxation and other business requirements
Demonstrate due diligence in the operation of the business
Develop a growing resource to help evaluate the performance of the business
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Review financial information
Reasons to review financial information
Compare actual business performance to budgeted/expected figures
Identify strengths and opportunities
Identify problems in a timely manner
Identify areas requiring improvement
Assist in making future decisions
Identify its current financial position
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Review financial information
Reviewing financial information
Reading the material
Gaining a general appreciation of what the information contains
Comparing statistics to previous periods
Identifying trends
Determining if any trigger points or red flag situations have arisen
Clarifying queries
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Verify financial information
Importance of verifying financial information
One of the first things to do when reviewing financial records is to view the documents with a view to convincing yourself the data they contain is accurate and complete:
Why is this important?
How can you verify financial information?
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Verify financial information
Financial maintenance policies and procedures
Each organisation will need to have established policies and procedures in order to ensure financial information collected, collated and included in statements or reports is verified and determined to be an accurate reflection of actual activities:
What are examples of policies and procedures used to ensure financial reporting is done accurately?
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Verify financial informationFinancial maintenance policies and procedures
The records to be created and maintained
Naming protocols for budgets and budget lines
Timelines for updating records
Frequency of report generation
Identification of types of reports to be produced
Type of accounting system to be used
Qualifications of people
Distribution list for records and reports
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Verify financial information
Financial maintenance policies and procedures
Storage and security protocols for the data
Accounting standards to be applied
Reviews and evaluations of the policies and procedures
Triggers (red flags) for individual statistics, KPIs or data
Auditing requirements
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Verify financial information
Activities associated with verifying financial information
Checking source documentation
Ensuring all relevant documentation, including source documentation has been provided
Verifying ‘brought forward’ figures from previous documentation
Ensuring only charges relevant to the business/unit have been posted
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Verify financial information
Activities associated with verifying financial information
Ensuring all revenue for the business/unit has been posted
Checking extensions and calculations within the documentation
Ensure financial information has been 'balanced'
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Verify financial information
Identifying discrepancies
What are common types of discrepancies?
What causes them?
How can they be identified?
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Undertake statistical analysis
Importance of financial information analysis
Interpretation of financial information is required to measure the success or otherwise of trade for the period in question and to plan future action:
How can you do it?
What would you analyse?
How can you measure financial success or failure?
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Undertake statistical analysis
Why analyse financial information?
Interpretation and analysis of financial information is required to:
Measure the success or otherwise of trade/operations for the period in question
Plan future action
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Undertake statistical analysis
Why analyse financial information?
The key in interpreting and then analysing financial information is to be able to:
Explain what is happening
Understand why it has happened
How you can fix it (if required)?
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Undertake statistical analysis
Objectives of financial analysis
Evaluate past performance
Assessment of current position
Prediction of future business position and strategies
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Undertake statistical analysis
Undertaking analysis
Analysis involves comparing the actual performance against:
Budget
Forecast
Industry leaders
Industry average
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Undertake statistical analysis
Measuring the financial position
Select financial analysis method
Conduct financial analysis
Identify significant variances
Determine the cause of significant variances
Take corrective action as required
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Financial analysis methods
Select financial analysis method
The 3 common analysis methods are as follows:
Horizontal
Vertical
Ratio
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Financial analysis methods
Horizontal Analysis
Methods of financial statement analysis generally involve comparing certain information:
Across periods
Across companies
Against benchmarks
Measured:
Dollar analysis
Percentage analysis
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Financial analysis methods
Vertical analysis
Vertical analysis is most often used in tourism organisations to monitor and control expenses that appear on an income or profit and loss statement
The amount of each expense is divided by total revenue and converted to a percentage
COMPLETE ACTIVITIES 7 & 8
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Financial analysis methods
Ratio Analysis
Ratio is a mathematical way of expressing one number in terms of another
A ratio is regarded as a statistical yardstick
Relationship between two or various figures can be compared or measured using ratio.
Total Current Assets Total Current Liabilities
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Financial analysis methods
Ratio Analysis
Ratio analysis uses a number of different measuring devices:
Ratios – such as ‘working capital ratio of 2:1’, or ‘the ratio of FITs (Fully Independent Travellers) to group tour guests is 4.5:1’
Rates – such as ‘debtors turnover is 6.8 times per year’
Percentages – such as ‘the gross profit margin for the department is 37%’
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Liquidity (short term stability) ratios
These ratios show us whether or not we can meet our short term debts and how speedily we can pay them.
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Current ratio = Current assets
Current liabilities
Quick asset ratio = Current assets – (stock + prepaid expenses)
Current liabilities
Working capital = Current assets – current liabilities
Activity ratios
Asset turnover ratio
This ratio tells us how efficiently we use our assets to provide us with income:
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Asset turnover ratio:Total sales
Total assets
Activity ratios
Average Inventories Turnover (Stock Turnover)
This calculation shows how long it takes to “turnover” or sell the inventory of the organisation
Debtors turnover ratio
This ratio tells us how skilful we are at collecting our debtors
It shows the number of days it takes to collect in monies from our customers
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Debtors turnover ratio = Average debtors
Average daily credit sales
Profitability ratios
Gross Profit ratio
Gross profit ratio demonstrates the direct relationship between Sales and the Cost of Goods Sold
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Gross profit ratio = Gross profit
x100 Net sales
Profitability ratios
Net Profit ratio
This shows how much of each sales dollar becomes profit
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Net profit after tax*x100
Net sales
Profitability ratios
Return on Investment (ROI)
ROI indicates the efficiency of management’s decisions regarding the purchase and use of assets
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(Net operating profit + tax + interest)x100
Average total assets
Long term solvency ratios
Leverage (Gearing) ratios
These ratios test an entity’s financial stability from a longer term point of view
COMPLETE ACTIVITIES 9 & 10
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Debtor to equity ratio
Total liabilitiesx100
Total assets
Proprietorship ratio
Owners equity (shareholders funds)x100
Total funds or total assets
Draw conclusions
Process of drawing conclusions
Once the complex task of analysing financial information has been completed, conclusions will be made regarding the current financial status of the organisation and strategies for further activities will be identified
How do you draw conclusions?
What do you do with these conclusions?
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Draw conclusionsProcess of drawing conclusions
Determining if current position is within acceptable parameters
Noting aspects of the information for investigation or attention
Identifying operational aspects of the business for investigation or attention
Determining if one-off special events gave rise to exceptional results
Seeking input from relevant others
Checking and confirming statistics
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Draw conclusions
Provide reasoning for variances
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COMPLETE ACTIVITY 11
Determine the cause of significant
variances
Identify significant variances
Element 3:
Determine action to be taken on the basis of interpretation of financial information
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Determine action to be taken on the basis of interpretation of financial informationPerformance Criteria for this Element are:
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Identify whether or not action needs to be taken
Consider options available to address identified need
Select the most appropriate option(s) for action
Share information and proposed action with relevant personnel
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Determine action to be taken on the basis of interpretation of financial informationPerformance Criteria for this Element are:
Apply the proposed course(s) of action
Monitor the results of the changes
Review remedial action and revise as required
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Identify need for action
Identify the need to take action
Variances may be large or small on both monetary and percentage terms.
Some may be so small they are deemed not to be a problem, whilst others may require further investigation:
How can you decide when action needs to be taken?
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Identify need for action
The tolerance limit
Organisations have policies that managers can follow detailing the size of the variance that is acceptable and variances that should be investigated further.
This is called a tolerance limit.
Tolerance limits are generally expressed as percentages
What is acceptable tolerance limits?
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Identify need for action
Identifying need to take action
Determining whether or not to allow the situation to continue unchanged or whether to take remedial action
Determining if action needs to be taken on revenue, costs or both
Confirming the need for action with relevant others
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Identify need for action
Identifying business trends
Variances may be a one-off event
It may be some once off occurrence or be part of a pattern or trend that is emerging
Most properties ignore one-off variances, but will explore trends
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Identify need for action
Identify trigger points
A trigger can be seen as a pre-determined point at which action must be taken or investigation must be undertaken to identify the reason for ‘actual’ performance
As with trends, this trigger may exist for both positive and negative results
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Identify need for action
Identify trigger points
An adverse report or audit from some authority
A one-off critical incident that is significant in nature
Customer complaints that have reached a certain level
An adverse internal audit that identifies failure to comply with in-house policies and procedures
COMPLETE ACTIVITY 12
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Consider options to address need
Identify options
When a need to take action has been identified, it is now time to determine options that can be taken in response to the trend or trigger:
What are different options to address a need?
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Consider options to address needCritical points about identifying options to address trends and
triggers
Your contributions to this process must be:
Made only when you are in full possession of all the relevant facts
Able to be seen as ‘part of the solution and not part of the problem’
Practical and able to be readily implemented
Able to demonstrate the required changes will occur of your
suggestions are followed
Fully-costed
Talked through with management
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Consider options to address need
Identify options
Your contributions to this process must be:
Select line items in TM Financial Statements in Section 2.3
requiring action
Identify range of options that can be applied to address
problem
Refer to options in Section 3.2 as a reference
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Consider options to address need
Income and expense related options
What are examples of:
Income related options?
Expense related options?
Refer to options in Section 3.2 as a reference
COMPLETE ACTIVITY 13
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Select appropriate option
Select the most appropriate option(s) for action
Now that a range of possible options, whether focused on income, expenses or operational systems, have been identified it is now time to select the most appropriate options or group of options that can be implemented to address the identified trend or trigger:
How can you identify the best option?
Who needs to be part of the selection process?
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Select appropriate option
Selecting the most appropriate options for action
Ensuring the options selected align with business objectives
Ensuring compliance with legislated requirements
Ensuring a cost-benefit analysis has been undertaken to support the decision(s) taken
Ensuring the decisions taken can be supported by the resources available
Making relative comparisons with alternatives available.
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Select appropriate option
Identify corrective action to be undertaken
Name of the account or item investigated
Actual monetary amount
Budgeted monetary amount
Variance – indicating if it is favourable or unfavourable
Causes, reasons and suggested corrective action
COMPLETE ACTIVITY 14
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Share information
Share information and proposed action
It is important that relevant financial information is shared with other colleagues in a timely manner. It is important to determine who to share this information with and what information is allowed to be shared:
Who needs information?
What information do they need?
How can information be communicated to them?
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Share information
Sharing information activities
Explaining rationale for proposed action
Describing potential alternatives available
Explaining rationale for selection of chosen course of action
Describing costs and benefits of implementing proposed course of action
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Share information
Sharing information activities
Describing implementation details relating to the proposed course of action
Setting trigger points and key performance criteria in relation to the revised course of action
Developing implementation plans for the proposals
Obtaining approval/authorisation to implement the proposed course of action
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Share information
Sharing information considerations
Audience of financial information
Reporting periods
Confidentiality
Location of audience
Methods of communication
Slide 102
Preparing a financial report
Writing a financial report
Executive summary
Introduction
Resources
Methodology
Detailed Analysis
Recommendation
Conclusion
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Preparing a financial report
Factors to consider for a good financial analysis report
Clearly understood
Understand the needs of the readers
Clear framework and analysis
Integration of financial analysis with operations
Timeliness
Accuracy
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Preparing a financial report
Prepare explanatory notes
Notes almost always accompany financial statements.
These notes provide users with information such as:
Source of financial information such as external data
Detailed activities
Explanations for movements or changes
The basis for any calculations
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Sharing financial information
Ways to share financial information
Printed copies
Conduct meeting / discussion
Conduct presentation
Distribute electronically
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Sharing financial information
Sharing information
Make the sharing timely
Maintain confidentiality
Keep to the facts
Produce the information with users in mind
Indicate further action required
COMPLETE ACTIVITY 15
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Apply proposed actions
Apply the proposed course(s) of action
Planning for the implementation of actions is essential to ensure all aspects relating to the proposed actions have been considered, planned and have clear plans for implementation:
What needs to be considered?
What needs to be planned?
Slide 108
Apply proposed actions
Implementation considerations
Legal liability exposure
Integration with other aspects of the business
Timing issues
Resources
Changes to policies and procedures
Documentation & record keeping
Service delivery
Slide 109
Apply proposed actions
Implementation planning inclusions
Details of intended actions to be taken
Allocation of responsibilities for action to nominated persons
Determination of accountability for actions taken
Timelines for completion of nominated actions
Details of the budget and resources allocated
Description of the processes for monitoring progress
Details and timelines for reviewing progress
Slide 110
Apply proposed actions
Budgeting resources
Staff
Training
Time
Feedback
Physical resources
Slide 111
Apply proposed actions
Identify and communicate action strategies
Key vision of the action
Reasoning or purpose behind the action
Background information
End objectives
How the action will be implemented
Roles and responsibilities of key stakeholders
Timelines
Support mechanisms
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Monitor changes
Importance of monitoring
In order for a tourism organisation to be successful in being able to overcome financial issues that have been identified, it is essential that plans that have been implemented in the hope of overcoming these problems, are being undertaken as planned:
Why is it important to monitor?
How can you monitor?
Slide 113
Monitor changes
Importance of monitoring
Activities must be monitored to find out:
What is being done correctly
What needs improvement, by identifying causes and remedy
Slide 114
Monitor changes
Aim of monitoring courses of action
Tracking changes to sales and costs
Tracking attainment of projected figures against actual results
Monitoring reactions to changes
Identifying areas which are being done well and rewarding accordingly
Identifying where areas of operationscan be improved
Slide 115
Monitor changes
Monitoring and evaluation methods
Reviewing updated financial information, statements and reports
Obtaining customer feedback
Use of checklists
Staff input and review
Observation
Benchmarking
COMPLETE ACTIVITIES 16 & 17 Slide 116
Review remedial action
Review remedial action and revise as required
It is important that all remedial action is reviewed on a regular basis
This should be done, as far as possible, using verifiable data and also feedback from stakeholders
Slide 117
Review remedial action
Timing of reviews
Weekly, monthly or quarterly reviews
Performance reports
Financial reports
New trends or triggers
Slide 118
Review remedial action
Undertaking reviews
Identify the extent to which financial issues have been addressed and overcome
Identify the areas in which issues may still exist
Identify the precise areas within areas where issues are still occurring and steps being taken to address them
Identify the precise nature of any outstanding problems
Slide 119
Review remedial action
Undertaking reviews
Identify the staff involved and gather first hand information that may be helpful in understanding and overcoming financial issues
Discover what can be done to improve a less than optimum situation
Identify what needs to be done to improve remedial courses of action
Slide 120
Providing feedback and recommendations
Providing feedback and recommendations
Any feedback and recommendations must:
Be positive and constructive
Respect the feelings of the person you are providing advice to
Be fair and accurate
Be based on facts
Not be personal in nature
Restrict your comments to only those things that can be changed
Slide 121
Providing feedback and recommendations
Methods of providing feedback and recommendations
Informal discussions
Holding team meetings
Providing hard copy information
Sharing information via the intranet
Disseminating information at staff briefings
Slide 122
Providing feedback and recommendations
Feedback and recommendation information
Explaining if the remedial actions and efforts worked
Identifying the reasons why they worked or not work.
Identifying significant variations and the factors associated with the changes.
Discuss unusual results and determine their causes
Slide 123
Providing feedback and recommendations
Feedback and recommendation information
Identifying areas of strength
Identifying weaknesses and potential areas of improvement
Outlining implications of the results and conclusions on financial and operational performance
Outlining suggested recommendations to improve remedial actions
COMPLETE ACTIVITY 18
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