Activity 1 (2)

Class Activity 1

SITXFINOO3A INTERPRET FINANCIAL INFORMATION

Why does an organisation require financial information/data?

Where does that data come from?

Financial data collected on behalf of your organisation, from both internal and external sources, is essential for business planning and forecasting purposes.

Generally, in larger organisations, your data will come from the cost centre within your organisation. A cost centre may be a location, department, section or project area within the organisation which is responsible for managing its own running costs and financial data.

What types of information/data should be collected and what should be done with it?

Financial performance information

Revenue

Net Profits

COGS

Taxes

Gross Profits

ROI

Cash Flow

Transaction information

Assets

Liabilities

Equity

Expenses

How is the information/data used to plan future business activities?

Businesses need to have a clear direction to work towards, so that their employees know what they are seeking to achieve and what they need to do. The directors of a company (with the Finance Director or Chief Financial Officer playing a prominent role) establish financial goals which are used by investors, financial analysts and other external parties to monitor the performance of a company Because these financial goals can be set out in numbers, it is relatively easy to compare actual performance against the set targets. For example, by setting sales growth goals, it is possible to check progress in meeting sales targets.

Who is generally responsible for financial management in an organisation?

Shareholders

* To check on quality of direction of company, as well as profitability, solvency, value of company and other signs of health.

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of company and other signs of health.

Employees

* To check on job security and scope for wage and benefit increases.

Suppliers

* To check that a company is generating the cash to be able to pay up.

Government- including ATO

* For calculations of business taxes and associated fees.

To ensure financial information is accurate and timely; what does this information depend on?

Management requires accurate and timely information. In order to provide the required information, you need to:

* identify the data that needs to be collected

* classify and code the data according to accounting and organisational principles

* calculate costs, profit/ loss and/or breakeven analyses etc. Where necessary analyse the data where necessary and report on outcomes of the data collection.

Name the three of the most important financial reports used in a business?

Give a description each one.

1. The Balance Sheet setting out the financial position of the company at a particular moment in time e.g. the year end.

2. The Profit and Loss (P&L) / Income statement showing how the profit or loss of the business has been generated.

3. Cash flow statement setting out the cash inflows and outflows to the business during a particular period of time.

What is the main purpose of financial reports and budgets?

The purpose of financial statements is to communicate. Financial statements tell you and others the state of your business. The three most commonly prepared financial statements for a small business are a balance sheet, an income statement, and a cash flow statement.

A balance sheet (also known as a statement of financial position) is a formal document that follows a standard accounting format showing the same categories of assets and liabilities regardless of the size or nature of the business.

“The Balance Sheet is like a photograph” is a term used to describe the purpose of a balance sheet. What is meant by this term?

A balance sheet provides a snapshot of a business’ health at a point in time. It is a summary of what the business owns (assets) and owes (liabilities). Balance sheets are usually prepared at the close of an accounting period such as month-end, quarter-end, or year-end. New business owners should not wait until the end of 12 months or the end of an operating cycle to complete a balance sheet. Savvy business owners see a balance sheet as an important decision-making tool.

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