Assess organisation needs

When working in the accounting and financial services industry, it is important to collect information that may assist in determining who the client is and their expectations.

The first thing to determine is who the client is so that the appropriate financial and business performance information can be provided. Your clients could include:

• Start-up or existing businesses varying in size and from different industries
• Small business
• Medium business
• Large business
• Financial institutions
• Individuals
• Shareholders
• Partnerships

If you are working for a business, then your client could be the business itself, the company directors or in-line management.

Once you have established who the client is and their business structure, you will be able to determine their needs (objectives) and expectations. Their needs and expectations will vary but could include the need to: 

• Increase organisational and administration efficiency
• Reduce the number of tax liabilities
• Improving cash flow management
• Choosing between different investment and financing options
• Increasing profit margins
• Increasing growth for the shareholders

In the case of an individual client, the objectives might be slightly different such as a:

• Improved quality of life
• Improved cash flows
• Wealth accumulation
• A higher level of investment return. 

The decision to start up a business or expand an existing one can be daunting. When providing information on financial viability or business performance, you may be required to assist and advice on a range of issues or scenarios.  

Listed below are some of the questions clients may ask regarding their financial and legal requirements: 

• Should we purchase this company?
• Should we increase/decrease the price of our products?
• What would happen to my profit and cash flow if I increased/decreased my prices?
• Should I buy that item of equipment or should I rent it?
• Should I rent my business premises, or should I buy them?
• What do I have to do to increase my profits?
• What do I have to do to reduce my bank overdraft?
• Should our business borrow money to finance future growth or issue equity?
• What is the best financing option for this particular project?
• Which of these investment proposals should I choose and why?
• How can I improve cash flow for my business?
• What is the best credit policy for my business?
• What is the optimal order quantity for my inventory?

Financial Plans   

When establishing and clarifying the client’s expectations (including the business structure), it is essential to develop a financial plan to confirm the identified goals and objectives and identify the financial requirements of the business. 

Through discussion with the client, the primary financial goals, including the ability to earn profits and maintain a healthy financial position, can be established. 

Every organisation should have a mission that defines the purpose of its existence and acts as a guide for management to achieve its goals and objectives. 

Financial plans are implemented to achieve goals and objectives and may be weekly, monthly or annually. Short-term plans address the short-term operation of the organisation’s activities while long-term strategic plans focus on the organisation’s future growth and expansion.2

To achieve identified client’s goals and expectations, different financial options will need to be considered which will then form the basis for developing suitable implementation plans.

Financial options to be considered may include:

• Debt and Equity Financing Structure of a Business
• Asset Liquidation
• Dividend Policy
• Long-Term Investments
• Purchases
• Funding Alternatives
• Sources of Finance

Financial plans to be developed may include:

• Accounts receivable management
• Adequate funding structure
• Alternate forms of finance
• Business plans
• Business registration
• Cash flow development and management
• Insurance needs
• Long-term and short-term financial requirements
• Personal financial needs and position
• Personal investments 
• Regulations, permits, and licences
• Review of financial systems
• Suitable business structure
• Tax issues
• Working capital needs

There are many reputable agencies that can provide information, advice and even templates on different types of Business and financial plans..

Further Reading

Business.gov.au also has a very useful section on Business Plans as well as  Registrations and licences 

Business Queensland has some useful business planning tools and resources

Business Victoria has some useful financial management resources and templates

Strategic Plans   

As well as establishing a financial plan, a strategic plan is essential and a crucial requirement when structuring and establishing a business. 

An organisation operates in an environment where there are opportunities to market a new product or service, and there are threats from competitors. The organisation may have strengths (such as highly specialised staff) or weaknesses (such as a shortage of funds for expansion). It is important to analyse the strategic opportunities available against the threats from the environment and document the measures to manage these in the form of a strategic plan.

Strategic plans, developed by higher-level managers, impact many areas of organisational activities and are documented to provide an overarching guideline, covering a broad span of time that could be up to several years or decades.

When converting strategic plans into short-term operational plans, it is important to conduct negotiations and liaise with all levels of the organisation as the various workgroups are responsible for achieving the established budgets.

Operational Plans   

Combined with financial and strategic plans, the operational plan provides the day-to-day considerations of the business and must also be established when structuring a business. 

Operational plans have a more restricted scope which often covers one financial year. Operational budgets are mostly developed by middle and lower-level managers.

Operational plans guide the day-to-day and week-to-week activities of an organisation and the budget form part of this plan. 1

To be effective, operational plans must:

• Be realistic and have achievable targets
• Focus on the future
• Represent a certain period
• Be managed to identify any variances between actual and planned performance
• Determine why the variance has occurred 
• Have established performance indicators

All budgets and plans must be approved by senior management before any action can be taken. All relevant information must be collected, and a comparison made between different courses of action considered involving revenue, expenses, investment, and the efficient use of resources. Ethical considerations and directors’ responsibilities form part of the decision-making process. 2

Financial Products and Sources Used to Assist with Providing Financial and Business Performance Information    

When seeking advice on financial and business performance information, it is essential that it is reliable and based on the most up-to-date information available. 

The following are some key sources which can be used to assist in providing accurate information regarding financial products to clients:

• Banks
• Credit unions
• Financial experts and brokers
• State/Territory business finances
• Australian Securities and Investments Commission (ASIC)

These are sources of information about markets relating to financial and business performance information:

• Stock exchange
• Australian Securities Exchange (ASX)
• Factiva
• S&P Global Ratings (former Standard & Poor’s Indices)
• TradingRoom.com - ASX Code Lookup
• Market research

Providing Efficient and Effective Service   

As with any business, the clients (or customers) are critical to its success. 

To provide an efficient and effective client service involves obtaining a sound knowledge of your organisation’s products and services and being able to communicate the information competently to clients.3

Providing efficient and effective service involves acknowledging the needs and responses of clients. A client-focused organisation is where the client is the centre of the operations. It is essential that adequate assistance and support is provided and where necessary, training is given to ensure that information is clearly understood.

Asking the right question is at the cente of effective client communications and information garthering. By using the right questions at the right time, you can improve a whole range of communications skills. You will gather better information learn more, and build stronger relationshipswith your clients.

Further Reading   

Top Ten Communication Skills for Career Success | Indeed.com 2022, Indeed Career Guide, viewed 6 October 2022.

Monitoring the Needs and Opinions of Clients and Customers   

By regularly monitoring the needs and opinions of clients, improvements can be identified, and high-quality service maintained. This may involve conducting market research, interviews and surveys or by obtaining feedback through questionnaires and feedback forms. Feedback obtained from staff members, clients and customers can be used to maintain and improve the quality of services or products. 3

Client feedback on services provided should be sought on a regular basis to determine whether any areas need improvement.

When quality client service is a priority, obtaining and analysing client feedback is an important part of developing and improving this service.

Collecting feedback from clients can help organisations identify problems with existing systems and procedures. Analysing these problems can lead to improvement in the systems and procedures which in turn will improve the client service.

The most common method of obtaining feedback is through an evaluation form with a series of questions. This may be a paper form, email form or web-based form. 

Other methods include interview and focus groups.

Survey Monkey is a website which allows you to create a web-based feedback form. Once you have created your survey or feedback form, you can email it directly to your clients with a link to the survey which they complete online. 

The results of the survey are collected and can be viewed directly online. The following is a sample feedback form which could be used to regularly analyse client feedback.

Sample Feedback Form

Click here to download a sample feedback form.

In the example above, a mix of closed and open questions is used. Instructions for completing the questions are included, as in Question 1 – Place a tick in the selected box.

Closed questions, such as Question 1 in the evaluation form above, allow you to measure strengths and weaknesses and make comparisons over time. 

Open questions, such as Question 2, allow the user to provide an answer that gives more detail on how the service can be improved.

Addressing Shortfalls in Customer Service   

If the client is unhappy with the services provided, it is necessary to determine the reason for the unhappiness, so it is important to consider some important issues and includes a need to:

• Establish all relevant factors.
• Maintain proper records.
• Present accurate advice in appropriate formats.
• Provide advice within agreed time frames.

Once areas of improvement are identified strategies should be put in place to effect the necessary changes.

The client should always be kept informed that identified shortfalls have been addressed and corrective actions have been undertaken. 

It is also important to put in place a process that will prevent the same mistakes from happening again in the future.

Verbal Communication   

Verbal communication involves the use of interpersonal skills including tone, language, questioning, listening and observation. It is essential when communicating with clients that sensitivity and respect for the diversity of the client and their needs is maintained.

When communicating with clients, some useful tips are:

• Keep the language simple – don’t use jargon
• Be timely and relevant when communicating advice
• Be instrumental in reaching an agreement or securing co-operation
• Establish rapport between sender and receiver
• Choose the most direct way to express your ideas
• Make sure your thoughts are organised before you start speaking
• Speak at the right pace and speak clearly
• Make sure there are pauses between sentences to give time for comprehension
• Don’t complete the client’s sentences
• Names and addresses may need to be spelt out
• Don’t raise your voice; don’t patronise or condescend

It is important to identify and address any barriers to listening such as:

• Not focusing on what the speaker is saying
• Not looking at the speaker
• Negative body language which shows a lack of interest in what the speaker is saying
• Showing a dislike of the speaker’s personality or appearance
• By reaching early conclusions
• Pre-judging the speaker

It is necessary to keep in mind that all people are worthy of respect and it is important to separate your emotions about the person and the way they behave from the content of the negotiations that are being carried out. ³

The Budget Processes   

The budget process has the potential to enhance the planning and control functions within the organisation. When providing advice and preparing financial information for clients, cash flow and budgetary control provide a systematic method for:

• Reviewing objectives
• Co-ordinating activities
• Setting realistic targets
• Facilitating communication 
• Acting as a motivator for staff members. 

The key principles of budgetary control include:   

• Planning - A budget is a plan of action. Budgeting ensures a detailed plan of action for a business over a period of time.
• Co-ordination - Budgetary control co-ordinates the various activities of the entity or organization and secure co-operation of all concerned towards the common goal.
• Control - Control is necessary to ensure that plans and objectives are being achieved. Control follows planning and coordination. No control performance is possible without predetermined standards. Thus, budgetary control makes control possible by continuous measures against predetermined targets. If there is any variation between the budgeted performance and the actual performance, the same is subject to analysis and corrective action.

A set of budgets provides a clear representation of the organisation’s activities and plans. 

The main factors that influence the success of the budget process are as follows:

• The budget is only good as the assumptions or estimates upon which it is based.
• The budget process may be expensive initially in monetary terms and staff time. The benefits must exceed the cost of implementing the process.
• Preparation of the budget is no guarantee of success. A successful outcome will depend on the performance of staff members, the general operating environment, and economic conditions.
• The budget must be timely. Information must be presented and monitored so that appropriate remedial action can be taken if required.
• Budgets should be varied if circumstances change. Variances should be addressed, and alternative measures are taken as necessary.
• Budgets should be set as a control tool and targets should be challenging and achievable and “budget slack” avoided. Budget slack involves setting targets that are easily attainable without stretching resources. Targets, however, should not be unrealistic and unattainable as this may reduce motivation and incentive amongst team members.
• If the purposes of the budget process are not communicated to staff members involved in the process, this may result in negative behaviour.⁴

To establish the budgets requires consultation with the client. It is through a discussion about the financial options and processes that financial plans or targets of an organisation can be identified, and they play an important part in setting budgets. 

Budgets are developed by various groups and are prepared for a future and definite period. This is then documented, recorded and monitored at specified times to analyse and assess the success of each budgeted item. 

The budgets for shorter periods allow management to identify deviations and to take corrective action. Senior management within an organisation set the strategic objectives and allocate the available resources to achieve the objectives of the organisation.

Budget preparation will differ between organisations such as trading, manufacturing and service organisations. Many medium and large organisations may use specialised programs to prepare budgets electronically. 

Small and medium organisations may use spreadsheets to develop formulas to automate calculations. 

The main advantages of using electronic spreadsheets are that a range of data can be compiled and updated automatically and a “what if” analysis performed. The disadvantage of using spreadsheets is that any error in a formula can have a flow on effect and lead to mistakes in final calculations and reports.

Forecasts   

When budgets and plans are proposed by relevant groups and individuals, consideration should be given to the history of the organisation and market conditions. The history of the business should not be considered where current environmental conditions are different from those of the past. 

In these situations, expectations for the future should be considered. This may include a review of the government’s long-term economic plans. The budget proposals should be linked to the strategic objectives of the business. ¹

The following are techniques that can be used to forecast financial and business performance:   

Delphi method (Qualitative)   

This is a structured methodology for deriving a forecast from a group of experts, using a facilitator and multiple iterations of analysis to arrive at a consensus opinion. The results from each successive questionnaire are used as the basis for the next questionnaire in each iteration; doing so spreads information among the group if certain information was initially not available to everyone. Given the significant time and effort required, this method is best used for the derivation of longer-term forecasts.

Time series methods (Quantitative)   

These methods derive forecasts based on historical patterns in data such as budgets, actuals and variances. By observing data over equally spaced time intervals, the assumption is that recurring patterns in the data will repeat in the future. Types of time series methods include: 

• Rule of thumb: copying forward historical data. E.g. sales for one month are forwarded to the next without variation as the expectation is the same. 
• Smoothing: uses averages of past results. 
• Decomposition: breaks down the historical data into trends which could be seasonal or cyclical.

Types of Budgets   

The types of budget which are required for a business will vary on the industry, size of the business and the purpose of the budget.

A service organisation, for example, may need to develop the following budgets:

• Fees and revenue budget
• Operating expenses budget
• Income statement budget
• Balance sheet budget
• Cash flow budget

A trading organisation may develop specific budgets including a:

• Sales budget
• Purchases budget
• COGS budget
• Operating expenses budget
• Inventory budget
• Income statement budget
• Balance sheet budget
• Cash flow budget

A manufacturing organisation, on the other hand, would need to develop the following types of budgets for example:

• Production budget including direct materials budget, direct materials usage budget, direct labour budget and factory overhead budget
• COGS budget
• Operating expenses budget
• Inventory budget
• Income statement budget
• Balance sheet budget
• Capital expenditure budget
• Cash flow budget 

Variance Analysis   

Variance analysis is one way of controlling the financial performance of an organisation. Variances are the results of comparing the actual input or output within the budget. 

The first step when analysing the budget or other financial information is to check whether an accounting error has occurred. 

In the case of revenue, the variance may arise because of differences in the actual price charged and the volume sold compared to the budgeted figures. In the case of expenses, the variances may occur because of the differences in the actual price paid and the quantity used. Only significant variances should be investigated. ⁴

Where a budget is created for one level of activity, it is referred to as a “static” budget. A flexible budget will be designed for various levels of activity (e.g. the worst-case scenario, the best-case scenario, and a realistic current economic and competitive situation). Flexible budgets are prepared by identifying the fixed costs that remain constant at all levels of production and the variable costs that change as activity levels change.

A variance could be either favourable or unfavourable and in some instances are the result of a budget which has been based on incorrect assumptions. 

The measurement of variances provides a basis for continuous improvement. The measurement may occur weekly, monthly, or quarterly. 

For Example:

• Weekly for restaurant menu
• Monthly for the production of cars
• Hourly for a foreign exchange market

Where there is a time lapse between the activity occurring and the persons responsible for taking corrective action, the time lapse may be too late for any corrective action. Negative or unfavourable variances are detrimental to the organisation as they result in a decrease in the planned profit for the organisation. ¹

Cost Variances   

Variances are analysed to determine the cause and effect, and the causes may be controllable or uncontrollable. The variance could be the result of a change in the purchase price of a unit or a change in quantities used.

The following are two (2) types of variance methods which can be applied when evaluating information about the profitability and efficiency of the business:

(1) Direct Material Cost Variances   

The total direct material cost variance is the difference between the budgeted cost and the actual cost incurred.

Example:

The buying price (BP) of material is $10 per unit. The actual buying cost (AP) of the material was $9 per unit. Total output is 50 units and budgeted purchase quantity (BPQ) was 5 kg per unit, and actual purchase quantity (APQ) is 6kg per unit.

Total direct material cost variance is budgeted cost (BC) – actual cost (AC) (50 x 5kg x $10) – (50 x 6kg x $9) = $200 unfavourable (UF)

The formula to calculate the direct material price variance is:

Direct material price variance = (BP –AP) x total output x APQ

= (10 – 9) x 50 x 6

= $300 favourable (F)

The effect of material usage on the total direct material cost variance is calculated by multiplying the difference between budget usage and actual usage by the standard price per unit. This is called the “direct material usage variance”.

Using the figures from the example above, BPQ is 5kg, and APQ is 6kg. The standard BP is used (e.g. $10)

Direct material usage variance = 

(BPQ – APQ) x 50 x BP (5 – 6) x 50 x 10 = $500 UF

The net effect of the price and usage variance is $300F - $500UF = $200UF.

(2) Direct Labour Cost Variances   

The total direct labour variance is the difference between budgeted cost and actual cost incurred.

Example:

A business has the following direct labour usages. Budgeted hours per unit of output (BH) is 10 hours, budgeted rate (BR) is $20 per hour, actual hours (AH) of output is 12 hours per unit, actual rate (AR) is $19 per hour. Total output is 50 units.

Total direct labour variance = Budgeted Rate (BR) – Actual Rate (AR) 

(50 x 10 x 20) – (50 x 12 x 19) = $1,400 UF

The direct labour variance is the difference between the budgeted rate and the actual rate of pay by the actual labour hours.

Direct labour rate variance = (BR – AR) x AH x total output

(20 – 19) x 12 x 50 = $600F

The direct labour efficiency variance is calculated as follows:

[(Total output x BH) – (Total output x AH)] x BR (standard rate)

[(50 x 10) – (50 x 12)] x 20

= $2,000U

The effect of the rate and efficiency variance is $600F - $2,000U = $1,400U¹

Trend Analysis   

Besides a cost variance analysis, the use of trend analysis is another management tool used for planning and controlling a business. The word “trend” means the general direction is taken or tendency of specific items or events. 

A trend analysis from a financial perspective could include:

Financial items   

• Expenses incurred
• Net profit achieved
• The rate of dividend paid by a company
• Earnings per share

Non-financial items   

• Labour turnover
• Absenteeism
• Defective goods
• Machine breakdowns
• Workers’ compensation claims

Trends are established by progressively comparing the occurrences for different periods and may be presented by percentage changes from one period to another against a base period. 

Some of the factors that affect trends which impact on financial information and analysis are:

• Economic conditions – inflation will increase the selling price and produce an upward trend in sales value. Growth will incur an upward trend in costs. The opposite effect occurs where there is deflation in the economy.
• Population growth – natural growth or immigration will increase consumption and demand and cause an upward trend in sales. A decline has the opposite effect.
• Fashion and taste – will bring an upward trend in the sale of consumer goods.
• Technological changes – will produce changes in production and innovation.

A key consideration, when using techniques to forecast financial and business performance, is inflation. Where inflation occurs, the selling price of a product or service will increase. 

Example:

A business has sales of 2,000 units for the current year. The selling price of each unit is $5. Inflation is expected to rise by 4%. The selling price of each unit needs to be adjusted for inflation to become $5 x 1.04 = $5.20.

The reported variance and trends will reveal either underperformance or over performance. An organisation must respond to changes in the environment by continually reviewing and making changes to strategies and plans. 1

Benchmarking   

A critical consideration when establishing budgetary controls is benchmarking. Benchmarking involves comparing the organisation’s activities with similar internal and external operations. 

The objective of a benchmark is to identify the best performance standards and measure and compare those standards with the standards within or outside the organisation. Benchmarking can be conducted against external competitors where the organisation compares its operations with those of the competitors. ¹

Key Performance Indicators (KPIs)   

Key performance indicators (KPIs) are used to measure the input and output of an organisation and are organised in a way that reveals trends in performance. 

Discussing and establishing KPIs as part of structuring and financing the client’s business will establish the milestones and assist in achieving client goals within specified timelines.

The input usually consists of resources such as labour and material to produce output such as a product or service. 

Performance can be measured in physical units or monetary terms. 

The performance indicators and their trends over a period are used in the control process. Where the measurements are made in monetary terms, they are referred to as “Financial Performance Indicators”. 

Non-monetary indicators are referred to as “Non-Financial Performance Indicators”. 

Financial performance indicators or ratios will focus on profit and can be expressed as a relationship between profit and sales or between profit and cost of sales.

Types of financial indicators which can be used to analyse and evaluate information on profitability and stability of the business include:

• Percentage of net profit to sales
• Percentage of gross profit to sales
• Percentage of net profit to COGS
• Percentage of gross profit to COGS
• Market share – the percentage of the business’s sales to the total sales of all competitors in a specific area or region.
• Return on capital investment – a percentage of net profit to the capital invested.
• Sales to investment – the sales generated per dollar of investment.
• Collection period or accounts receivable turnover – the average number of days taken to collect accounts receivable.
• Inventory turnover – the number of times the inventory is replenished on average per annum.
• There are also non-financial indicators which may need to be considered which include:
• Warranty repairs – the number of items under warranty as a percentage of the total number of units sold.
• Customer complaints – the number of complaints received from customers as a percentage of the total number of units produced.
• Number of rejects – the number of defective units as a percentage of the total number of units produced.
• Absenteeism of employees – the number of employees absent without prior arrangement with supervisor as a percentage of the total number of employees.
• Accidents – the number of accident compensation claims made as a percentage of the total number employed.

Performance may be defined as the quantitative or qualitative measured input and output of an activity or series of activities. ¹

Performance Reports   

Providing financial information takes many forms, and performance reports serve as a tool for management to utilise when monitoring the performance of budgets. They are also useful in decision-making and future planning. 

A performance report is useful when it evaluates information from an actual outcome against a planned outcome. The object of the report is to provide relevant information, and the report should be presented so that information can be easily understood and interpreted.

Examples of the types of reports which can be used include: 

• Periodic reports which are prepared at pre-determined periods to reflect the outcome of the organisation’s activities for that period. 
• Progress reports which are prepared at infrequent times and is usually produced to report on a long-term project. 
• Specific reports which are produced when requested to highlight a specific situation. The information which is included in the reports should address the needs of both the receiver and the creator. 

Charts, graphs and pictures may assist the manner in which the information is presented and create ways to present information in different formats.

Optional Further Reading   

By presenting data graphically, you will not only make the most out of your financial information, but simple visuals will do half of the explaining for you. In this article Bernardita Calzon, presents essential examples of financial graphs, and visualisations AND explains why you need to include in financial analysis. 

Regardless of the method used to present the information, it is essential that any deficiencies in the report are identified and rectified. ¹

Identified gaps in performance reports can be the result of:

• Relevant and import information being omitted
• Irrelevant or unnecessary information included
• Information not structured logically
• Missing attachments
• Incorrect computer output
• Duplication of information

The Australian Consumer Law sets out key requirements relating to financial and business performance information:

• The ACL prohibits misleading or deceptive conduct in trade or commerce. It is unlawful for a business to make statements in trade or commerce that are misleading or deceptive, or which are likely to mislead or deceive.
• Under the ACL, businesses must provide consumers with a proof of transaction for transactions over $75 and for lesser amounts upon request. 
• The ACL includes specific protections against certain defined ‘unfair’ practices, including particular instances of misleading or deceptive conduct, pyramid selling, unsolicited supplies of goods and services, component pricing and the provision of bills and receipts.

Financial Reports   

Financial reports are periodic reports which are prepared for specific periods to inform decision-makers about the financial affairs of the organisation. 

The financial reports serve as a tool for management and provide information to owners, stakeholders, and the public. 

Financial reports can be prepared monthly, quarterly, six--monthly or annually and must comply with relevant legislation and accounting standards. Large proprietary companies and public companies must file financial statements with the ASIC or the Australian Stock Exchange (ASX) which are publicly accessible.

Corporations Act 2001 sets out the key requirements that a company must comply with in relation to their financial and business performance information:

• Company directors must make sure the company keeps up-to-date financial records that:
  • correctly record and explain the company’s transactions, and
  • outline the company’s financial position and performance.
• This ensures that accurate financial statements can be prepared and audited (if necessary) and the company can comply with taxation law.
• All the company’s public documents and all documents lodged with ASIC must bear the company’s ACN or ABN.
• Upon receiving the annual statement from ASIC, the company must:
  • Check the statement and make sure the company’s details are up to date. If the details are out of date, update them as soon as possible.
  • Pay the annual review fee by the due date.
  • Pass a solvency resolution.

Taxation Reporting Obligations   

The Australian Taxation Office (ATO) is the government’s principal revenue collection agency. Its role is to manage taxation, excise and superannuation systems that fund services for Australian.

For taxation purposes, the accounting year in Australia and the reporting period is a 12-month period from 1 July to 30 June. The balance date in this instance is 30 June. 

Businesses divide their accounting year into 12 monthly periods or 13 four (4) week periods so that items like cash flows, profits and losses can be ascertained and reviewed on a regular basis.

The legislation that governs the payment of income tax is the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997. The legislation stipulates that all income derived by an Australian resident and a non-resident in Australia or any capital gain by a resident or non-resident must be included and be disclosed as assessable income. 5  (Willis, 2011 p.8).

Complex and Significant Taxation Issues   

Based on the taxation legislation there are several significant taxation issues which all businesses need to be informed of and given the appropriate information to ensure all tax obligations are met. 

Significant taxations issues which may need to be addressed when providing financial information and preparing financial report include the statutory reporting for: 

Business Activity Statements (BAS)   

Businesses use an activity statement to report and pay specific tax obligations, including:

• Goods and Services Tax (GST)
• Pay as You Go (PAYG) instalments 
• Fringe Benefits Tax (FBT) and withholding tax

Activity statements are also used by individuals who need to pay quarterly PAYG instalments.

Businesses are required to report any Goods and Services Tax (GST) received and paid to the Australian Taxation Office (ATO). 

A business can use an activity statement to report and pay the GST a business has collected and claim GST credits. Most businesses report and pay their GST quarterly. The due dates for reporting each year are:

• 28 October
• 28 February
• 28 April; and
• 28 July

Pay as You Go (PAYG) Withholding Tax   

If a business is operated as a company, the company must withhold amounts from payments made to employees. It must also withhold amounts from payments to company directors for their services for taxation purposes. This includes payments made to other workers such as contractors. Companies pay a specified tax rate on profits earned from the business.

Failure to withhold Pay as You Go (PAYG) amounts may lead to the client being required to pay penalties. As company directors are legally responsible for the company meeting its PAYG withholding obligations, the company directors are the ones liable for the penalty. They must pay a fee equal to the unpaid amount.

Reporting and Lodgement Dates   

Failure to lodge tax returns and business activity statements (BAS) on time will result in the client being required to pay penalties, which varies depending on the nature of the business. If your client is unable to lodge a tax return or BAS at all, they may be prosecuted for criminal charges under the Taxation Administration Act 1953. This is especially true in relation to severe tax-related fraud offences.

Further Reading   

The following website outlines the ATO’s company tax rates.

Australian Taxation Office   

The business making the payment is called the “payer” and the individual receiving the payment is called the “payee”. 

The employer (e.g. the company which operates the business and makes payments subject to withholding tax) must:

• Register for PAYG withholding with ATO
• Work out the amount to withhold
• Report and pay withheld amounts to the ATO on a monthly basis
• Provide payment summaries to employees
• Lodge an annual report after the end of each income year.

The PAYG withholding payment summary annual report should be submitted to the ATO by 14 August each year.

In addition to the issues above, it is also necessary to discuss and confirm the reporting and lodgement dates with the client and implement measures to ensure that these requirements are met. 

This could simply be a case of setting up reminders in an outlook calendar or preparing a checklist for the completion of all financial and statutory reports to ensure they are not overlooked or lodged late. 

The result of late or missed lodgement of statutory reports will be monetary penalties. 

Further Reading   

The following website outlines the penalties for late lodgement relevant to statutory taxation reporting. 

Australian Taxation Office – Penalties 

Meeting All Required Statutory, Financial, and Organisational Requirements   

Organisational policies and procedures play a large part in the reporting process. Policies and procedures are developed to ensure that all staff have clear guidelines of what is expected. These policies and procedures include financial management manuals, internal reporting requirements and the process for recording and filing information and data.

Some policies and procedures are influenced by external parties such as the Australian Taxation Office (ATO) and other financial institutions (such as superannuation funds) which are required as an obligation to the Generally Accepted Accounting Principles (GAAP) and relevant accounting standards. 

Where relevant, it is important that all reports and statements meet the requirements of the (GAAP) and accounting standards. 

Under the Corporation Act 2001, companies are required to file an annual financial statement. This is monitored by the regulatory authority, the Australian Securities and Investments Commission (ASIC) as directed, under S293 of the Act. Reporting entities do not include sole traders, partnerships and small private companies unless exceptions mentioned above apply.

Financial reports prepared in accordance with the Corporations Act 2011 also need to comply with the accounting standards. The Australian Accounting Standards meet the requirements of International Financial Reporting Standards (IFRS) which Australia adopted in 2005.

The Australian Accounting Standards apply to:

• Each entity required to prepare financial statements in accordance with part 2M.3 of Corporations Act 2001.
• General purpose financial statements of each reporting entity.
• Financial statements that are or are held to be general purpose financial statements.

As well as the Accounting Standards, it is necessary to apply the Statements of Accounting Concepts (SAC1) - Definition of reporting entity and (SAC2) - Objective of General Purpose Financial Reporting. 

When providing financial information, it is also necessary to meet the requirements based on the Framework for the Preparation and Presentation of Financial Statements. The framework sets out the concepts that underlie the preparation and presentation of financial statements for external users. 

Key aspects of the framework which must be undertaken include: 

• Objectives of financial statements.
• The qualitative characteristics of useful financial information. 
• The definition, recognition and measurement of the elements from which financial statements are constructed.
• Concepts of capital and capital maintenance.

According to SAC1, a reporting entity is one where it is reasonable to infer that there are users of reports who depend on the information contained in the reports to make economic decisions or judgements. 

General purpose financial statements as defined by the AASB 101 Presentation of Financial Statements:

General purpose financial statements (referred to as ‘financial statements’) are those intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs.

Although the Corporations Act 2011 does not require small proprietary companies to prepare financial statements (unless foreign-controlled or they are requested by ASIC or shareholders), they are a valuable tool for managing the company. They provide an excellent method for checking the progress and financial position and will be required if looking to secure finance. 

An annual financial report usually includes following statements:   

Document	Section of the Corporations Act
Statement of financial position as at the end of the year (if consolidated accounts are not required by Accounting Standards)	295(2) & 296(1)
Statement of comprehensive income for the year (if consolidated accounts are not required by Accounting Standards)	295(2) & 296(1)
Statement of cash flows for the year (if consolidated accounts are not required by Accounting Standards)	295(2) & 296(1)
Statement of changes in equity (if consolidated accounts are not required by Accounting Standards)	295(2) & 296(1)
Consolidated financial statements, if required by accounting standards - which may include parent entity financial information where (CO10/654) conditions are met	295(2) & 296(1)
Notes to financial statements (disclosure required by the regulations, notes required by the accounting standards and any other information necessary to give a true and fair view)	295(3)
Directors' Declaration that the financial statements comply with accounting standards, give a true and fair view, there are reasonable grounds to believe the company/scheme/entity will be able to pay its debts. The financial statements have been made in accordance with the Corporations Act	295(4)
Directors report, including the auditor's independence declaration	298-300A
Auditor's report	301 & 308

A directors’ declaration is necessary and comprises statements from the directors that:

• The financial statements and the notes comply with accounting standards.
• The financial statements and notes give a true and fair view.
• There are reasonable grounds to believe that the company is solvent.

Public companies are additionally required to appoint an auditor who will make a complete assessment of the financial statements. The auditor needs to verify if the financial statements provide a true and fair view of the financial operations of the company and have been prepared in accordance with approved accounting standards.