Topic 3 Provide Financial Business Recommendations

TOPIC 3: PROVIDE FINANCIAL BUSINESS RECOMMENDATIONS
Make logical and justified recommendations

In most instances a report on finances related to international business will contain a
section providing insight and direction for decision making across the company’s
functional and market-facing areas. The intention of the financial report is, apart from
its basic information sharing function, to help shape corporate strategy and
sustainability.
A recommendation is a suggestion or a proposal that describes what is believed to be

the best course of action based upon the information that is available at that point in
time. It can be contained in a report that compares two or more issues, products or
solutions and from those makes a selection about which is the best option.
Recommendations might be contained in a financial report or in a separate

recommendation report.
Evidence and information in the report must support the recommendation and, where
relevant, outline other alternatives that might have been available. Analysis must
show why the recommendation has been made and why the other alternatives are less
desirable.
Recommendations are derived from the data and data analysis that informs financial
reports.
A process of accurate and unbiased analysis can provide information that will support
logical recommendations—those that are acceptable under the circumstances and that
can be justified by the data and data analysis procedures.
Recommendations must always be substantiated or justified by evidence to explain

the:
 benefits of the recommendations

 costs
 risk analysis results
 costs and risks associated with not undertaking the recommendations
They must be supported by accurate and readily understood facts and figures, details
and information. Recommendation reports must provide all of the financial data, the
specific requirements of organisation and relevant information about the international
market/market conditions in which the organisation is operating or intending to
operate.

Data and calculations should be clearly presented. A spreadsheet could be used.
Variations such as increased labour or material costs, changes in the political or
economic environment of the host country could be highlighted and explained in
terms of negative results or positive opportunity. For example, increased labour costs
might have been incurred due to equipment breakdown, an election or a change in
government policy might have resulted in less stringent restrictions international
trade.
A budgeted cost analysis should consider contingencies in case events have a negative
effect on an organisation’s budgeted costs. The report should identify likely
contingencies and their final cost/price. Recommendations might relate to what to do
if this situation (or a similar situation) occurs in the future.
The recommendation report should be prepared in the required format, meeting

enterprise guidelines and within designated timelines. It should utilise language,
format and information which can be understood and used by the audience to whom it
is addressed.
Recommendation reports revolve around:
 identifying problems and opportunities

 evaluating possible solutions or actions for taking advantage of opportunities
 analysing each of the solutions/opportunities
 identifying possible strengths and weaknesses of each
 making recommendations
 providing the reasons for choosing that recommendation
To be of benefit to management, recommendation reports need to be relevant, reliable,

timely and accurate. For example, reports that provide information on current
performance to the end of the budget period should be supplied as soon as they are
completed.
Recommendation reports differ from normal financial reports in that they provide a
variety of potential solutions to an issue and then reach a conclusion recommending
what is considered to be the best one. As a consequence, recommendation reports are
written in a more persuasive manner as their intention is to make an informed
recommendation based upon substantial research and evidence.

When writing a recommendation report the organisation might require a standard
format or the style might be left to the individual.
To get the most from recommendations, businesses need to use all the information,
and not act on reports in isolation.
For example, a business may be attempting to increase its sales revenue by

discounting products to increase international sales volume. Looking at the sales
figures alone may tell the manager that the strategy has been a success.
However, increased demand also increases the level of inventory required and the
need for working capital. If costs also increase during the expansion period, the
business might find there is a squeeze on margins and a declining profit.
If management is not alerted to the potential problem early enough, they may continue
the discount strategy to the detriment of the business. Efficient record keeping and a
review of the profit and loss and margin figures would immediately inform the
business of the situation.
In circumstances such as this had a recommendation report been commissioned prior

to discounting products the issues associated with higher inventories and increased
demand for working capital might have been identified.
In this way the business would have been acting proactively and would not be subject
to potential damage to the long term viability of the business.
Propose constructive actions that will make positive

contributions to the business’s international business
activities
Any recommendations that are contained in the report should promote positive
outcomes for the organisation and be achievable. They should be constructive and
identify strategies that develop the organisation and improve its productivity.
Effectiveness is about making the best possible use of all the resources of the
business. Efficient businesses maximise the outputs from their inputs and as a
consequence minimise their costs and maximise their productivity. This improves
their competitiveness and the viability of their business.
Recommendations could include information pertaining to:
 cash flow
 changes in business activity including markets, goods or services traded
 consolidation
 expenses and overheads
 labour costs including decisions to move production partly or wholly offshore
 loss
 profit
 write-offs
Other issues that might be highlighted in a recommendation report could relate, for
example, to the need for:
 expenditure relating to expansion

 cutting costs
 increasing local employment—recruitment and selection of staff
 importing executive staff
 working with suppliers to increase/improve quality
 improving processes and work practices
 improving workplace safety
 decreasing support costs
 increasing export/import reliability

activities
If the organisation is operating from or is operating subsidiaries in another country
recommendations might relate to social justice – for example providing support
(giving back) to the economy in the host country and/or to supporting local
communities in the host country (in particular in Third World countries). This could
involve providing financial support or allocating company resources for building
projects, schooling, sporting or community growth projects etc in the host country.
The report will indicate what amount of money or the type of resources/services can
be allocated. It will also detail the benefits of providing support. Benefits to the
organisation’s public image, in the host country and at home, should be explained.
Taxation benefits might also accrue as a result of this type of activity.
FINANCIAL CONTROLS
Recommendations are often formalised and provided in the form of advice for
improving financial or budgetary controls. Financial controls are formalised
procedures for meeting targets across all budgets. The type of control used depends on
the type of budget account.
It is management’s responsibility to enforce financial control/procedures when actual

results differ from the anticipated figures expressed through the budget.
The accountant prepares reports for periodical financial progress meetings. While
compiling the actual versus budget reports trends are noticed in capital, revenues,
expenses and cash flows and highlighted in the report. A professional accountant
should go further and make suggestions about controls to fix trends. The suggestions
should be written into the budget summary in words that are impersonal and reveal
relationships between accounts.
Management may accept the reasons for the difference and ask the accountant to
adjust the budgets. This is acceptable when the underlying budget account assumption
is wrong. When the assumption is correct, the accountant should make suggestions to
management about processes to correct the trends. These suggestions depend on the
type of budget.
Over the following periods the trends should be monitored and financial controls
introduced to manage the budgets. Controls should be formally documented in
organisational manuals. They should list who is in charge of the control and who the
control affects.
Some of the most fundamental controls are to:
 assign specific levels of purchasing authority to staff

 enforce that staff properly sign for and classify expenditure receipts

activities
There are four tiers of function within a business:
 governance – responsible for the direction and control of the business (eg the
board)
 management – responsible for implementing the directions and intentions of the
board
 organisation – the logistics of how implementation will occur
 administration – the actual work being done to fulfil the tasks as required
The board (governance) is only indirectly responsible for controls—they do not

recommend or enforce controls on employees. The board is only responsible for
overseeing management’s use of controls. The board is not directly involved in the
day-to-day operations of the business.
Corporate governance refers to the framework of relationships, systems, processes and

the rules by which authority is exercised and controlled in corporations. It refers
specifically to accountability, fiscal responsibility, disclosure, ethical practices and
compliance with the Corporations Act.
Recommendations that are made need to reflect this understanding. It is of little value
recommending that an employee doing the actual work should use a different
approach if, in fact, tasks are being performed as per the directions of management. In
a case such as this the recommendations should be directed at management, or if
required, to the board at governance level.
For recommendations to be constructive in nature they need to address the origins of

the problem rather than just look at where the problem is occurring.
REVENUE CONTROLS
Revenue controls are procedures that control the achievement of forecast revenue
targets. The most common control is to divide total units for sale by the number of
sales outlets or regions or the number of employees. Managers are responsible for
ensuring that sales targets are reached and adjusting sales quotas according to staff
performance.
A useful revenue control is to link wages to the achievement of sales forecasts. As

staff reach set targets, individuals or groups receive additional remuneration bonuses
or commissions linked to sales. In this way the forecast becomes a tool for staff
motivation. This control increases the chances that forecast targets will be achieved
because the employees are more likely to work harder to achieve bonuses and
commissions.
Involving employees, at the annual budget planning meeting, also improves the
chances of sales forecasts being achieved. This is because staff feel they have been
involved in building the forecast and feel a sense of ownership. A forecast that is
forced on staff by management risks being labelled as unrealistic and difficult to
control.

activities
EXPENSE CONTROLS
Expense controls are procedures to control the size and amount of expenses. Expense
accounts take up the largest space of many budgets and have the most financial
controls. Effective managers make staff aware of expenditure controls that are formal
written procedures and policies.
When the accountant composes the actual results they are compared with the budget.
This reveals expenditure trends that are high over successive periods, which creates an
expenditure trend.
The accountant should aim to inform management of expenditure trends prior to

periodical budget progress meetings. This ensures that management is able to consider
control alternatives before having to make a decision. This avoids making decisions
under pressure.
It is important to identify the trend as quickly as practical to avoid blame when

expenditures are higher than budgeted. Expense controls are put in place to make sure
there are procedures and responsibilities for correcting overspending trends.
Overspending is common when businesses expand rapidly and the tendency is to

focus on the revenue forecast and overlook expenditure assumptions directly linked to
achieving the revenues. When entering new international markets there will be
additional costs involved. Many of these costs will be upfront and occur well before
any income from the new territory will be generated. These include increased travel
costs, new staff wages, travel and possibly new premises purchase or rental.
Management must carefully analyse how the expansion will proceed in order to time
expansion when cash flows are available. It will often take several periods for the new
business to start receiving cash flows due to credit terms required to secure customers.
This includes the fact that making additional sales results in expenditure for increased
raw materials for production, or inventory for units to sell, and sales staff to make the
sales.
During expansion as in normal operations, management might choose to accept the

reasons for the budget overspend and ask the accountant to adjust the budgets. In this
way the accountant plays an important role in correcting and reducing the level of
expenditure which leads to increased profit.
Staff should be involved through the budget meeting and made aware of the impact of
their actions on expenses. Staff incurring expenses should know how to control
spending and be aware that expenditure limits have been reached.

activities
JUST IN TIME INVENTORY
Just in time inventory is purchasing inventory as close as possible to when it is

needed. The main benefit of this method is that it makes cash available that would
otherwise be stored on the business premises in the form of stock and raw materials.
This system only works if the business has invested time in its supplier relationships.
Suppliers should be contracted and given ongoing business when they are willing to
make frequent small deliveries. Other benefits of this system are that it reduces floor
space required to keep stock and raw material. The risk of stock held becoming
obsolete is reduced when only what is needed for sale or production is ordered.
Ideally inventory control systems are computerised. This is the case for large
manufacturing organisations. Upon receiving a customer order via a staff entry or via
the internet the computerised inventory control system records changes to inventory
levels and prepares production orders. The system notifies production and logistics
managers about items that need reordering and provide them with a variety of
inventory status reports.
Computerised inventory control systems thus help a business provide high-quality

service to customers while minimising investment in inventory and reduce inventory
carrying costs. The accounting department manager receives pre-selected inventory
status reports automatically.
At the end of each period these appear automatically in the balance sheet. This
reduces the number of transactions completed by the accountant who is assisted in
preparing periodical budget versus actual reports. This process saves time and reduces
the expenditure required to prepare the budget cycle.

activities
Cash flow controls
Cash flow controls are procedures that control the flow of cash. A common control to
manage cash outflows is to give one staff member to make volume purchases for
inventory, stationery and raw materials in order to receive discounts.
Accounts receivable are amounts owed to the business by customers who have been
given credit. Accounts receivable is an important account for managing cash inflows.
Many businesses operate with credit systems where customers are able to take goods
and services before paying for them.
Those who offer credit give customers a proof of purchase receipt showing any
amount paid when the sale occurs. It is then common for customers to be invoiced at
the end of the month with credit terms to pay the outstanding balance within one to
three months of the invoice date.
This account is controlled by:
 appointing one staff member to authorise new customers who are allowed
credit terms
 checking the credit rating of customers applying for credit when setting up new
accounts
 offering discounts for early payment of accounts
 making customers aware through staff of late charges for non-payment of
accounts
 using collection letters for overdue accounts
Management needs to make one person responsible for the assigning of new staff. A
procedure for proposing new credit accounts and verifying the creditability of
applicants needs to be developed.
A notice at the service area and in the administration area stating this is necessary. All
staff should be made aware of the importance of the timing issue to the business. This
can occur at a meeting or informally.
The communication to staff should include the proposal to manage receivables with
greater accuracy, the need for all staff to promote new discounts to customers during
sales encounters for early payment and the need to incur penalties to customers for
late payment when sending out the monthly accounts.
Cash flow controls are useful when business has a brief annual high capacity seasonal.
The most common control is to set aside cash reserves for low revenue months. The
cash is deposited into liquid investment accounts that can be accessed at short notice
when the cash is required.

activities
CAPITAL CONTROLS
Capital controls are procedures that control the capital of the business. Capital
controls are used for liabilities. When the business is unable to meet loan payments—
it uses budgeting to notify the financial institution in advance—to renegotiate the
repayments and period of the loan. Asset controls use budgeting to plan asset sales in
advance.
It is important to note that the accountant is not responsible for the financial success
or failure of the business. The budget is a useful guide towards achieving financial
goals and works only when all staff accept responsibilities and cooperate. When
results are less than desired the accountant is sometimes blamed.
If the accountant has been given no authority to enforce financial controls and still
blamed for the businesses’ performance the business is likely to struggle. This is
especially the case when the accountant has made suggestions about controls that have
been ignored—which indicates there may be a problem with management—in which
case management should be notified. Recommendations should be made to senior
management to rectify the situation.
The accountant should not take accusations about poor budgeting personally. If the
budget does contain errors then criticism leads to improved reporting. A useful
procedure is for the accountant to meet with a manager responsible for a department
with budget trend challenges. They should be approached to provide ideas and support
for financial control procedures at the next budget meeting.
Make clear and concise recommendations

When providing recommendations information must be easy to find and written in a
manner that is easily understood by those who are expected to read it.
For example, an employee might be required to undertake a thorough analysis of the

business’s potential sales from international activities. That information could be
used, in conjunction with anticipated additional expenditures, to evaluate the possible
profitability of the business in the next financial period.
Recommendations could be made to improve the business’s prospects and

performance.
Recommendations must be clear and concise. One of the issues associated with
management is information overload with vast amounts of detail available through
internal reports. Managers do not want to spend time trying to decipher what is being
said. Instead they want the information stated clearly and concisely.
When writing concisely focus on brevity and do not:
 use more rewords than necessary

 provide needless detail
 explain to the reader what should already be obvious to them
 use tautologies
 use unnecessary modifiers
 use repetition/repetitive wording

Recommendations must be presented in a format that enables readers to understand
why they have been made and why one recommendation might take precedence over
others. There must be sufficient, clear evidence and justification to show that the
recommendation or proposal will be beneficial and is based on logical premises.
If the report contains information that is irrelevant or unnecessary readers will have
difficulty working their way through it.
In many instances a report summary/executive summary will be beneficial for readers.

It will be short, explain exactly what is intended and why it is appropriate.
Use graphs, charts and statistical tables which provide a pictorial representation of the
information and make it easier to read quickly.
When writing reports you should generate an initial draft. Read the draft to ensure that
spelling, punctuation and grammar, sentence construction and paragraphs are
appropriate. Check the information to ensure that it is comprehensible and remove any
extraneous detail. Consider the document from the reader’s perspective.
Before a final draft is prepared ask someone else to read the document. Ask them to
give their opinion regarding the language used, and whether the information is
sufficiently concise and clear.

RECOMMENDATIONS
Recommendations relate to financial information about:
 costs  profitability
 operations  markets
 credit analysis  threats
 inventory management  opportunities
 invoices and accounts  the organisation’s strengths and
 potential sales weaknesses
 cash flow
Recommendations should enable management to improve and control cash flow,

production and productivity, solve problems, plan for continuous improvement,
implement quality control procedures and to plan future strategies, including the
preparation of achievable budgets or goals.
Immediate aims of the organisation’s financial reporting system are likely to ensure:
 maximum profitability
 that sufficient cash flow exists to meet all financial obligations

Performance evaluation
Recommendations that are focused on improving the performance of the organisation

often look to evaluations of performance of the organisation. These provide up-to-date
and relevant information about the efficiency of sections of the organisation.
One of the hallmarks of leading-edge organisations is the successful application of

performance measurement to gain insight into, and make judgements about,
organisational effectiveness—to drive improvements and successfully translate
strategy into action. A clear and cohesive performance measurement framework that
is understood by all levels of the organisation, including employees, process owners,
customers, and stakeholders, supports objectives and delivery of results.
High-performance organisations clearly identify what it takes to determine success

and make sure that all managers and employees understand what they are responsible
for.
Accountability for results is clearly assigned and well-understood. Budgets—as a

planning/forecasting and as a monitoring/evaluation tool—contribute to the
determination of performance expectations. Information collection or management
systems which provide the information that is, in turn, used to design and develop
future budgets/forecasts.
Accountability requires information and understanding. Many organisation’s

employees have no awareness of the relationships between costs, profits and their own
contribution to financial success. The communication aspect of a budget should
enable employee awareness and involvement in cost-cutting, waste reduction, and
revenue raising.
Performance measurements offer information on what expenditures are needed and on

how to prioritise expenditures—how to develop the financial plan (budget) that will
support all organisational operations. They help to identify what works and what does
not so as to continue with and improve on what is working and repair or replace what
is not working.
Budgets and performance management are critically linked. Budget analysis produces
information about the efficiency with which resources are transformed into goods and
services, on how well results compare to a program’s intended purpose, and on the
effectiveness of operations in terms of their specific contribution to program
objectives. For this reason, it is vital that information be collected, collated and stored,
so that it is both accessible and useable for these purposes.
Include comparative financial performances in the reports

and prioritise significant issues so they can be reviewed
under review results can be used for decision-making
A company’s financial statements provide information that supports effective
financial management. In statements significant issues can be highlighted. This
involves identification of important issues and prioritisation to make sure they are
addressed in a timely manner.
Prioritisation is the process of determining what is most important and scaling down
to what is least important, then developing a plan for sequentially addressing those
issues in the way that most benefits the organisation. Other issues might be prioritised
in terms of review, evaluation and decision making.
Comparative financial statements are the complete set of financial statements that an
entity issues, revealing information for more than one reporting period. They relate to
ratio analysis (liquidity, turnover, profitability, etc), trend analysis and industry
comparative analysis.
Comparative financial performance statements:
 assist with identification of significant issues or those to which attention must

be paid
 helps support review and decision-making processes
 enable comparison with other businesses in the same or similar industry sector
 help with identification of trends that are effecting or will affect the company
and/or the industry over time
By comparing company’s financial statements in different time periods it is possible

to identify growth or decline in revenues, growth or decline in expenses (costs),
changes in capital structure, or other financial trends that will impact on operation of
the business.
The financial statements included in the comparative performance package can

include the:
 income statement showing results for multiple periods

 balance sheet showing the financial position of the entity as of more than one
balance sheet date
 statement of cash flows showing the cash flows for more than one period
 budgets variations

Comparative financial statements can also include reports on the information for each
of the preceding 12 months on rolling basis.
They are particularly useful because they provide:
 a method by which accounting errors can be more readily identified by

comparing with previous periods
 historical financial statements which are useful to help predict future
performance
When working with comparative financial statements it is common to provide

additional information which deals with variance between periods as well as
percentage changes between periods. Identifying variances is an important task in
prioritising the issues arising from examination of comparative financial statements.
Identifying variances as early as possible when they occur is a critical aspect of

maintaining the financial well-being of the business.
VARIANCE REPORTING
A variance is the difference between a budgeted amount and the actual amount
incurred or received. Variances can be calculated for each type of budget account
including revenue, expense, cash flow or capital.
It is rare for actual operational revenues, expenditures and cash flows to exactly meet
those budgeted for. Many small and insignificant differences occur each period. To
report on these is a waste of organisational resources. For the difference to be
highlighted and included in the periodic budget review there must be a significant gap
between actual and budgeted amounts.
This gap is the material level. The company sets down in policy what dollar amount or
percentage is material. Often this is five or 10%. Only the accounts that differ by
above this amount are reported on.
In teams that collaborate, staff experienced in managing variances train novice staff in
the practices of constructing the variance report.
Training in variance reporting should aim to demonstrate the balance between listing
detail and making reports user-friendly. The senior accountant develops an accurate
perception of the variance report users’ needs based on long-term communication.
This can mean providing less information about the variance trend than the accounting
department has. This allows the report users to focus on the main budget issues and
not take up too much time on irrelevant detail.

The accounting department needs to meet with production and sales managers in order
to collect more information about revenue and expenditure trends. This is required
when the decision-makers using the variance report are expected to ask questions at
budget meetings.
In explaining a budget variance either internally to management or to clients there can

be several reasons for the differences. In most instances variances are caused by a
timing difference which is absorbed in the next period. This suggests how to more
accurately time transactions in future budgets.
When there is a gap that is larger than the material level it indicates that an incorrect
assumption was used to construct that budgeted account balance.
An incorrect estimate indicates how to better prepare thorough assumptions. The

assumptions need to be taken out of the budget folder and examined for the reasons of
the differences.
When an unfavourable trend has continued over successive periods it points to a

control problem by management or insufficient highlighting by the accountant. The
accountant must be the expert. They must have thoroughly checked through the entire
budget report at the end of each period and keep suggestions of financial controls
made to management on file.
Favourable variances should also be examined as these can lead to variances in related
accounts. Variances need to be carefully highlighted to management along with
suggestions in order to enhance the business.
This may be difficult if expenditure trends are reducing profit. Poor financial controls
points the way to increased profits. This is because when controls are enforced
properly expenditures are reduced. The accountant should ensure that variance reports
are authorised prior to periodic budget reviews and that the reports are filled with the
master budget.
The budgets become a control tool that reduces current expenses trends. Accounting
staff recommend financial control actions and improve assumptions. This way the
company capitalises on opportunities including when there is a growth in profit.
Growth is managed properly including considering the correct timing and by
controlling expenses.
The requirements of reporting variances are developed through communicating with

decision-makers in management and on the board of governance.
The periodic budget review is used to assess the organisation’s operations in order to
improve controls and correct assumptions. These lead to reducing expenditure trends
and demonstrate the worth of the accounting department to the organisation.

Prior to periodic budget review meetings, variance reports and account assumption
corrections are authorised by management. In the meeting the board is advised of the
action to correct problems. The accountant keeps the master budget and all
worksheets, assumptions and variance reports in a folder that is taken to the budget
meeting.
Variance reports are used to make:
 suggestions of controls to management

 future budgets more accurate by correcting periodic budget figures in the future
that are due to timing
A variance might show:

 that actual results are better than expected when compared with the budget (a
favourable variance usually indicated by an F)
 that actual results are worse than expected when compared with the budget (an
adverse variance usually indicated by a U)
Policy dictates what level of variances is reported. Expert budget staff should address
the originally developed revenue, expense and cash flow assumptions to explain
variances and make suggestions. Newer staff should assist through note taking and
observing. New staff should be given straightforward variances on which to complete
reports. These include variances that result from assumptions that were originally
under or overestimated.
Expert staff should teach new staff to understand the importance of timing, when
budgets need revision and how to identify trends through comparison with actual
results. In this way new staff can learn that reporting on variances is a continuous
cycle of budget improvement.
Management will sign the variance report and related budgetary revision. They are
responsible for the controls that are recommended in the reports.
The CEO can enforce a policy requiring managers to:
 obtain approval prior to expenditures

 sign for and correctly classify receipts, including motor vehicle fuel receipts
 use sign out journals and log books
New budgets and projects will require constant variance reporting until established.
This can take several quarters.

CONTRIBUTION TO DECISION MAKING
Budget reports are analysis of periodic business situations and include implications of
current revenue and expenditure trends. They are used by the governance board for
decision making. The board will meet periodically and consider the budget report for
the period.
It is the duty of the board to use the budget reports in order to make decisions of
oversight that relate to the strategic direction of the organisation. Useful reports
include recommendations about the types of financial controls needed to manage
trends. Decision-makers use these suggestions to solve operating and financing
problems.
When making suggestions about budget controls the accountant must be well
informed. This includes conducting research through talking to those incurring
expenditures and generating revenue. They are production, operations, general and
sales managers. Variance reporting and introducing controls has an impact on other
budgets.
Staff should provide information about the causes of the trends. They usually know
the solutions and provide this input that then becomes part of the recommendations
provided to decision-makers.
Ensure that reports conform to organisational and statutory

requirements
Reports provide information on financial performance and position. Business entities
or companies must keep, record, report on and explain all financial transactions—
domestic or international.
A financial report outlines how much money an organisation has made, in Australia or
as a result of overseas business transactions, how much money it has spent and the
profits it has made.
Companies must provide for true and fair financial statements. Accurate and complete
financial records must be made available for financial audits and they will contribute
to the management of an organisation’s taxation obligations.
Under corporations legislation there are a number of statutory requirements that apply
to financial reports whether the organisation is trading on the domestic or international
front.
The main requirements are that all companies must keep appropriate financial records
that record and explain all financial transactions. These can be used to report on
financial performance and position and provide for true and fair financial statements.
Financial records allow for a financial audit to occur. A budget is a financial report.
Financial reports revolve around and provide useable information relating to:
 assets  expenses
 liabilities  equity
 revenue
requirements
Budget reviews are used to identify and prioritise significant issues. They provide
information that will inform ongoing operations. A report might be prepared at the
end of a particular accounting period and a summary of accounting data for that
period, with background notes, forms, and other information. A report might be drawn
up to indicate how well the budget is operating.
Reports such as Profit and Loss, Balance Sheet, Revenues and Expenditure Reports,
Debtors and Creditor Reports and Cash Flow Statements, are generated from
accounting information and allow integration of financial considerations into
everyday business management.
Financial reporting involves the disclosure of financial information to management

and the public (if the company is publicly traded) about how the company is
performing over a specific period of time. Financial reports are usually issued on a
quarterly and annual basis. This is different from management reporting, which is
financial information that is disclosed to those inside the company to be used to make
decisions within the company. Financial reports are included in a public company’s
annual report.
PURPOSE
‘Financial reporting serves two primary purposes. First, it helps management to

engage in effective decision-making concerning the company’s objectives and overall
strategies. The data disclosed in the reports/budgets can help management discern the
strengths and weaknesses of the company as well as its overall financial health.
Second, financial reporting provides vital information about the financial health and
activities of the company to its stakeholders including its shareholders, potential
investors, consumers, and government regulators’.
If a company is publicly traded, it is subject to some very strict reporting regulations.

requirements
The financial report outlines how much money that the organisation has made and
how much money it has spent.
It should contain:
 a clear statement of purpose

 methods of data collection, sources, etc
 details on how the information included in the report was collected
 data related directly to the area being reported on, for instance:
o costing trends (wages, materials, overheads, etc)
o shifts in supplies and market
o information about how such shifts impact on product costs and sales
revenue
o contingency plans, suggestions or measures, with possible options for
sourcing other supplies, markets etc
o financial data and information, presented in a suitable form for use in the
draft cash flow forecast and for budget reports; for example spreadsheet
format for costing data, graphs for sales data—recommended percentage
increase rate for unit costs as a result of increases in materials, labour,
leases, interest rates, and so on
 relevant information relating to:
o sales information
o bills to be paid
o profit made
o items selling well
o items selling poorly
o condition of equipment
o maintenance required
o international currency exchanges
o opportunities
 problems, opportunities, threats and strengths that have or are likely to impact
on operations
 problem solutions and improvement recommendations
A report might be accompanied by a management discussion and analysis that will.
 identify and prioritise significant issues

 outline comparative financial performances for review and decision making
 make recommendations that will support the ongoing financial viability of the
organisation
 evaluate the effectiveness of financial management processes and make
appropriate suggestions

requirements
Information contained in reports must be clear and the structure and format of the
report must conform to organisational and, where necessary, statutory requirements.
Financial statements should be understandable, relevant, reliable and comparable.
Reported assets, liabilities, equity, income and expenses are directly related to an
organisation’s financial position.
To assure yourself that the structure and format of a financial report is accurate you
must determine the requirements of the organisation for which you work. This
information might come from the organisation’s policy and procedures manuals, more
experienced work colleagues or senior managers.
When participating in international trade it might be necessary to comply with

reporting requirements relevant to the country(ies) in which the organisation operates
(depending on the country, type of trade and organisational structure). Information
about these requirements will be determined by the appropriate authority in that
country and in Australia by bodies such as Austrade, the ATO, the Foreign Investment
Review Board and by Public Governance, Performance and Accountability
legislation. You might be required to produce quarterly or annual reports.
Some organisations will need to prepare and lodge financial reports with ASIC if:
 there are substantial sums of money involved

 the general public has invested funds with the company
 the company exists for charitable purposes only and is not intended to make a
profit
Reports are needed because:
 boards, owners/directors and managers use financial statements and reports to

make decisions that affect continued operations; financial analysis statements
provide management with a more detailed understanding of the figures and
contribute to an organisation’s annual report (where relevant)
 they can be analysed by prospective investors to determine viability and to
make a decision on whether they are prepared to invest
 if a company wishes to borrow from a financial institution (banks and other
lending companies), for fresh working capital or extended debt securities (such
as a long-term bank loan or debentures), or to finance expansion and other
significant expenditures the relevant financial institutions will need to examine
these reports
Reports must be clear, correctly formatted and contain only relevant details of
financial performance.
ADDITIONAL READING
Video Links
 How to write a recommendation report

https://www.youtube.com/watch?v=CJtesR9xL0Q&t=11s
 Guidelines for writing short business reports
https://www.youtube.com/watch?v=TW-1aan4nFs
 Welcome to 2019 income tax year from PwC Australia
https://www.youtube.com/watch?v=98IMU9A0X_s
 The world of corporate international tax in 2019 – Rob Aziz, BDO Global Head of
Tax https://www.youtube.com/watch?v=5YEqsoWcHaQ
 A better approach to global tax compliance
https://www.youtube.com/watch?v=UnzGLFhGqJI
Web Links
 How to write recommendation reports: purpose, structure and content video

https://study.com/academy/lesson/how-to-write-recommendation-reports-
purpose-structure-content.html
 How to write a recommendation report
https://untoldcontent.com/how-to-write-a-recommendation-report/
TOPIC 3 KNOWLEDGE QUESTIONS

Question 3.1
Objective: To provide evidence that you have the essential knowledge required
for the following performance criteria and related knowledge evidence.
 3.1 Derive recommendations logically and support with evidence in report
Question: Reports on finances related to international business can offer
recommendations relative to ongoing business success. What information/ evidence
will ensure that they are accepted as logical and credible?
Question 3.2
 3.2 Ensure recommendations propose constructive actions to enhance the
effectiveness and efficacy of functions and services related to international
business activity
Question: What types of recommendation will be constructive and will enhance the
effectiveness and efficacy of functions and services related to international business
activity?
Question 3.3
 3.3 Ensure recommendations are concise and facilitate direction and control of
organisation’s international operations
Question: How can you ensure that your recommendations are sufficiently concise
and will facilitate direction and control of the organisation’s international operations?
Question 3.4
 3.4 Identify and prioritise significant issues in statements, including
comparative financial performances, for review and decision-making
Question: Why is it important to identify and prioritise significant issues and to
include comparative financial performances in reports?
Question 3.5
 3.5 Ensure structure and format of reports are clear and conform to
organisational and statutory requirements
Question: How will you ensure that the structure and format of reports are clear and
conform to both organisational and statutory requirements within Australia and
internationally? What statutory requirements might apply?

Topic 3 Provide Financial Business Recommendations

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TOPIC 3: PROVIDE FINANCIAL BUSINESS RECOMMENDATIONS

Make logical and justified recommendations

A recommendation is a suggestion or a proposal that describes what is believed to be

Recommendations might be contained in a financial report or in a separate

Recommendations must always be substantiated or justified by evidence to explain

 benefits of the recommendations

Make logical and justified recommendations

The recommendation report should be prepared in the required format, meeting

Recommendation reports revolve around:

 identifying problems and opportunities

To be of benefit to management, recommendation reports need to be relevant, reliable,

Make logical and justified recommendations

For example, a business may be attempting to increase its sales revenue by

In circumstances such as this had a recommendation report been commissioned prior

Propose constructive actions that will make positive

Recommendations could include information pertaining to:

 expenditure relating to expansion

Propose constructive actions that will make positive

It is management’s responsibility to enforce financial control/procedures when actual

Some of the most fundamental controls are to:

 assign specific levels of purchasing authority to staff

Propose constructive actions that will make positive

The board (governance) is only indirectly responsible for controls—they do not

Corporate governance refers to the framework of relationships, systems, processes and

For recommendations to be constructive in nature they need to address the origins of

A useful revenue control is to link wages to the achievement of sales forecasts. As

Propose constructive actions that will make positive

The accountant should aim to inform management of expenditure trends prior to

It is important to identify the trend as quickly as practical to avoid blame when

Overspending is common when businesses expand rapidly and the tendency is to

During expansion as in normal operations, management might choose to accept the

Propose constructive actions that will make positive

Just in time inventory is purchasing inventory as close as possible to when it is

Computerised inventory control systems thus help a business provide high-quality

Propose constructive actions that will make positive

This account is controlled by:

Propose constructive actions that will make positive

Make clear and concise recommendations

For example, an employee might be required to undertake a thorough analysis of the

Recommendations could be made to improve the business’s prospects and

When writing concisely focus on brevity and do not:

 use more rewords than necessary

Make clear and concise recommendations

In many instances a report summary/executive summary will be beneficial for readers.

Make clear and concise recommendations

Recommendations relate to financial information about:

Recommendations should enable management to improve and control cash flow,

Make clear and concise recommendations

Recommendations that are focused on improving the performance of the organisation

One of the hallmarks of leading-edge organisations is the successful application of

High-performance organisations clearly identify what it takes to determine success

Accountability for results is clearly assigned and well-understood. Budgets—as a

Accountability requires information and understanding. Many organisation’s

Performance measurements offer information on what expenditures are needed and on

Include comparative financial performances in the reports

Comparative financial performance statements:

 assist with identification of significant issues or those to which attention must

By comparing company’s financial statements in different time periods it is possible

The financial statements included in the comparative performance package can

 income statement showing results for multiple periods

Include comparative financial performances in the reports

They are particularly useful because they provide:

 a method by which accounting errors can be more readily identified by