Tag Archives: chief financial officer

Business Blog No 32 – Q1 Profit and Loss

The end of the first quarter of the 2016/17 financial year signals a change in focus for my blog. We circle back to the phased budget we prepared earlier in the series and do our quarterly review of your actual Q1 results compared to the budget and prior year.

Your Accountant or CFO or Virtual CFO or Part-Time CFO should be providing this management reporting and analysis within a week following month-end. The timeliness, interpretation and understanding of the numbers are key, and exceptions should be noted or flagged early for explanation and/or remedial action if required.

In my experience, the financials should be presented in a concise but comprehensive slide deck of six or seven slides/pages. As a guide, try having the P&L and related reporting taking 5 slides, and one slide each for the Balance Sheet and Cashflow. The slide deck should be presented and discussed at a monthly management meeting.


This week we will look at the Profit and Loss statement. The following assumes a manufacturing entity, but is easily translatable to any entity for reporting purposes by ignoring irrelevant lines such as materials.

Ideally your P&L reporting should be in a format which shows actual month and quarter numbers alongside budget month/quarter and prior year month/quarter per the illustration following in Figure 1. Graphs can also be used to illustrate the story too for as the saying goes ‘a picture tells a thousand words’.

Each line of your P&L should be reviewed by your Accountant or CFO in the first instance comparing budget and prior year figures and flagging exceptions (TIP: I use a colour code system of RED and GREEN as an effective flag for exceptions).


Looking at the details.


The Sales numbers require a drill down analysis which is a Price-Volume-Mix Variance analysis by category or segment. This should be the second page of your P&L Report and will help explain any variation in sales between actual, budget and prior year.


An analysis should be undertaken to understand the material numbers and ratios for such things as Material Purchase Price Variances, Material Scrap and Usage Variances, Stocktake Variances and exchange rate variances for imported materials. With this information, combined with the sales analysis above, you should be in a position to understand what is driving these numbers and why they vary in comparison to the budget and prior year figures.


As with materials, you need to further analyse the direct labour numbers and drill down into things such as non-productive time, overtime, labour efficiency and even labour rate variances. It is the same with variable overheads; you need to get into the detail to understand the exceptions and the bigger picture.


Again, by using all the information and analysis gathered above, you should be able to explain the gross margin variances and also the % variances.


A dissection of the overheads incurred by the business should be listed in another report with a ‘dice-and-slice’ by department included in the report. Again exceptions need to be flagged and understood.


Having completed the analysis, the story behind your PBIT should be clear. I hope you can see that by diving into each line of the summary P&L, you build up a concise picture of why your actual profit/loss varies to budget and prior year. The numbers are nothing without understanding the story behind them and they can prove to be an insightful and powerful tool for building a sound foundation for business success.

You might notice my slogan that goes my logo is “going beyond the numbers” and that is exactly what you should expect from your key finance personnel.

Next week will move to the Balance Sheet.

Ross – Billson Advisory

Business Blog No 31 – Agri StartUp

This week, I thought I would follow on from the theme of last week’s blog on food and agriculture, and introduce you to the area of Agricultural Technology StartUp, or Ag-Tech. Things such as the commercial application of drone technology, robotics and sensors to the agricultural sector are examples of such ag-tech.

Given the world’s growing population and finite resource availability, agriculture needs to become more productive and innovative to feed the growing population. Agriculture has always been a key industry for Australia and with the opportunities presented by our location and region, and China in particular, our ageing agricultural producer population is seeking to bring scientists and IT professionals to the industry. Along the way inspiring a new generation of agricultural personnel.


A new entity has recently been created by a joint venture between the National Farmers Federation and a private equity partner. This new entity creates an Ag-Tech support centre to kick-start start-ups for the sector focussed on developing new agricultural technology.


The entity, SproutX, launched recently and is based in Melbourne. It is the first entity of its type in Australia and has received State Government support. It is now accepting applications for its Pre-Accelerator program and will soon be accepting applications for its Accelerator program.

The Pre-Accelerator program is currently open and offers a free 6-week course to prepare start-ups for the Accelerator program itself, by fleshing out ideas, providing mentoring, online lectures and some cash to go towards bringing ag-tech ideas to life.

The Accelerator program itself is backed by a $10million fund. It gives ag-tech start-ups access to all the best practical and mentoring advice, cash grants, distribution opportunities, media, PR and office space in an ag-tech hub with direct access to experts and connections to the agriculture industry. The goal is commercialisation of ag-tech ideas. Applications open in November for this program.

An aside

Ironically, I heard 2016 Casey Cardinia Business of the Year, Australian Fresh Leaf Herbs, co-founder Mr. Jan Vydra speak at a business breakfast last week about the need for evolution of the sector and the challenges of making farming attractive to young entrepreneurs.

The SproutX initiative presents a great opportunity for fledgling agricultural startups to provide a sound foundation for business success, as well as the success of the agricultural sector itself.

Next Week

Due to recent requests, the blog next week will focus on management reporting and analysis covering the end of the first quarter of this current financial year. We will start with the Profit and Loss Report next week.

Ross – Billson Advisory

Business Blog No 29 – Transfer Pricing

We have all heard the allegations in the media of multi-national entities (MNE) diverting profits away from Australia to lower tax jurisdictions thereby reducing the global tax bill of such MNE’s. Entities such as Google and Apple have been at the forefront of allegations of improper use transfer pricing practices.


Entities can divert profits using a variety of means. The simplest way of doing this is to overstate the cost of imported products from an overseas MNE subsidiary thereby reducing the profits made by the MNE’s Australian subsidiary. This artificially increases the profits in the MNE supplier country which is in a lower tax regime than the Australian subsidiary thereby reducing the overall tax burden for the MNE. Other more complex methods are catching the ATO’s eye with two announcements last week by the ATO putting entities on notice who try to use a partnership structure to avoid the law, or who use circular financing arrangements to transfer income overseas but keep deductions in Australia.

Organisation of Economic Co-Operation and Development (OECD) Transfer Pricing Actions

The OECD’s Base Erosion and Profit Shifting (BEPS) action plan is the foundation of global transfer pricing practices and was released late 2015. It focuses on taxing profits where consumers live. This puts the OECD at odds with US MNE’s who assert that their global income is essentially American income derived by a US company and that it will decide if, how and when it will be taxed it, irrespective of the locations of end consumers.


Australian Actions on Transfer Pricing

The Australian Government has already enacted the Multinational Anti Avoidance Law (MAAL) to ensure that large multinational companies operating in Australia are subject to Australian tax laws. The larger MNE’s subject to these provisions have global revenue of $1billion+. In addition, the Government’s 2016 Budget introduced a new Diverted Profits Tax, a 40 per cent penalty rate of tax on large MNE’s that attempt to shift their Australian profits offshore to avoid paying tax. The combined MAAL and the Diverted Profits Tax are expected to raise around $650 million over four years.

For SME’s in Australia, the ATO has released ‘Simplifying Transfer Pricing Record Keeping’ for entities whose Australian income is below $25million. It doesn’t alleviate obligations under the legislation, but allows such entities to self-assess and simplify what would otherwise potentially be costly compliance requirements.

Documenting how costs and prices are determined as well as the decision making process followed in setting cross border pricing remains key. Benchmarking analysis and the arms-length principles remain best options for ensuring compliance.

The new transfer pricing regime remains largely untested in the courts, so please ensure you get good advice on the documentation requirements and methodology used in setting cross border prices if you operate within a structure whereby related entities are located both here and overseas and these entities transact with each other.

Ross – Billson Advisory

Business Blog No 26 – Succession and Exit Strategy

When you start planning to start your own business, you should be also planning how you will exit that business. Starting your own business is perhaps your biggest financial investment, along with your home, and you will want to ensure that the return on this investment is maximised. Will you sell your business through a business broker when the time is right? Will you plan to hand the business onto your children? Will you have a successor ready to take over when you are ready to exit? Or will you simply close the doors and leave it all behind? The ironic thing is that recent surveys indicate that less than half of surveyed SME owners have a succession or exit plan in place.

blog 26

Your exit strategy is a key issue because you want to maximise the value of your business and get the timing right and make sure you don’t have to delay your retirement. An interesting statistic is that the average age of a SME owner is 56! Our ageing population means more and more businesses will come up for sale meaning by pure supply-demand economics, business sale prices will fall. This is particularly relevant as more baby boomers head towards retirement and are looking to exit their businesses.

Before exiting your business, you need to document processes and formalise customer, supplier and employee relationships and ensure that the business is not dependent on you for it to succeed. The business’ profits need to be sustainable in a potential purchasers eyes. Nobody will be interested in buying or running a business which collapses following your exit if you are in reality the business.

It is generally accepted that it takes 3 to 5 years to have a business ‘sale ready’ so don’t delay developing your exit strategy. You want to be ready in case an unexpected offer to buy your business materialises.

Due Diligence

Any potential purchaser of your business will undertake a due diligence process which will cover all aspects of your business to ensure it is legitimate and sustainable and that the numbers presented stand scrutiny. From that due diligence process, a potential buyer will put a value on the business most likely a profit multiple ratio depending on the industry type, scale of business, concentration of customers and key suppliers and the risk profile of the business. Profit multiples used to value a business are falling in recent times illustrating that it is a buyers market when it comes to business sales.

Another option is to put a board in place prior to putting your business up for sale. A board can add value to your business and also make it more saleable and can present an opportunity for you to stay involved as a board member if the new owner so desires (and you too)!

So ensure you have your succession and exit strategy in place as a foundation for business success.

Ross – Virtual/Part-Time CFO

Business Blog No 25 – Casuals and Redundancy

Casual hours to count towards redundancy payouts

Last week, the full bench of the Fair Work Commission resolved that periods of regular casual employment will now be counted towards redundancy entitlement calculations. The advantage to employers in ‘casualising’ their workforce is slowly being eroded away, and this latest decision is another step in that direction.

The decision means that workers who start as casuals before their positions become permanent, either full-time or part-time, will have their full length of service recognised in the calculation of their final redundancy pay out.

blog 25

An appeal by the Australian Manufacturing Workers’ Union was upheld reversing a decision made earlier in the year which allowed a ship building company to only count the period of permanent employment in the calculation of redundancy payments.

To be included in the calculation of years of continuous service, the period of ‘regular and systemic casual employment’ must be part of the period of employment from which an employee is being made redundant. There can be no break between the period of regular and systemic casual employment and the transition to permanent employment.

The decision does not apply to employees who were casuals when their employment was terminated however.

If you are in this situation, you should talk to your Industrial Relations advisor to ensure you are calculating redundancy payouts correctly.

Ross – Virtual/Part-Time CFO

Business Blog No 23 – The Cloud

Cloud computing is not new. We have all used eBay, Google, Facebook, Gmail etc. which are all cloud based. The problem is that the word ‘cloud’ is a misnomer and perhaps makes us feel that our data is in ‘outer-space’ somewhere. All cloud hosting companies actually run huge physical servers in big data centres across the globe to store the data.

Just like plugging into a grid to get access to what a company or individual wants and needs, ‘cloud’ is a subscription based pay as you go service where you don’t own the infrastructure or software but rather subscribe to access it. There are various versions of the ‘cloud’ including Software as a Service (SaaS), which means using cloud based software solutions, and Data Protection as a Service (DPaaS) which means replicating and backing up data to the cloud or to a third party disaster recovery provider.

Being in the ‘cloud’ does have many ‘silver linings’ such as allowing flexibility and giving you access to the latest technology from anywhere there is an internet connection. A start-up can also access the same technology as a big corporate. A key advantage of moving to the cloud is the cost savings from no longer needing to purchase hardware infrastructure and software licenses; instead you pay a regular monthly subscription fee. This also converts a capital cost to a deductible expense. Going to the cloud can also facilitate efficiency improvements and cost savings freeing up resources. It also enables easy sharing of data and financials and is a real time one view of the truth.

There are risks of going to the cloud and these include the risk of data loss, security risks and access issues being out of your control. So good data security and backup procedures remain key. It is however argued that cyber security risks are actually reduced by sitting in the cloud as the companies that provide cloud services invest more money in security than individual companies would and they have specialists managing the cyber-security matters. Privacy Laws may come also into play. A solution to this is for customers’ personal data not to be stored in the cloud, allowing only business process tools to sit in the cloud.

A key step before moving to the cloud is to firstly assess what the real business requirements are and what are the objectives of your IT needs and your IT budget itself.

Look for a cloud service provider who has achieved the internationally recognised ASAE 3402 certification and that sound SLA’s (Service Level Agreements) are in place with these providers and that issues of locking-in and transferability are covered. Naturally get some customer references to validate the providers claims.

It might mean dipping your toe in the water with things such as Microsoft Office 365, Cloud-based Antivirus software, payroll systems or accounting software eg MYOB. A staged approach of moving to the cloud and ensuring adequate training for staff ensures your business won’t be overwhelmed by taking on too much at once.

From our survey earlier in the year, a surprising result was the apparent slow uptake of cloud based IT solutions. For the vast majority of the survey respondents, IT systems are still kept in-house.

From my perspective, cloud solutions are the future and are great productivity and cost saving opportunities. Converting your in-house software platforms (and the associated reduction in necessary infrastructure costs and maintenance) to a cloud based solution by a subscription model is recommended. Beware of IT support providers who advise clients to avoid going to the cloud due to their own self interests. To take the mystery out of cloud computing, just remember all our personal emails have always sat on a server somewhere in the “cloud” until we retrieved them and that hasn’t seemed to have bothered us…

Ross – Virtual/Part-Time CFO

Business Blog No 22 – SuperStream

SuperStream is a government initiative which details the way businesses are to pay employee superannuation contributions to superannuation funds. Businesses with 20 or more employees are already required to use the system, with small businesses with 19 or fewer employees needing to put the system in place. The original deadline for small businesses to be ‘Superstreamed’ was June 30, 2016, but the ATO are showing flexibility by extending this deadline to October 28, 2016. From my perspective, I highly recommend you cross over to the new regime as soon as possible as there are productivity and efficiency improvements to be gained.

SuperStream transmits money and information in a consistent format across the super system between employers, funds, service providers and the ATO in a single transaction, even if you deal with multiple super funds. The data is linked to the payment by a unique payment reference number.

How your business becomes SuperStream compliant is your choice. Options include using a compliant payroll system, using a super fund’s online system, using a messaging portal or using a super clearing house like the ATO’s Small Business Super Clearing House (SBSCH). For your information, the ATO’s SBSCH is a free, optional service for small business with 19 or fewer employees.

You don’t need to use SuperStream for contributions to your own self-managed super fund (SMSF) if you are an employee of your family business, or if you are a sole trader and you make personal superannuation contributions to a super fund for yourself. For these types of contributions you just keep using your previous processes.

If you need help getting SuperStream compliant, don’t hesitate to contact us on (03) 9554-3128.

Ross – Virtual/Part-Time CFO

Business Blog No 21 – Budget – It’s a Wrap!

Last week, you completed the last piece of your budget financials for the new financial year, your Cashflow Budget.

Congratulations on completing your 3 months budget creation journey! I hope you have learnt a few things along the way.

You should now have a phased Profit and Loss budget, a budget Balance Sheet and a budget Cashflow Statement.


Now that you have created these budgets for your business, you need to assign responsibility and accountability for components of the budgets to personnel in your organisation. I would suggest the following as an indicative responsibility assignment:-

Profit and Loss Budget

  • Sales Budget responsibility – Sales Manager
  • Distribution Overheads responsibility – Distribution Manager
  • Selling Overheads responsibility – Sales Manager
  • Administration Overheads responsibility – Accountant, Finance Manager or Virtual Part-Time CFO
  • If you are a manufacturer, your manufacturing budget – including direct materials, direct labour, direct overheads and Production Overheads responsibility – Production Manager
  • If you are a distribution company, your cost of sales budget responsibility – Purchasing Manager
  • If you are a service entity, your direct cost of services responsibility – Operations Manager.

Balance Sheet Budget

  • Accounts Receivable Budget responsibility – Accountant, Finance Manager or Virtual Part-Time CFO
  • Inventory – Raw Materials responsibility – Purchasing Manager; Work in Progress and Finished Goods responsibility – Production Manager.
  • Accounts Payable Budget responsibility – Accountant, Finance Manager or Virtual Part Time CFO


Once you have assigned responsibility for budget areas, you need to ensure the relevant personnel are accountable for their budget areas, by measuring and reporting actual numbers against the budgets every month. This will require the development of a reporting structure and comparison reports. These reports and numbers should form part of your monthly review meeting focussing on exceptions that need action, explanation or further investigation. Such reports and analysis can be prepared by the Accountant, Finance Manager or Virtual Part Time CFO to ensure independence and impartiality.


Use this week to assign responsibility for budget targets and develop a reporting and accountability structure so each month you can measure and compare the progress of your actual numbers against your budget numbers. Once you start measuring things, it is amazing how quickly improvement can actually come from the simple measuring process itself, as well as the identification of improvements opportunities.

All the best for a prosperous and successful financial year! As always, if you need some help or guidance, don’t hesitate to call me on (03) 9554-3128.

Next week we will move away from the budget process and onto some new topics to provide a sound foundation for business success.

Ross – Virtual Part-Time CFO