advanced diploma of government – session 9 welcome back!

Advanced Diploma of Government – Session 9

Welcome back!

© CIT Solutions Pty Ltd 2014© CIT Solutions Pty Ltd 2015

Before we start

Emergency procedures Facilities Mobile phones Keep safe and comfortable Move


Learning outcomes for today

By the end of the session, participants will be able to: develop linkages between strategic planning

outcomes and financial management processes establish and maintain a financial risks

management strategy establish and maintain a taxation strategy establish resource requirements in financial terms develop financial bids and estimates.


Develop linkages: need for clear linkages

between strategic plan and financial processes

linkages may be cross government as well as inter-agency

financial management processes should support achievement of strategic plan outcomes.


Develop linkages

What the PBS articulates


Develop linkages

Linking the PBS to Financial Management Processes


Develop linkages

Group Exercise

Using extract of Agency PBS – identify the linkages between Outcomes, Programs and Outputs (deliverables), Performance and Risk.


Develop linkages

Assessment Activity:

AAFIN3 Strategic linkages

Using extract of Agency PBS – identify the linkages between Outcomes, Programs and Outputs (deliverables), Performance and Risk to your own work area.


Financial Risk Management

What is risk?

What is risk management?

The three major contributors to organisational risk– Strategic risk– Environmental risk– Operational risk.



Risk Management Program– What is it?– What does it look like?– What are the key success factors?

• High level support• Establishing a clear purpose• Integration with business planning• Tailored to the organisation• Formal review process• Focus on important issues



What does a risk management program include?– The foundations and organisational arrangements

for designing, implementing, monitoring, reviewing and continually improving risk management throughout the organisation



Risk Management Policy– What is it?– What information does it include?



Steps in implementing an effective risk management program. Note that communication and consultation occurs throughout all these steps.

1. Establish the context

2. Identify risks

3. Analyse risks

4. Evaluate risks

5. Treat risks

6. Monitor and review.



From ISO 31000:2009 Risk Management



1. Establish the context– Define the organisations objectives and external

and internal parameters.




– External Risks• are exposures that result from environmental

conditions that the firm commonly cannot influence, such as the regulatory environment and market conditions.

– Internal Risks• are exposures that derive from decision-

making and the use of internal and external resources, including the firm's operations and its objectives.




– Risk Management context• the goals, objectives, strategies, scope and

parameters should be fully defined.

– Risk Criteria• define how risks are measured • tailor criteria to suit the needs of the

organisation.


Financial Risk Management 2. Identify risks

– identify sources of risk, areas of impacts, events (including changes in circumstances) and their causes and potential consequences.

– aim is to generate a comprehensive list of material risks based on those events that might create, enhance, prevent, degrade, accelerate, or delay the achievement of objectives.



Group Exercise – Identify Financial Risks

– Brain storm to identify as many financial risks as possible. The following areas are provided to provide you with some ideas:

• Capital Management, Budgeting, Revenue and Expenditure, Reporting.


Financial Risk Management 3. Analyse risks

– identify existing control measures– taking into consideration the existing

controls, determine:• 1. the consequences of an event, and• 2. the likelihood of the event occurring.


Financial Risk Management 4. Evaluate risks

– Combine the consequences and likelihood to determine an overall risk rating



4. Evaluate risks– rank risks using the defined risk

evaluation criteria and determining whether risks are acceptable or unacceptable and therefore require further risk treatment

– additional controls may need to be introduced in order to reduce the risk to an acceptable level.



5. Treat risks– decide what action is required to treat

risks– identify the range of options– assess the options– prepare risk treatments plans– implement risk treatment plans.



5. Treat risks– Risk treatment options:

• avoid• reduce• share or transfer• accept.



5. Treat risks

Treatment plans should identify– responsibilities– schedules– expected outcomes– budgeting– performance measures– reference to other risk docs– a review process.



6. Monitor and review– A structured review process is an

essential component of a success risk management program.

– The review process should involve reporting of non-compliance against the risk management plan with resulting direction to implement corrective action.



Communication: Communication and consultation

occurs throughout all the risk management steps.

The risk management policy should outline the communication requirements– i.e. when information should be shared

with stakeholders.


Financial Risk Management Revision:

– What is a risk management program?– What is its intended outcomes?

• The establishment of a robust risk management framework and processes.

• Improved organisational awareness and management of risk.

• Acknowledgement that risks are an integral part of managing any organisation.

• Organisational and individual preparedness to manage risk and minimise adverse impacts.


Taxation Strategy

What is a taxation strategy?– A strategy to ensure that taxation obligations are

met in the most cost effective manner.

It is important to:– ensure legislative requirements are met– ensure timely advise is sourced and utilised– establish a cost effective strategy to capture and

report tax liabilities– to minimise tax liabilities by correctly following

the legislative requirements.


Taxation Strategy

What are the legislative tax requirements for Government departments?

– The main applicable State/Territory and Federal taxes which you should have an understanding of are:

• Goods and Services Tax• Fringe Benefits Tax, and• Payroll Tax.


Taxation Strategy

Goods and Service Tax:– Commenced 1 July 2000– Levied at rate of 10%– Applied to most goods & services– Exemptions include:

• certain basic foods• religious services• charities• water and sewerage• payment of employee wages.

• council rates• some education and

childcare services• some medical services• exports


Taxation Strategy An entity must be registered for GST if it is

carrying on an enterprise and annual turnover is more than $75,000 (or $150,000 for non-profit entities).

The extent to which an activity incurs a GST liability (or not) is determined by which category it falls into.

Categories– Full GST Liability– GST-free– Input taxed.


Taxation Strategy

Remitting GST– A Business Activity Statement (BAS) must be

lodged for each tax period (either monthly or quarterly).

– A return must be submitted, even it is a nil return for the period.

– BAS must be completed on an accrual basis unless:

• the entity’s annual turnover is less than $2,000,000 in which case it can elect to use a cash basis.


Taxation Strategy:

What is a cash basis?

What is an accrual basis?


Taxation Strategy

Group exercise

Cash v accrual accounting


Taxation Strategy

Fringe Benefits Tax:

Commenced in 1986 to tax certain benefits that were provided to employees that had effectively provided the employee’s with tax benefits.

It was introduced to cover what was seen as inequality in the tax system.

It is paid by employers, irrespective of their structure, e.g. sole traders, partnerships, trusts etc.


Taxation Strategy

FBT covers a wide range of benefits including:– Motor vehicles– Loan/debt waivers– Housing– Living-away-from-home allowance– Certain accommodation benefits– Expense payment benefits– Entertainment– Car parking– Airline transport– Property and goods– Other residual benefits


Taxation Strategy

FBT rate: – has varied over the years– is currently 49%.

Taxable amount is subject to two different rates:– Type 1 - for benefits where the provider is entitled

to claim GST– Type 2 - for benefits where the provider is not

entitled to claim GST.


Taxation Strategy

Exempt benefits are:– items which the employee would be been able to

claim as a tax deduction– items which are specifically FBT exempt

including:• Newspapers and periodicals• Relocation expenses• Minor benefits (less than $300 including GST)• Laptop and other portable computers• Tools of the trade• Briefcases, calculators, electronic diaries and other

similar items.


Taxation Strategy

Reportable fringe benefits

– Employers are required to identify on payments summaries the grossed-up value of an employees fringe benefits which are their remuneration package and in excess of $1,000 (before gross-up).


Taxation Strategy

Fringe benefits are not included in an employee’s assessable income, however they are included in a number of income tests relating to items such as:

• Child support payments• HECS repayments• Superannuation surcharge• Medicare level surcharge• Rebate for superannuation contributions to

personal or a spouse’s superannuation.


Taxation Strategy Payroll tax:

– is paid by employers to Australian State Governments based upon wages paid out by the employer

– was introduced by the federal government in 1941 to finance a national scheme for child endowment.

– In 1971 the federal government handed over payroll taxes to the states, acknowledging that this tax represented the sole possible growth tax available to the states.


Taxation Strategy Payroll tax

– It was originally a uniform rate, but now state payroll taxes are now levied at rates ranging between 4.75 per cent and 6.85 per cent and with different threshold amounts for payment.

– Payroll taxes are still an important source of tax revenue for the states, accounting for between 24 and 36 per cent of each state’s total revenue.



Assessment Activity

AAFIN4 Financial Risk and Taxation Strategy


Establish resource requirements

When developing financial strategies, it is important that resource requirements are determined in terms of physical assets and human resources.

Resource requirements for new activities or assets, for example:– when a departments submits a new policy

proposal (NPP) for consideration, they complete the templates required by Department of Finance to document the resource requirements.



Resource requirements for assets:‒ Departments are required each year to develop

and submit for internal approval a strategic asset plan which outlines proposed asset purchases, disposals and capitalisation of completed projects.

Resource requirements for operations:– Internal budgeting processes are established in all

Government departments and they provide the mechanism to allocate resources efficiently, effectively and economically in accordance with the departments strategic and operational plans.



When evaluating and approving resource allocation proposals, financial analysis techniques are used.

Financial analysis techniques include:– Accounting rate of return– Payback method– Net present value– Internal rate of return– Whole of life costing.



Accounting rate of return:

Measures the project’s rate of earnings on the average capital investment over the project’s life

It is also known as Return on Investment (ROI) and is widely used

It is not based on cashflows but rather considers that the project is acceptable if the ARR is greater than a predetermined rate.



Accounting rate of return:

It focuses on long-term profitability and is expressed as a percentage.

If several projects are being evaluated, the one with the highest ARR is selected first.

ARR = Average annual profits from the investment

Average investment



Accounting rate of return Some of the benefits of ARR include:

– It is easy to calculate and to understand.– Performance evaluations often use ARR so it is

consistent with the method of evaluation that is likely to be used on the project.

– The whole project life is included in the evaluation. Some of the limitations of this method include:

– It does not consider cashflows.– It ignores the time value of money.– Future uncertainty is ignored.



Payback method: considers the amount of time necessary for

the cashflows generated by the project to recover the original cost of the investment

is calculated by accumulating cashflows until the original investment is recovered.



Payback method: A project is acceptable if its payback is less

than a certain pre-set time, known as the hurdle period.

If several projects are being ranked, the one with the shortest payback period will be the most attractive as it frees up capital to be invested in other projects earlier.



Payback method: Payback period = Cash outlay ÷ the amount

of net cashflow generated by the project.

The benefits of using payback analysis include:

– It is easy to understand and simple to use.– It provides a rough estimate of risk as the earlier

cashflows recover the initial investment costs the less risky the investment.



Payback method The limitation of this type of analysis include:

– It ignores cashflows after the payback period. So if two projects are being compared and one returns cashflows quicker to cover the initial investment, this project would be undertaken according to this method, irrespective of the fact that while the second project might take a bit longer to cover the initial investment but in the long-term it is expected to generate greater cashflows than the chosen project.

– The time value of money is ignored. This could be assisted by discounting the cashflows.



Payback method The limitation of this type of analysis include:

– Future cashflows are treated as certain, which is a highly unlikely assumption.

– Some equipment (especially leading edge equipment) may have longer payback periods because a lot of funds have been invested to develop them. This methodology would rule out investing in this type of equipment, even though the equipment may make the investing company into a highly profitable organisation in the long-run because it has invested in this type of technology.



Net present value: The NPV of a project is the residual when the

total value of all cash outflows discounted to present value is subtracted from the total value of all cash inflows discounted to present value.

A project with a positive NPV is acceptable. Where multiple projects are being assessed,

the higher the NPV, the better the project.


Establish resource requirements Net present value

NPV = R ×1 − (1 + i)-n

− Initial Investmenti

When cash inflows are even:• in the above formula,

R is the net cash inflow expected to be received in each period;i is the required rate of return per period;n are the number of periods during which the project is expected to operate and generate cash inflows.



NPV = [R1 +

R2 +R3 + ... ] − Initial Investment

(1 + i)1 (1 + i)2 (1 + i)3

When cash inflows are uneven:Where,i is the target rate of return per period;R1 is the net cash inflow during the first period;

R2 is the net cash inflow during the second period;

R3 is the net cash inflow during the third period, and so on ...

Net present value



Net present value The benefits of this type of evaluation tool

include:– the entire life of the project is included in the

evaluation– the time value of money is included– cashflows are considered (which is important to any

organisation). The limitations include:

– cashflows are treated as certain– when ranking projects with unequal lives, the shorter

projects will be preferred unless proper adjustments are made for comparative purposes.


Establish resource requirementsInternal rate of return: Is the discount rate that causes the present

value of a project’s cash inflows to be equal to the present value of its cash outflows.

It is that point where the NPV equals zero.. A project is acceptable if the IRR is greater

than a specific hurdle rate such as the organisation’s cost of capital.

If there are multiple projects the one with the highest IRR will be the most preferred.


Establish resource requirements Internal rate of return

NPV= ∑ {Period Cash Flow / (1+R)^T} - Initial Investment

where R is the interest rate, and T is the number of time periods.

IRR is calculated using the NPV formula by solving for R if the NPV equals zero.



Internal rate of return

The benefits of this type of evaluation tool include:– the entire life of the project is included in the

evaluation– the time value of money is included– cashflows are considered.

The limitations of this type of evaluation include:– cashflows are assumed to be certain.



Whole of life costing– Also knows an Life Cycle Costing (LCC)

Tracks all the revenues and costs attributable to each product throughout its life, from its initial research and development through to final customer servicing and support in the marketplace.

It has long been used in planning for reliability and maintenance for complex engineering systems in defence, airline, railway, offshore platform, power station, and other applications.



Whole of life costing:

Life cycle budgeted costs can provide useful information when undertaking costing decisions.

It highlights the need to cover all costs when setting prices.

In addition, LCC allows a buyer to consider, at the time of purchase, the productivity, reliability and maintainability of alternative pieces of equipment.



Final points: When allocating resources, it is important to

ensure that they are allocated in accordance with prioritised strategic and operational plans, i.e. they should be cross-referenced to strategic and operational plans.

Where no such linkage can be made, the question needs to be asked why are we undertaking this particular course of action?



Final points: It is also important to ensure that service delivery

requirements are established in accordance with program requirements.

Where some of the resource requirements include physical assets they should be cross-referenced to the strategic asset plan.

A strategic asset plan needs to be developed, submitted for approval and maintained in accordance with organisational requirements.

Information from the strategic asset plan is often used to develop our capital budget proposal, which is included in our portfolio budget statements.


Develop financial bids & estimates

Developing financial bids and estimates required when requesting new resources.

Organisational initiatives are costed and bids/estimates need to be prepared in accordance with budgetary processes and requirements.

Bids may include:– program discretionary bids– programme, section, business unit bids– portfolio managed bids.



Estimates may include:– Budget estimate– Additional Estimates– Forward estimates– Long-term Estimates– Revised estimates, both current and forward.

The budgetary requirements may include:– Zero based budgeting– Accrual budgeting– Cash budgeting– Activity based costing– Output and outcome based budgeting– Down/bottom up approach– Base plus increment– Cash flow management.


Develop financial bids & estimates:

Guidance for the information required would normally be available from your central finance area.

Some of the other agencies also issued guidance from time to time. These include: The Department of Finance has guidance on

budgetary processes and requirements and has issued a guideline for cost recovery and competitive neutrality.



The Department of Prime Minister and Cabinet, has guidance on preparing implementation plans.

The ANAO has issued many guidance documents in relation to a variety of financial areas.



These bids/estimates need to be linked organisational priorities/outcomes, based on substantiated information.

The types of information that may be used to substantiate the bids/estimates include:

– historical information– costing of activities– cost benefit analysis– staff/resource requirements– contractual information.


Develop financial bids & estimates:

The bids/estimates need to contain logical assumptions and to take into account resource constraints and organisational needs.

Supporting documentation may include:– phasing for liabilities and expenditures– impact statements– reasons for major variations– significant variations to financial guidance and

staffing resources.


That’s it for to

day!

advanced diploma of government – session 9 welcome back!

Documents

cit solutions pty

financial processes

aafin3 strategic linkages

clear linkages

financial terms

financial bids

strategic planning outcomes

linkages assessment