Business Awareness: Student Guide

Business
Awareness
BUS001
Student Guide
Caterpillar Service Technician Module
BUS001
Business Awareness
Published by Caterpillar of Australia Pty Ltd

1 Caterpillar Drive
Tullamarine Victoria Australia 3043
Version 4.0, 2005
Copyright 2005 Caterpillar of Australia Pty Ltd. Melbourne, Australia.
All rights reserved. Reproduction of any part of this work without the permission of the
copyright owner is unlawful. Requests for permission or further information must be
addressed to the Caterpillar Learning Manager, Australia.
This subject materials is issued by Caterpillar of Australia Pty Ltd. on the understanding that:
Caterpillar of Australia Pty Ltd., its officials, author(s), or any other persons involved in the
preparation of this publication expressly disclaim all or any contractual, tortious, or other form
of liability to any person (purchaser of this publication or not) in respect of the publication and
any consequence arising from its use, including any omission made by any person in reliance
upon the whole or any part of the contents of this publication.
Caterpillar of Australia Pty Ltd. expressly disclaims all and any liability to any person in
respect of anything and of the consequences of anything done or omitted to be done by any
such person in reliance, whether whole or partial, upon the whole or any part of the contents
of this subject material.
Acknowledgements
A special thanks to the Caterpillar Family for their contribution in reviewing the curricula for
this program, in particular:
Caterpillar engineers and instructors

Dealer engineers and instructors
Caterpillar Institutes.
Table of Contents
Included in this Module:
Module Outline Document..........................................1
1
Topic General Business Awareness.....................................9
Introduction................................................................................... 10
Types of Business Structures....................................................... 10
Business Funding......................................................................... 13
Starting a Business...................................................................... 14
Record Keeping............................................................................ 17
Successful Businesses................................................................ 18
2
Topic Insurance....................................................................19
Introduction...................................................................................20
Business Insurance......................................................................20
Types of Insurance....................................................................... 21
3
Topic Purchasing..................................................................25
Purchasing....................................................................................26
4
Topic Business Costs..........................................................31
Introduction...................................................................................32
Operational Costs.........................................................................32
Time Management.......................................................................33
Work Study...................................................................................36
Capital Cost Management............................................................ 41
Transaction Documents...............................................................45
Managing Assets..........................................................................48
1
Appendix Glossary......................................................................55
Commercial Terms And Abbreviations.........................................56
Business Awareness BUS001

C aterpillar of Australia P ty Ltd
Business Awareness
Module Outline Document
ii
BUS001
Caterpillar of Australia Pty Ltd
Included In This Section:

Learning Outcome Details and Module Information

C aterpillar of Australia P ty Ltd
Business Awareness
Module Number: BUS001
Module Name: Business Awareness
Module Objective:
This module identifies the competency required to communicate in the workplace.
Prerequisites:
Nil
Date: 2nd January 2005
Version: 4.0
Recommended Delivery:
1. As a minimum, personnel delivering this module must have the status of a
Caterpillar Trainer and Assessor Program (CTAP) Level 1 Facilitator, or equivalent
2. Media, demonstration and practical facilitation, given:

Notebook Computer
PowerPoint Presentation
Video Projector
Whiteboard
Use of various training aids/models or machines
3. Estimated time of delivery 8 hours
4. Classroom and Workshop Environment
5. Resources:
Nil
6. References:
BUS001 Facilitator Guide
Relevant manufacturers specifications
7. Recommended maximum student/teacher ratio:

Classroom 15:1
Workshop NA
8. Resources for Student:

BUS001 Student Guide (one for each student)
BUS001 Student Guide (one for each student)
Notebooks and Stationery

BUS001
Caterpillar of Australia P ty Ltd
Business Awareness
Revision
Nil
Assessment
This is an underpinning knowledge and practical module. Learning Outcomes should
be assessed using formative and summative assessments. Evidence of achieving
this modules learning outcomes, at a knowledge level, is attained by oral and written
assessment. The written assessment is closed book and a minimum standard of 80% is
required. Attainment of the student performance at a hands-on level is achieved by the
use of practical activities aligned with marking guides.
The practical activities may be used as a learning activity or as a practical assessment. If
the practical activity is used as a practical assessment, the student must work alone and
be deemed competent in all aspects. The assessment method must confirm consistency
and accuracy of performance together with application of underpinning knowledge. The
assessment must be by direct observation of tasks, with questioning on underpinning
knowledge. Personnel conducting the assessment must be qualified as a workplace
assessor.

BUS001
Business Awareness
Learning Outcome 1: Describe types of businesses and associated

terminology used in industry.
_______________________________
At the completion of this learning outcome, students should be able to:

1.1 Explain the difference between the private and public sector
1.2 Explain the basic forms of private enterprise ownership
1.3 List the attributes of a successful business
1.4 Describe the types of funds used by businesses
1.5 Explain how businesses obtain funds
1.6 List sources that businesses obtain advice from
1.7 Explain reasons for record keeping.

BUS001
Business Awareness
Learning Outcome 2: Explain types of insurance related to operating a

business.
_______________________________

2.1 List the types of insurance a business would be covered for
2.2 Explain types of insurance
2.3 Describe Motor Vehicle Third Party Insurance
2.4 Describe Employee Superannuation
2.5 Explain essential insurance.

BUS001
Business Awareness
Learning Outcome 3: Explain the principles of purchasing goods.

_______________________________

3.1 Explain the factors affecting purchasing of goods
3.2 Describe supplier selection
3.3 List the sources of information on suppliers
3.4 Describe the purpose of a purchasing policy.

BUS001
Business Awareness
Learning Outcome 4: Explain costs involved in running a business.

_______________________________

4.1 Explain what operational costs are
4.2 Describe the importance of time management and work study
4.3 Explain the process of capital cost justification
4.4 Explain the purpose of transaction documents
4.5 Describe simple methods for managing assets

BUS001
Business Awareness

BUS001
1 General Business Awareness
Topic
Included in this Topic:

Introduction...........................................................................................................................................................................10
Types of Business Structures........................................................................................................................10
Business Funding. .........................................................................................................................................................13
Starting a Business.....................................................................................................................................................14
Record Keeping................................................................................................................................................................17
Successful Businesses. ........................................................................................................................................18

Business Awareness
Student Guide Topic 1
Introduction
Business can be defined as any enterprise in which one or more persons make
all of the critical management decisions, such as finance, accounting, personnel,
purchasing, processing, or servicing, marketing and selling, with the aid of
internal specialists and with specific knowledge in functional areas.
Types of Business Structures

A way of classifying the enterprise in which you work is based upon who owns
the enterprise. A basic division is often made between:
The public sector
The private sector
Public Sector
By the public sector we mean those enterprises that are owned by the
government. In Australia there are a number of enterprises that are government-
owned. This is primarily because Australia is so large and its population so
small. In Australia if the government didnt look after some things like railways,
postage, telecommunications, and social services, we wouldnt have the level of
services that we do have. Although there are countries that have private railway
lines, this is rare. Railway lines dont make much money, at their best, and, at
their worst, they make substantial losses.
There are many services that a private business would not take on because they
are not profitable and that is often where the government will step in and provide
the service.
However, there are many areas of enterprise that are capable of making a profit
and this area is where the private sector comes in. There will be some profitable
areas where the government will have a monopoly but, more and more,
governments are passing these areas over to private enterprise.
There are three levels of government:

Local governments (which includes, city, town shire and borough councils)
State governments
The national Commonwealth government
If you are working with a government-owned enterprise, which level of
government owns the enterprise?
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Business Awareness
Identifying government ownership from the name of the enterprise may be

easy or difficult. There are different types of government-owned enterprises.
Some government-owned enterprises are easily identifiable as belonging
to the government because they have a title like Department of..... The
Department of Social Security and the Department of Agriculture clearly belong
to the government. These departments ultimately report to a minister in the
government. Because these departments do things for the public they arent
required to make a profit like a privately owned business.
Other government-owned enterprises are less directly controlled by the

government. These dont have a name like Department of... but have a title
that described their function like State Electricity Commission or Gas and Fuel
Corporation. These types of enterprises are usually encouraged to cover their
costs but are not under pressure to make a profit.
Some government-owned enterprises have been given permission to act in a

very independent manner as if they were privately-owned. They are required to
make a profit. These enterprises include large government-owned enterprises
like Australian Defence Industries which has facilities all over Australia.
In some cases governments are simply selling off things that they owned to
private industry this is called privatisation. An example of privatisation is the
former Williamstown Naval Dockyard in Melbourne which used to be run by the
Commonwealth Government but which was sold to the private firm Amecon.
In some cases governments are telling organisations they own that they must
seek to make a profit that is, that they must begin to make decisions as if they
were a privately owned business. An organisation which has been corporatised
is Australian Defence Industries which was once a government-owned and
run organisation controlled by a government department and encompassed
defence industries in all the Australian states. Now Australian Defence Industries
has considerably more independence from government in what it does, has a
manager and board of directors, aims at making a profit, has closed down or
reduced some unprofitable areas and has acquired some new facilities in search
of more profitable business. This is called corporation.
Private Enterprise
There are three basic forms of private enterprise ownership:
Sole trader
Partnership
Company
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Business Awareness
Sole Trader
A sole trader is a business owned and operated by one person. The sole trader
may employ other people but the full responsibility for the profits and losses of
the business are with the one person. Sole traders can trade under their own
name (as do many consultants) or under a business name. Business names (for
example: Top of the Town Fashions) must be registered with a state government
agency to ensure that no two businesses in a state have the same name.
Partnership
A partnership is a business owned and operated by two or more people. It is
advisable to draw up a contract to ensure that both sides are legally committed
to their agreement. There is a law called the Partnership Act that may need to be
abided by regardless of whether there is a formal contract of partnership or not.
In some cases there are restrictions on the number of partners who can own the
enterprise. For example, accountancy or lawyer enterprises may not have more
than 400 persons as partners; architects, pharmacists and veterinary surgeons
have a limit of 100; and medical practitioners have a limit of 50.
In the case of a partnership, unless there is a legal agreement to the contrary, all
the partners have a responsibility for the profits and the debts of the partnership.
Companies
There are a variety of types of companies. However, we will make only the
distinction between the private and public company.
The private company is one in which the number of people taking part in the
ownership of the company is limited by the legal document that set up the
company. This is often the situation in family companies where the family
members want to ensure only family members can take part in the company.
The public company is one in which anyone can have a share if they are willing
to buy shares. These shares are freely traded on the stock exchange.
As with partnerships, there are specific government laws which control

companies, including how they are established and how they can operate.
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Business Awareness
Business Funding
Types Of Funds Used By Businesses
Overdraft
This is the most common means of obtaining business funding. Interest is
charged on the amount of money that is owed daily. The less the account is
overdrawn the lower the interest. Banks usually require security on an overdraft
account.
Fixed Term Loan

These loans are usually used to purchase particular items of equipment and
should not be used to top up working capital. They must be repaid within a
certain amount of time. These types of loans are offered by banks and other
lending institutions on a variety of terms of time and interest rates.
Personal Loans
These are made to a person applying, not a business. These forms of funds only
apply to small businesses and are of no interest to us.
Leases
The leasing of equipment has been a very popular means of gaining capital
equipment without having to pay out large sums of cash. Spray painting booths
would be a good example. A leasing company (lessor) purchases the equipment
and leases it to the spray painting business (lessee) for a specified rental. The
lessor owns the equipment but the lessee uses it for the lease period. The lease
payment includes the interest rate, which is usually higher than bank finance.
Where Businesses Obtain Funds

Trading Banks
These are the most common source of short, medium or long term loans.
They have a variety of funding systems that can assist the different kinds of
businesses according to their particular needs.
Stock Market
The ability to raise subscription funding from investors is a commonly accepted
way for funds to be sourced by growing businesses. This is done via the
mechanisms of a listed Stock Exchange where the floating of a venture is done
in exchange for required funds.
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Starting a Business
Registering A Business Name
A business name is the name or title given to the business activity. A business
name is optional, but if it is to be used it must be registered. Business names
are registered at the Corporate Affairs Office in each state in which trading is
conducted under that name. Registering a business name gives protection from
any other business using that name.
Seeking Specialist Advice

Company should seek as much advice as possible from a wide range of
professional people/groups and organisations, particularly when the wrong
decision could be disastrous.
Subjects About Which Advice May Be Needed

There are many permits, licenses and regulation compliances that any business
must comply with. Some of these are:
Trade Waste Permit
EPA Certification
Hazardous and waste chemical movement and disposal
Municipal council permits
Signage permits
Compressor/boiler registration
Occupational Heath and Safety Code of Practice compliance
Sales Tax registration
Sources of Advice
Advice is available through the following sources:
Motor Trade Association of Australia
Bank managers
Accountants
Society of Automotive Engineers
Suppliers
Municipal councils
Trade publications
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TERMINOLOGY
The most common method of identifying the success of a workshop is not only
by counting the number of vehicles that are run through the doors, but by looking
at the businesss Profit and Loss Statement and determining the amount of
profit made in a given time. To be able to do this the owner of the business must
understand the language and terms of accountancy. Following is a short list of
the basic terms used in recording financial transactions in a business (this is by
no means a complete list of terms).
The process of identifying, measuring and communicating

Accounting economic information to decision makers to enable them to
make better decisions relating to their future economic activities.
Asset What the business owns (e.g. motor vehicle, tools, cash).
The process, conducted by independent accountants, of

examining a businesss financial reports and records and
Auditing
expressing an opinion as to whether the reports are true and
fair.
A statement listing at a specific time the liabilities and the
Balance Sheet
assets of a business.
A loan from a bank whereby it agrees to honour cheques drawn
Bank Overdraft on an account in excess of the accounts balance. Interest on
such loans is calculated on the daily balance.
Bank Statement A statement of a businesss account at the bank.
A financial plan of action to control a businesss operations and

Budget
evaluate its performance.
Capital The value of all investments in the business.
A current asset comprising notes, coins, cheques and any other

negotiable instruments such as postal notes that a bank will
Cash
accept for immediate deposit in a bank account in addition to
bank account balances.
The flow of money within a business from receipts (from all
Cash Flow
sources) to payments and drawings.
An attachment to a cheque, removed and kept by the account
Cheque Butt
holder of the cheque, to record the details of the payment.
Creditors People to whom the business owes money (e.g. suppliers).
Debtors People who owe the business money for work that it has done.
Deposit Slip A document used to evidence the banking of cash.
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Business Awareness
Drawings
The amount of assets (usually cash) taken out of the business.
(Withdrawals)
Equity The money and other assets put into any business.
Costs incurred in earning revenue, from which no future benefits

Expenses
beyond the accounting period are expected to be derived.
Costs which do not change when work increases or decreases.
Fixed Costs Also called indirect costs or overhead expenses, e.g. insurance,
advertising, rent.
Part of the price agreed for a business that relates to the right to
take over and run the business and be entitled to future profits,
Goodwill
taking into account the good name and ongoing nature of the
business.
Gross Profit Sales less the cost of the goods sold.
Inventory
The stocks of a business at balance day, e.g. materials,
(Stock/goods/
stationery.
merchandise)
A source document which records the sale of a good or
Invoice
provision of a service, usually on credit.
Liability What the business owes (e.g. creditors, bank overdraft).
The ability of the business to pay its debts in the near future.
This is measured by the degree that current assets (e.g. cash,
Liquidity
debtors) are greater than current liabilities (e.g. bank overdraft,
creditors).
Profit Total income minus total expenses over a set time period.
Receipt A record of payment received.
Source Documents which provide original evidence of a transaction,

Documents e.g. invoices, receipts, cheque butts.
The facility expended by the seller to the purchaser which
Trade Credit allows the purchase of goods and services without making
immediate payment.
A decrease in the price paid for goods due to the business
Trade Discount
being in a particular industry or trade.
The exchange of resources between two parties, one of which
Transactions is external to the business, leading to an entry in the businesss
records.
Costs which are directly related to work such as materials,
Variable Costs subcontractors and transport.
The cash or credit available required to meet all the costs of
Working Capital
running the business.
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Record Keeping
Every business is required by law to keep records so that the income tax liability,
sources of finance and assets can be easily found. The legal requirements
include State and Federal Government legislation. The financial information
contained in these reports assists in:
Decision Making Appropriate financial decisions can be made.
Responsible Management Managers must demonstrate responsible
care in the management of funds and property.
Compliance to Law Business obeys the taxation and other government
requirements.
Reasons for Record Keeping

Keeping accurate business records is important for the following reasons:
Need to know the value of assets, liabilities and equity
Cannot control costs if the costs are unknown
Information is needed to prepare budgets and monitor whether the business
is keeping to the budget
Need to know what hours employees work to calculate salaries
Need to know the terms of agreement entered into with clients/suppliers
Need to know how much the business is owed by debtors and who the
debtors are
Need to know how much the business owes to creditors and who the
creditors are
Potential lenders will require up to date information before lending the
business money
Need to be able to work out whether the business can afford to buy new
assets
Need to know about seasonal trends in the business
Need to know how employees are performing and how productive they are
May want to sell the business and need to calculate its value
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Business Awareness
Reporting Requirements
There are a range of reporting requirements that a business must meet. There
are various government returns that must be prepared from current information.
Information on assets and sales are needed for taxation purposes. Businesses
need cost and value information to insure assets. Suppliers will sometimes
require details of the business before supplying credit.
Banks will require regular reports on turnover and profitability.
Management needs to make plans regarding new products, changes in
operations, expansion, diversification and elimination of poor products.
Businesses require information regarding past experience with products,
debtors and creditors.
Professional advisers will need information about the business. A business
may have to provide evidence in applications for licenses, registration,
permits and fees.
Information is required for calculation of payroll taxes, workers
compensation, insurance and sales tax.
Taxation Reporting
The Taxation Office is interested in accounting information for a number of
reasons. If the business uses goods when it provides a service, sales tax may
be payable on those items. The Taxation Office will need to know the value of
goods sold. Payroll tax and group tax (the value of the tax instalments deducted
from employees wages and salaries) may be required to be paid and the value
of wages and salaries will need to be known. The Income Tax Assessment Act,
requires the accounting records of the taxpayer to be kept in accordance with
the act to enable the assessable income and allowable deductions and rebates
to be explained.
Successful Businesses
Are flexible and adaptable to changing economic conditions, products,
work procedures and demands by clients.
Offer specialised services to customers, after-sales service.
Provide satisfaction for customers; develop the working environment to
suit their particular needs.
Reward for skill and effort linked to the skills, competence, time and
effort given to the business.
Have close company/employee relationship resulting from working
closely with employees and building strong links with them.
Are capital smart attract sound capital investment in the ventures that
they are involved in.
Attract the right amount of capital required adapt and tailor funding to
suit each unique venture.
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2 Insurance
Topic

Introduction.......................................................................................................................................................................... 20
Business Insurance................................................................................................................................................... 20
Types of Insurance.......................................................................................................................................................21

Business Awareness
Introduction
Insurance is a term that is used in all parts of life. People insure all manner of
items and even themselves against loss or damage.
The idea is that any business can seek some reasonable compensation after an
accident or incident has caused some level of loss.
Insurance is a method of sharing the risk of loss across a number of businesses.

This is called sharing the risk. The loss of one business is shared across many
businesses. Insurance will help any business survive through times of loss and
hardship.
Business Insurance
Businesses should carry many kinds of insurance to cover themselves against
the risks around them. These include:
Lost production
Increased liabilities
Loss of assets
Public liability
Work cover (Workers Compensation)
This can be done by determining the particular needs with:
Underwriters
Insurance Agents
Insurance Brokers
Insurance Underwriters
Are the large insurance companies that provide a specified amount of funds
against a stipulated list of claims. They are the ones who actually pay out on a
policy. Well known underwriters include AXA, Lloyds of London.
Insurance Agents
These are the people who generally represent one insurance company
(underwriter) and sell their insurance through a local agency office.
Insurance Brokers
These are full time professionals who have made a career in insurance, but
work for themselves. They operate by knowing which insurance companies
(underwriters) offer the best deals for all types of insurance.
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Types of Insurance
Insurance can be divided into two basic types:
1. Insurance of Property (Assets):

Buildings
Contents
Vehicles
Materials; etc.
2. Personal Insurance:
Personal Liability
Workers Compensation
Accident
Life Assurance
Loss of Profits, etc..
However, these types of insurance can also be broken up into various categories:
Compulsory Insurance Insurance that the law says a business musthave.
Essential Insurance Insurance that a business really must have.
Useful Insurance Insurance that most small businesses consider is
important to acquire.
Compulsory Insurance
This insurance includes:
Workers Compensation
Motor Vehicle Third Party
Employee Superannuation
Workers Compensation (Work Cover)

All businesses that employ workers must have Workers Compensation. This is
to ensure that the employer is able to pay compensation to a worker (employee)
whosuffers an injury and/or disability during the course of their employment.
Workers Compensation insurance ensures that the worker is paid and looked
afterwhile off work.
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Motor Vehicle Third Party

All vehicles that are registered in Australia have a Third Party Insurance cover.
This is usually paid with the registration fee. This type of insurance protects
the owner of a vehicle against legal liability to pay for personal injury to another
person (the third party) who may have been hurt in any way. This insurance does
not cover property damage and is attached to the vehicle, so that it does not
matter who was driving the vehicle at the time of the accident.
Employee Superannuation
This is an insurance scheme that uses a part of the employees salary and a
contribution from the employer to give the employee an income when they retire.
It is a legal requirement for the employer to make contributions to the nominated
and managed employee superannuation scheme.
Essential Insurance
This insurance includes:
Public Risk
Burglary
Fire
Public Risk
This insurance covers liability of any business for claims regarding damage, loss
or injury to people or property that has been caused by the business operation
or by employees. The business is covered if Public Risk insurance has been
taken out.
Burglary
This type of insurance protects the business from loss or damage caused by
thieves breaking into premises.
Fire Insurance
This covers loss or damage to premises caused by fire. It is possible to extend
the policy to cover additional risks, however these make the policy more
expensive.
Other Useful Insurance

Comprehensive Motor Vehicle Insurance
Personal Accident
Life Assurance
Self-Employment Superannuation
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Comprehensive Motor Vehicle Insurance

This covers the cost of repair or replacement of vehicles which are registered
in the business name. This type of insurance covers damage to the vehicle and
damage to other peoples property. This type of insurance can be broken down
into three main types of vehicle insurance:
Full Cover Covers damage to the businesss vehicle caused by accident
or theft It also covers damage to other peoples property
Third Party Property Damage Covers liability for damage caused by the
businesss vehicle to other peoples property. The businesss vehicle is not
covered in this type of insurance
Fire, Theft and Third Party Property Damage Covers loss or damage to
the businesss vehicle caused by fire or theft and liability for damage caused
by the businesss vehicle to other peoples property. The businesss vehicle
is not covered except for damage when stolen or burnt
Personal Accident
These policies cover potential injury or death and usually apply to individuals
rather than companies. Companies normally take out third party comprehensive
property and injury policies.
Life Assurance
These policies cover the insured and pay out on the death of the person.
Personal Superannuation
Individuals can make their own superannuation contributions in addition to
money paid by employers. These contributions may attract tax benefits or
rebates from the taxation office.
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Business Awareness
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3 Purchasing
Topic

Purchasing. ........................................................................................................................................................................... 26

Business Awareness
Buying materials and products can be an extremely specialised part of any

business operation, to the point where people are employed as Purchasing
Officers, particularly in large organisations.
Purchasing
The purchasing of large pieces of equipment require extensive investigation to
ensure a number of things such as:
Does the piece of equipment satisfy the business needs now, and in the
future?
Will it fit into the space provided?
Is the correct power supply available?
What guarantees come with the equipment?
What training is provided by the supplier?
Can existing staff members man the equipment?
Will future jobs coming into the workshop keep the equipment busy?
How much does it cost to keep the equipment going?
How much does the equipment cost?
These concerns dont affect every purchase, however they identify some of
the concerns that must be considered. Following are the more day-to-day
considerations discussed in the following sections.
Supplier Selection
One important role of a Purchasing Officer is appointing a supplier of goods.
This is often critical to the effective operation of a business. A supplier who fails
to deliver goods can disrupt operations. A supplier who charges high prices can
reduce the potential profitability of the business.
A survey of Purchasing Officers identified the following reasons for selecting

suppliers:
Reliability of seller
Continuous supply under all conditions
Accessibility of seller
Availability of advice
Low prices
Quick and reliable deliveries
After sales service
From this list it can be seen that price is not the only criteria for selection.
Reliability scores very heavily in the list. Of course, other things being equal,
price may be the deciding factor. A repercussion to the reliability factor is often
the holding of higher store levels, which means that the business may have to
have products on the shelf doing nothing.
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Sources of Information on Suppliers

There are numerous sources of information available on suppliers, both local
and overseas. Among these are the following:
Supplier catalogues
Trade registers and directories
Trade journals (including overseas publications)
The Yellow Pages
Vendor files
Mail advertisements
Sales people or salesperson
Trade exhibits (including overseas exhibits)
Company personnel
Obtaining the Right Price

Seeking out prices can be a laborious task. It is, however, a most important
one if a business is to obtain an acceptable low price. It is also a task which
should be done regularly since suppliers prices vary from time to time. Several
methods are available for obtaining prices from suppliers. These are as follows:
Published price lists
Competitive bidding (this not only includes the obtaining of tenders but also
includes quotations from suppliers)
Negotiation
Price investigation
Purchasing Policies
Policies should be considered by a business over a wide range of criteria
associated with the purchasing function. These policies not only cover factors
associated with those aspects relating to materials and service, such as quality,
price, reliability etc., but should also include two important areas, i.e. ethics and
supplier relations. It is these latter two functions that can be very important in
building a cooperative basis for the supply relationship.
Supplier relations are a very critical component of all and any purchasing tasks
and processes. These involve:
Sales people
Purchasing officers should always ensure they treat all sales people fairly and
courteously. This means that the firm should at least interview sales people
whose products have some relevance to the firms operation.
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Competitive Bidding
The basis on which assessments will be made should always be communicated
to the bidders. They will then have an understanding of what is required and
should therefore be in the position of ensuring that their bid is complete.
Competitors should also be permitted only one bid and each should remain
confidential. Closing dates should also be specified.
Pre-sale Technical Service

Suppliers should be allowed to conduct a pre-sale survey if the nature of the
item to be purchased is peculiar. Policies should be adopted to determine both
the necessity and amount of such surveys.
Supply Sources
Policies must be determined on the basis of selecting supply sources. These
policies could include the number of sources, the size of sources, the use of
local sources, reciprocity, foreign sources and the development of new sources.
Ethics
The ethics of purchasing covers a wide range of practices such as not accepting
kickbacks, buying without prejudice, being honest in ones dealings, being
courteous and so on. These ethics should be clearly stated to employees
involved in purchasing to ensure that management attitudes are known.
Ordering from Suppliers Catalogues

Suppliers catalogues usually contain the terms and conditions of supply of
goods. These outline the suppliers:
Methods of ordering back orders
Sales tax policy on prices
Order size deliveries
Terms of payment warranty conditions
Return/claims policy
It is important to read these conditions prior to ordering.
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Price and Parts Catalogue

The catalogue can contain Parts Lists with component number, part number,
description, trade price, tax price. Also, they can illustrate the various
components that a supplier may have.
This price list gives important information that must be placed on the order to
ensure delivery of the correct part. The automotive industry relies upon the
supply of good quality products and materials from a large number of suppliers.
These suppliers must be reliable and ready to support the business in the
prompt delivery of good quality products.
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4 Business Costs
Topic

Introduction.......................................................................................................................................................................... 32
Operational Costs......................................................................................................................................................... 32
Time Management...................................................................................................................................................... 33
Work Study. .......................................................................................................................................................................... 36
Capital Cost Management. ................................................................................................................................41
Transaction Documents....................................................................................................................................... 45
Managing Assets.......................................................................................................................................................... 48

Business Awareness
Introduction
To be able to understand and undertake better time and labour management,
businesses need to be able to identify the relationship between operational
costs, labour costs and the end cost to the consumer. Coupling this knowledge
with better time management practices will bring about a more efficient
operation.
Operational Costs
In any business there are three major cost components that affect the operation
of that business and the end cost of the product for the consumer. These cost
centres are:
Direct costs
Indirect costs
Overhead costs
If the business does not understand what these costs are, it is not possible for
an accurate hourly cost of operations to be calculated. If an accurate hourly cost
is not known, the profit from work done cannot be calculated.
Direct Costs
Direct costs are those that can be attributed directly to the job or task being
done. These include:
Wages of employees actually doing the job
Loadings into wages
Holiday pay
Superannuation; etc.
Indirect Costs
Indirect costs are those that relate to other tasks/jobs that must be done to keep
the business viable. These include:
Bookkeeping
Banking
Estimating
Client Relations, etc.
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Overhead Costs
Overhead costs are those that relate to providing the framework for the work to
take place. These include:
Power
Rent
Gas
Time Management
Time is a fixed resource, there are only 24 hours in a day and if there are too
many things to do there is only one remedy set priorities. That is, reallocate
the amount of time available.
It is essential that time management is used as a vital component of cost control.

A business will be able to ascertain its real costs when it can accurately account
for all of its timed activities.
Time Logs
To be able to manage time a business needs to be able to list what tasks and
activities it is currently doing, then analyse that information and see where it can
improve the use of time. This can be done with a time log.
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There are 24 hours in a day, 7 days a week which gives us 168 hours each
week. Traditionally we spend eight hours asleep, eight hours at work and eight
hours at leisure. For an average work day the following could be as follows:
Time Activity Hours*
12 midnight to 6.30 am Sleep 6.5 hours
6:30 am 7:12 am Shower, dress 0.3 hours
7:12 am 7:30 am Breakfast 0.7 hours
7:30 am 8:00 am Travel to work 0.5 hours
8:00 am 12:00 noon Work 4.0 hours
12:00 am 12:30 pm Lunch 0.5 hours
12:30 pm 4:30 pm Work 4.0 hours
4:30 pm 5:00 pm Travel home 0.5 hours
5:00 pm 5:30 pm Change clothes, travel to gym 0.5 hours
5:30 pm 6:30 pm Training at gym 1.0 hour
6:30 pm 7:00 pm Travel time, quick shower 0.5 hours
7:00 pm 7:42 pm Dinner 0.7 hours
7:42 pm 10:30 pm Watch TV 2.8 hours
10:30 pm 12:00 midnight Sleep 1.5 hours
Total Hours 24 hours
Table 1 Sample Time Log

* Using metric time: 6 minutes = 1/10 of an hour.
If we analyse this day we will find:

Eight hours of the day was spent asleep
Approximately 18 minutes showering, etc.
One hour and 30 minutes eating
Eight hours working.
1 hour exercising
2 hours, 48 minutes watching television.
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The only way to gain more time in this type of day is to watch less TV or move
closer to work or sleep less. This gives an example of how we can start to
analyse our time using the Time Log. Now we should look at how we spend our
time at work, because for every minute that we spend there is an hourly rate
being charged.
Replacing Bad Habits

Replacing bad habits with good ones takes planning. There are two stages in
the process of improving time management. An audit of time means keeping a
diary, time sheet or list that records the activities on which time is spent (this
does not have to be a long time).
Analyse
The diary of activities must be analysed to find out how well or how badly you
use your time.
Take Action
After identifying your time management problem comes the hard part. Changing
your bad habits to good ones. Once you have done this process you havent
finished. It should be repeated over a period of time to see if you have lapsed
into bad habits or found new good ones.
Time Management In Business

At work it is surprising how much time is wasted by small daily habits that we get
into. However, it is the lack of planning that causes the most waste. In the case
of a spray painter, failing to plan the job at hand can mean a number of trips to
the storeroom to get materials. On the way it is easy to stop and have a chat with
a workmate. This is not to say that work friends shouldnt talk, but the number of
chats can add up to a significant amount when multiplied by the hourly rate.
Time Wasters in Business

The following are some of the most common time wasters in business:
Telephone interruptions, delays and complications
Meetings too many and poorly run
Time wasted with meetings and committees can be reduced by asking: why,
when, who and where for every meeting
Meetings must have a purpose and be planned
Lack of objectives, task priorities and daily action plans (no clear job
descriptions or procedures coupled with lack of co-operation and teamwork,
leading to confusion, mistakes and duplicated effort)
Doing only the urgent jobs
Not allowing others to do the tasks that they should
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Drop-in visitors. An open-door policy need not mean your door is literally
open all day, implying that you welcome anyone (and everyone) to drop in
Leaving tasks unfinished (a source of stress). This can happen for various
reasons, but should be avoided
Lack of personal organisation (a cluttered desk is the result of a
disorganised mind)
Being spread too thinly across too many tasks, from lack of planning and
setting of priorities and failing to concentrate effort on the few critical tasks
Failure to say no and mean it when the willing worker is being unfairly
loaded with more work and responsibility
Indecision and procrastination. If you frequently put off making decisions
and taking action, you are probably losing time and opportunities and
increasing pressure on yourself
Working hard, but not seeing the distinction between activity and results
(being busy is not necessarily getting results)
Lack of self-discipline, not being able to settle down and concentrate on, the
one task until completion
Accepting upward (or reverse) delegation. Do not encourage employees to
depend too heavily on you for answers
Inadequate support staff and therefore, no way to delegate
Faulty communication, working without enough accurate information and
instruction.
Work Study
Work studies involve the following major points:
To indicate levels of work activity
The relevant costs for productive output
Various alternative options for how
Where, when and what sort of output is produced
Whether or not there are better ways of doing something.
A work study should show:
Outline of key factors in carrying out a work study
Methods used to record work activity
Method of data collection and presentation of analysis.
A typical work study may examine what any person performs on any selected
day. Each individual activity that the person does on that day may be identified
and given a time value. Then, a notional money value may be given to each unit
of time and activity. These money values could be the same or unique for each
type of activity. For example working with tools may be valued at $25.00 per
hour, while working with paper reports may be valued at $20.00.
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At the end of the day the business should be in a better position to decide what
work it should focus on because that type of work makes more profit.
Case Studies are a useful form of activity or work study measurement and
should be considered in areas where it is felt that efficiency gains are possible.
They can provide further supporting information to supplement a capital item
justification, or they can be used independently to provide an analysis of a
perceived problem area.
Case studies are a type of time and motion study without going to the extent of
using stop watches. They record the operations comprising a work segment, e.g.
the amount of time spent climbing on and off the machine, lifting, turning large
heavy items; time lost in finding, or waiting for tooling or equipment.
Analysis of this information can provide excellent supportive documentation

towards making improvements and supporting capital item requests.
Using a data collection form, record the current time, allocate each activity an
individual step number, describe the activity; record the completion time and
enter the elapsed time.
Analysis of Case Study

At the completion of the work cycle, analysis of each activity can be carried
out. The resultant information is best displayed in graphical form, additionally
photographs if appropriate, can aid your presentation of the analysis.
Job/Labour Control
Job/Labour Control can take many forms but in its simplest format it is the
dealers ability to manage a service task (large or small in the most effective and
efficient way, to the satisfaction of both the customer and the dealership.
Job controls are established to ensure that a particular task is undertaken to

provide the fastest turnaround, highest quality, minimal resource usage and the
most cost effective methods are used.
Labour controls are established to account for labour hours by individual

employees and by individual work order segments, again to ensure the best
possible result for each task undertaken. These controls also provide a yardstick
to measure service workshop efficiency and to identify areas that may need
attention.
Work Segmentation
To manage any repair work effectively, it is necessary to have the work divided
into pieces (segments) that have meaning and use for a particular dealers
situation. From a control standpoint, it is generally more effective to manage
numerous small operations, for example, (disassemble engine, clean engine,
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recondition water pump, etc.) than it is to manage a single large complex

segment such as engine reconditioning. If all the operations are managed, the
total job will be managed.
Dividing a job, such as an engine rebuild, into separate operations

segmentation is a matter of degree. Here are three level of segmentation for
an engine rebuild:
Dealer A treats it as one segment with no separation into parts
Dealer B divides the job into one segment with six separate operations
Dealer C divides the job into 22 separate operations.
By comparing the three dealers we can see that Dealer C has the greatest
potential for improved job control because he can identify a number of specific
problem areas, that can be controlled and improved.
In general, it is best to separate out the high hour functions if accurate labour
control is to be achieved. Segmentation also allows for the division of work
for parts consumption by component, or work area. It further allows for dealer
additions, if only a portion of the labour is flat rated. Additionally full work
segmentation is an absolute must, if effective service history is to be achieved.
Accurate Target Times

Within most workshops today there is a need to effect a cultural change of
practises in regard to labour allocation. If we fail to successfully monitor labour
usage and promote an understanding within the workforce or the need to so
do, then we cannot identify the reasons for inefficiencies that may occur. Within
each work order segment it is necessary for the dealer to establish his own
target times. Times can be established by using historical data, time studies, or
other acceptable practices. The times should be realistic, achievable, and stated
in actual working hours rather than elapsed time, even though elapsed time may
be needed for scheduling. No work instruction should be issued to a serviceman
without a target time having been clearly identified. When we bring everything
back to basics; the sole function of a service department is the efficient
utilisation of labour. Without a total understanding of the use of that labour, hour
by hour, we have lost control not only financially, but also in regard to providing
customer satisfaction.
Feedback
On all tasks, both large and small, but particularly essential on large tasks, such
as machine rebuild, is the need to provide status reports back to the shop floor.
To be successful in completing large complex tasks it is necessary for a team
to be elected prior to work arrival. The team should plan the work cycle, know
what is expected in areas of target time, parts and total costs, completion dates,
together with any penalties or incremental earnings should delivery be early or
late.
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Once the repair is in progress then regular status reports need to be displayed
within the work area. It is suggested that simple Lotus graphs be used for this
purpose as they take little time to produce and visual displays are easy to
understand. Graphs should display expected costs and status versus actual at a
given date.
Weekly meetings should take place throughout the job cycle in order that any
developing problems can be rectified before they become major. It is worthwhile
to consider instructing mechanics to record all delays and obstructions
experienced. This ensures accurate and comprehensive information is reviewed
during the meetings.
Labour Control Sheets

Regardless of what system is used, it is essential that any business monitors
actual performance against the target. Where overruns are noted, the primary
cause of the overrun must be identified, e.g. tooling, training, parts delays,
additional work, etc. Once the cause is identified, ideally during the process
as opposed to at completion of the segment. Corrective measures should be
actioned to prevent re-occurrence.
Flat Rates
With good segmentation and target times established, an accurate history file
can be developed on particular models/components for repair. This database,
whether it is manual or computer generated, can in turn be used to set up a
quick and easy quotation system by job segments. This gives the dealership the
ability to assemble customer quotes quickly and will aid aggressive marketing of
services with confidence.
Management of Work In Progress (WIP)

A daily work in progress report is designed to provide management with the
current status of an open job. Thereby enabling monitoring of trends and
drawing attention to individual jobs that are becoming a concern.
It is usual for job status reports also to be generated, once a predetermined

amount, of the total expected dollars have been consumed, say 80%. This is all
well and good if the job is on schedule, in regard to costs and time. It is usually
however, far too late by this time to react if control has been lost. A fundamental
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part of work in progress management is therefore firmly in the hands of shop

floor supervision, in the area of continuous job monitoring; both in terms of
labour, parts and miscellaneous costs.
The following information should be considered a minimum for a detailed report:

Activity date
Customers name
Work order number
Segment number
Promised date per segment
Target costs (labour, parts, miscellaneous)
Actual costs (labour, parts, miscellaneous)
Variance (labour, parts, miscellaneous)
Number of days since last activity
There should also be an indication of whether the segment has been
completed.
Daily Labour Hour Summary

The daily labour hour summary is designed to help the service management
determine the labour hour usage for each shift. This summary provides the
management with data concerning total hours worked, overtime hours, expense
hours, redo, vacation, sick leave, inter-department work, etc. Thereby providing
management with a tool to evaluate the efficiency of the department as a whole;
and to aid in the determination of staffing levels, training, recourse allocation,
and in providing the basis for monthly/quarterly labour recovery reports.
The Job Closing Detail and Summary Report

The job closing detail and summary report is designed to gather all segments of
a job into a single report. This would include labour and parts cost in addition to
other costs associated with outside purchases and miscellaneous expenditures.
The primary use of this report is to provide support for the invoice, and on
automated systems, generate the invoice.
From this report, variance between flat rated segments/standard job times and
actual, can be analysed to determine whether there are inefficiencies. The
analysis could result in improvement/changes to areas such as, procedures,
shop layout, tooling, training etc.
Critical Paths and the Use of Critical Path Analysis

Critical path analysis is a planning tool used at many manufacturing and repair
sites to epitomise the use of scarce and competing resources. It involves the
identification of all work tasks into correctly ordered and scaled activities which
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can then be placed in the right order from start to finish to make sure that the
job is done as required the first time. On large jobs, (machine rebuilds, engine
rebuilds, etc.), critical path analysis should be considered before initiating
the job. The critical principle behind Critical Path Analysis is to schedule the
individual component repairs to run concurrently (where possible) to reduce
turnaround time on the whole job. This has two major benefits:
The customers machine is repaired in a shorter time
Workshop utilisation is improved.
Additionally it is not uncommon, with major rebuilds, for there to be a financial
penalty for late return, conversely some agreements also provide incremental
payments for early completion. Many commercial PC software packages can
be purchased that can assist the dealer in establishing the shortest possible
turnaround that can be achieved for a particular job. An example of the time
savings that can be made by the use of Critical Path Analysis is discussed within
the Scheduling Module.
Capital Cost Management

The principles of capital cost management involve understanding:
Key factors in analysing needs
Cost justification
Submission presentation
Identification and Analysis of Needs

The need for additional capital items can arise due to a number of reasons, such
as the replacement of worn equipment. The need to keep up with technological
changes/improvements, expansion and safety.
In all cases it is necessary to analyse the basic problem/requirement and to

ensure that existing equipment can not be economically upgraded to meet future
and current requirements. To simplify matters for the purpose of demonstration,
let us look at some possible examples of capital item needs.
Example 1
A review of outside purchases shows that during a 12 month period the
dealership sends 1091 cylinder heads to an outside supplier for planning at
an average cost of $65.00 per head. In addition to these costs we experience
delays to work flow resulting from the suppliers inability to meet our delivery
needs.
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Example 2
A review of a dealerships cylinder head section identifies that excessive labour
hours are consumed in the rebuilding of 3500 series cylinder heads. Closer
study shows that the root cause is in the amount of time taken to cut valve seats
taking 90 minutes per head.
Example 3
A review identifies the existing cabinet wash cleaner is undersized for the
current use, and is also creating major delays due to its inefficient operation. The
review identifies that mechanics within the specialisation area are spending, on
average, 4.5 hours/day manually cleaning parts.
Example 4
A 5 metre lathe is required by the hydraulic shop to enable re-rods and re-tubes
to be manufactured. Currently 99% of this work is sent to vendors (competitors).
In-house capability will enable the dealer to improve scheduling, and allow
the dealer to be more competitive in pricing.
In each of the above examples it is evident that a previous review/study was the
initial problem identifier; identifying either a missed opportunity or the root cause
of an inefficient operation.
Selection of Equipment
In many instances the selection of the best equipment to suit the dealerships
needs can be difficult. We need to keep in mind when looking for equipment that
our knowledge base may be very narrow and therefore not allowing the best
possible selection to be made. It is recommended therefore, in cases where
there is some doubt, that you discuss your requirement with your supervisor.
This does not infer that he/she is a world expert on all matters; only that he/
she is in a position to draw on the larger network of manufacturing plants and
dealers, from which to identify what equipment works well, and importantly what
does not, from other locations in similar circumstances.
Financial Arrangements
Once the selection process decision is made and all associated costs identified,
discussions need to occur with senior management about appropriate action.
The dealership may elect to purchase outright or to purchase through a leasing
arrangement, or by other means. For our purposes we will assume that the
normal method is through a leasing arrangement with a residual payment at
completion of the term. This is a common business practice.
It is suggested that a phone call to the Business Finance Section would be

worthwhile at this stage. They can easily advise of the lease options and
monthly payments required. Once in possession of the information, it is a simple
procedure to compile the justification request. It is recommended that when
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submitting capital item requests, all savings, especially labour, be clearly shown
and offset against the capital costs.
Example 1
A financial lease covering a four-year term is assumed.
Head Planner
Cost $45,000.00
Assume interest rate of 12.25%
Assume 4 year lease with 30% residual $13,500.00
Monthly repayments $977.00
Daily repayment $60.00

Assuming 21 working days per month
(includes residual payment) $28.00/hr
Cost labour rate
Based on current volume of planed heads 85% of all heads
1,091
planned
Assume 20 minutes machine and set up time per head $9.33
Total lease payments per year including residual $15,099.00
Total operating costs based on 1091 cylinder heads $25,245.00
Therefore average cost to machine cylinder head $23.13
Current average charge from supplier per head $65.00
Average cost saving per cylinder head $41.87
Annual incremental/savings $45,680.17
Table 2
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Example 2
Serdi 100 Valve Seat Cutting Machine
Cost $67,000
Assume 4 year lease with 30% residual $20,100
Monthly repayments $1,455
Daily repayment $89

Assuming 21 working days per month (includes residual payment)
$28/hour
Cost labour rate
Hours saved to be self funding = 3.2 hours/day
Each 3500 series cylinder head currently takes 90 minutes for
valve seats to be cut. It is expected that this will be reduced to $261
20 minutes. In the case of a 3508 this would save 9.3 hours
@acost labour rate of $28/hour.
Table 3
Example 3
Mart 100 Washing Cabinet System
Cost $159,324.66
Assume 4 year lease with 30% residual $47,797.00
Monthly repayments $3,465.27

Daily repayment assuming 21 working days per month
$165.00
(includes residual payment)
Cost labour rate $28.00/hour
Hours saved to be self funding 5.9 hours/day

Previous review/study identified that specialisation mechanics
spend 4.5 hours/day manually cleaning parts. Assume only 20
$403,200.00
mechanics in specialisation shop, the annual incremental/savings
= 20 x 3 hours x $28 x 5 days x 48 weeks equals
Table 4
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Return on Investment Review Analysis

It is equally important once equipment is purchased and up and running,
to review the operation and see how it is performing against the original
expectation and capital justification. In general, it is important that we carry out
this follow-up analysis, because without so doing, it is impossible to identify if we
have achieved our objectives.
Talk the Language of Money

Remember when preparing your submission for capital item approval, talk the
language of money and show the following key points within your submission.
Show why we really need the equipment
How much will it save?
Does it fit into the budget?
Will it improve productivity?
Is it expensive to maintain?
What is the payback period?
What is the life cycle of it?
Can it be used for other things?
Transaction Documents
In business many types of documents are used to progress transactions such as
sales. Typical documents include the following:
Delivery docket/note
Credit note
Debit note
Receipt
Statement
Delivery Docket/Note
Delivery dockets or consignment notes are used when previously ordered goods
are delivered to the customer. Content and layout design of a delivery docket
may be similar to that of an invoice, with the addition of:
The method and/or mode of delivery
A designated position on the document for the person receiving the goods
to sign.
The person or company receiving the delivery must sign to acknowledge
receipt of the item(s) in good order and to confirm the quantities detailed on
the delivery docket.
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Credit Note
When returned goods are accepted by the supplier as being damaged, or
incorrectly supplied, a credit note is issued to the customer. Credit may extend to
all or part of the total of goods invoiced.
Credit notes may be pre-numbered and consist of two or more parts. The
original goes to the customer and a duplicate to the suppliers accounts
department. A third copy may be retained in the book. As credit notes allow for
cash returns or reductions to a customers account, they should receive similar
security measures to those afforded to order documents and cheques. Because
of their importance, approval of credit notes is limited to the suppliers senior
personnel.
Printing credit notes in red shows a credit situation to the customer. Delivery
charges are not refundable items on credit notes unless a complete order is
incorrectly supplied. Any credits allowed for delivery charges depend upon the
suppliers stated policy. All charges shown on an invoice are also detailed on the
credit note according to the proportion of credit given.
Debit Note
Debit notes may be used for several functions. Suppliers may send debit notes
to customers as notification of an increase in the amount owed on an order
which has not been included on the original invoice. The customer would then
complete and send a debit note with the goods returned to the supplier. On
receipt of the goods and debit note, the supplier of the goods should then issue
a credit note to the customer. Sales tax and any customer discount is calculated
on a debit note in the same manner as an invoice.
Modern business practices dictate that regular use of debit notes is not a
common occurrence. Businesses have found that a telephone call to explain
the problem, followed by a letter or facsimile confirming details of the telephone
conversation, is sufficient information to enable resolution of most problems.
Customers are usually sent an additional invoice if there are additional costs
associated with an order, or if the customer has been undercharged.
While additional invoices or letters of complaint have replaced the debit note in
many instances, they are still valid documents which may be sent from seller or
buyer.
Receipt
A receipt can be defined as a written acknowledgment of the payment of monies
owed by one person, to another. Receipts may also acknowledge the change of
possession of an item of value.
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Receipts are usually generated from information entered into a computer.

Handwritten receipts are usually contained in a receipt book, where each receipt
is consecutively numbered and has an imprint copy that is left in the book.
Because the practice of issuing a receipt is not a mandatory obligation, many
businesses do not give the buyer a receipt unless it is specifically requested.
Receipts are not always issued for accounts settled by cheque, as the
processing and clearing of the cheque by a bank is taken as sufficient proof of
payment. Any documentation that is provided to the customer at the completion
of a sale may be considered a document of receipt, if it contains the following
information:
Date
Name of person or business who has paid for goods, (debtor)
The sale amount in words and figures
Signature of the person authorised to sign for the payee/creditor
Whether the sale amount was received in cash or cheque
Cash register roll imprint receipts do not always provide the amount of
information contained on a dedicated receipt document. You should be aware
that roll imprints which do not contain at least the minimum information listed
above may not be recognised as a legal receipt.
Statement
The statement of account is the monthly summary of a customers credit
transactions, where an account is operated with a trading company. The
company issuing the statement lists customer purchases, in date order, including
the total amount of each purchase. Because statements are constructed at the
end of the month, any payments received, or credits issued, after the last day of
the month are always credited to the customers next statement. As each credit
purchase was previously invoiced to the customers account, the statement need
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list only the invoice numbers and the total amount of those invoices. Where
credit for returns or damaged goods is detailed on credit notes, only the number
of each credit note is displayed on the statement, along with the amount of credit
allowed.
The purpose of a statement is to detail the customers transactions with the

company throughout a calendar month and highlight the amount of money
owing at the end of this period. Statements are demands for payment which are
usually expected to be paid by a nominated date in the following month. Often
an incentive is directed at the customer as an encouragement to repay the debt
owed to the supplier as quickly as possible. Between 3% and 5% off the final
statement amount may be offered as an incentive for the customer to pay the
total amount shown on the statement, in full, within the time frame nominated by
the seller.
Copying of statements is not normally required for any standard accounting

procedures. Similarly, a receipt for a statement is not issued unless a specific
request is received by the body issuing the statement.
A statement should display:

Month and year the statement refers to
The customers name and address
Amount of account rendered
Dates of recorded transactions
Numbers of invoices, credit notes or receipts
Monetary amounts debited and credited
The running balance and final total amount owing to the company
Managing Assets
Fixed Assets
It is important for all people to have a basic understanding of what constitutes
both Fixed and Current Assets and how Fixed Assets are depreciated.
For a company to exist it must invest funds in assets which will be held by the
business for several years. These assets are used to aid the manufacture or sale
of goods and services and are referred to as fixed assets.
Examples include:
Plant and equipment
Land and buildings
Furniture and fittings
Office equipment
Cars and service vehicles
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They will in most cases, diminish in value as their useful life expires, and will
therefore have their real value written off accordingly. This process is called
depreciation.
Current Assets
Current assets are the daily available assets, and are therefore by definition,
continually changing. They provide the day-to-day funds to ensure that the
business can operate. Current assets are any item (asset) that can be converted
into cash within any one year. Additional examples being:
Cash on hand or at bank
Accounts receivable (trade debtors)
Inventory (stock)
Short term deposits
Depreciation of Fixed Assets

In order for items to be classified as fixed assets two basic factors are required,
namely that:
1. The life of the asset will be in excess of one financial year

2. The asset will diminish in value as its useful life expires.
To account for these factors, it is necessary for the cost of the fixed asset to
be amortised, e.g. written off over the period of its useful life. This is done via:
thecharging of depreciation in the profit and loss statement, to match the cost of
its usage during the accounting period, against the income earned by using this
asset in the same period. On the balance sheet the same depreciation amount
charged is accumulated in the accumulated depreciation account, thereby
decreasing the value of the fixed asset as shown in the balance sheet.
Methods of Calculating Depreciation

Several methods are available and can be adopted for the calculation of
depreciation.
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Diminishing Value Method

Normally utilised for assets having a relatively short life, i.e. computers. This
method of calculating depreciation has the effect of depreciating the value of the
asset in larger amounts during its earlier life, and by smaller amounts in its latter
life. In other words, the amount of depreciation diminishes each year. Assume
that a lathe is purchased for $25,000 and that we expect to receive a 10 year
working life from it. We will depreciate the lathe over the 10 years and using the
diminishing value method we will depreciate it at an annual rate of 15%. The
table shows how this would be calculated. At the end of 10 years the lathe is
almost fully depreciated.
Year Lathe Value Depreciating at 15% Depreciation Amount
1 $25,000.00 $3,750.00
2 $21,250.00 $3,187.50
3 $18,062.50 $2,709.38
4 $15,353.13 $2,302.97
5 $13,050.16 $1,957.52
6 $11,092.63 $1,663.89
7 $9,428.74 $1,414.31
8 $8,014.43 $1,202.16
9 $6,812.26 $1,021.84
10 $5,790.42 $868.56
Total $20,078.13
Table 5
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Prime Cost Method

Normally utilised for assets having a medium to long term life, i.e. lathe or
dynamometer.
The prime cost method of calculating depreciation causes, the amount of

depreciation to be constant for each year of its life. The amount of depreciation
is therefore always calculated on the original cost of the asset.
Again let us assume that a lathe is purchased for $25,000 and that we expect
to receive a 10 year working life from it. We will depreciate the lathe over the
10 years, and this time we will use the prime cost method of depreciation, we
will depreciate it at an annual rate of 10%. At 10 years the lathe has been fully
depreciated.
Year Lathe Value Fixed at the Purchase Price Depreciation Amount
1 $25,000.00 $2,500.00
2 $25,000.00 $2,500.00
3 $25,000.00 $2,500.00
4 $25,000.00 $2,500.00
5 $25,000.00 $2,500.00
6 $25,000.00 $2,500.00
7 $25,000.00 $2,500.00
8 $25,000.00 $2,500.00
9 $25,000.00 $2,500.00
10 $25,000.00 $2,500.00
Total $25,000.00
Table 6
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Use of Taxation Rate Schedules

The Australian Taxation Office releases schedules of depreciation rates to be
applied to a wide range of fixed assets. The rates outlined in these schedules
must be applied in the calculation of depreciation for income tax purposes
(although rates at variance from these schedules may be applied with Taxation
Office Approval). There are also provisions in the Income Tax Assessment Act to
allow for accelerated depreciation in certain cases.
For normal accounting purposes or for corporate reporting (in accordance with
the Companies Act) it is not essential to conform to the tax schedule rates. A
depreciation rate should be chosen, that allows for factors peculiar to each item
of plant, and apply that rate to the calculation of depreciation.
Residual Values
In determining the rate of depreciation to be applied a calculation of the likely
residual value should be made. The depreciation rate applied should then be
determined via the above methods to ensure that the value, at the end of the
useful life of the asset, conforms to that amount.
Useful Life of an Asset

The useful life of an asset will vary for each item of plant. Factors which would
have an effect on it would include:
The materials used to construct the asset
The type of work required to be done
The conditions under which it operates
The likely technological developments and its resultant redundancy
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1 Glossary
Appendix

Commercial Terms And Abbreviations............................................................................................ 56

Business Awareness
Student Guide Glossary
Commercial Terms And Abbreviations

@ At.
A/C Account.
This appears on a statement if a debtor has omitted to pay his/
Account Rendered
her debt from the previous month.
ASAP As soon as possible.
B/F Brought forward.

A percentage of the net trade price given for prompt payment.
Cash Discount Usually a time limit on payment is imposed after which no cash
discount is liable.
Cash on Delivery. A very useful postal service. The postman
will collect the money for the goods he/she is delivering from the
COD
addressee and send it, according to instructions, to the sender.
Asmall fee is charged by Australia Post for this service.
When money is paid, it is shown in the credit column on the
Credit Statement and deducted from the balance of the debtors
account.
The person or firm to whom money is owed for the sale of goods
Creditor/Seller and services, e.g. if you owe a person money he/she is your
creditor and you are the debtor.
When goods are purchased on credit, the total cost is shown in
Debit the debit column on the statement and added to the balance of
the debtors account
The person or firm to whom the goods or services were sold and
Debtor/Buyer
who therefore owes money.
Free on Board/Free on Rail. For the price quoted covers all
FOB/FOR transport charges to the docks or rail plus loading the goods onto
the ship or train.
GDS Goods.
Gross The total purchase price of goods bought plus any charges.
This means that the figure set as a maximum stock level must not
MAX
be exceeded.
E & OE Errors and Omissions Excepted.
A minimum stock level. This must be set a level for supplies
MIN
(stock) to last until fresh supplies are received.
Net The total purchase price of goods bought less deductions.
Net Monthly No discount is allowed and the account must be paid in full within
Account a certain period of time.
p.c. Per Centum.
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A pro forma invoice is sent as a matter of document to notify a

Pro Forma Invoice prospective customer of the price of certain goods. Unlike a sales
invoice it is not a bill for goods bought.
The charge made by the Government on the selling price of
Sales Tax
certain goods.
A deduction allowed by some suppliers to a buyer engaged in a
Trade Discount similar trade. It also applies to goods bought to be sold again and
encourages bulk buying.
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Business Awareness
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BUS001

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What are the different types of business structures discussed?

What are the different types of business structures discussed?

What are the different types of insurance mentioned?

What are the different types of insurance mentioned?

Business

Published by Caterpillar of Australia Pty Ltd

Version 4.0, 2005

Copyright 2005 Caterpillar of Australia Pty Ltd. Melbourne, Australia.

Caterpillar engineers and instructors

Business Awareness BUS001

Included In This Section:

Business Awareness BUS001

Module Number: BUS001

Module Name: Business Awareness

Date: 2nd January 2005

2. Media, demonstration and practical facilitation, given:

3. Estimated time of delivery 8 hours

4. Classroom and Workshop Environment

7. Recommended maximum student/teacher ratio:

8. Resources for Student:

Learning Outcome 1: Describe types of businesses and associated

At the completion of this learning outcome, students should be able to:

Learning Outcome 2: Explain types of insurance related to operating a

At the completion of this learning outcome, students should be able to:

Learning Outcome 3: Explain the principles of purchasing goods.

At the completion of this learning outcome, students should be able to:

Learning Outcome 4: Explain costs involved in running a business.

At the completion of this learning outcome, students should be able to:

Included in this Topic:

Business Awareness BUS001

Types of Business Structures

There are three levels of government:

Identifying government ownership from the name of the enterprise may be

Other government-owned enterprises are less directly controlled by the

Some government-owned enterprises have been given permission to act in a

As with partnerships, there are specific government laws which control

Fixed Term Loan

Where Businesses Obtain Funds

Seeking Specialist Advice

Subjects About Which Advice May Be Needed

The process of identifying, measuring and communicating

The process, conducted by independent accountants, of

Bank Statement A statement of a businesss account at the bank.

A financial plan of action to control a businesss operations and

Capital The value of all investments in the business.

A current asset comprising notes, coins, cheques and any other

Creditors People to whom the business owes money (e.g. suppliers).

Deposit Slip A document used to evidence the banking of cash.

Costs incurred in earning revenue, from which no future benefits

Gross Profit Sales less the cost of the goods sold.

Liability What the business owes (e.g. creditors, bank overdraft).

Receipt A record of payment received.

Source Documents which provide original evidence of a transaction,

Reasons for Record Keeping

Included in this Topic:

Business Awareness BUS001

Insurance is a method of sharing the risk of loss across a number of businesses.

1. Insurance of Property (Assets):

Workers Compensation (Work Cover)