HSC Topic Finance Business

• Role of Financial Management:

  Plan and monitor the businesses financial resources in order to achieve the businesses financial objectives
• 5 Objectives of Financial Management:

  Acronym PLEGS

  
  

  Profitability ~ Achieve maximum profits and high returns

  
  

  Liquidation ~ Sell assets to meet short term financial commitments (overdraft, Accounts Payable)

  
  

  Efficiency ~ The ability of a business to minimise its costs and manage its assets so that maximum profit is achieved

  
  

  Growth ~ Ability for a business to increase size in the long term by expanding , merging or acquiring

  
  

  Solvency ~ Ability to meet long term financial commitments E.g Mortgage
• Short and Long term financial objectives

  Short term financial objectives:

  
  

  Short term financial objectives are objectives that are accomplished within 1-2 years.

  These goals are specific

  E.g 15% Increase in Profits, Integrating new technology

  
  

  Long term financial objectives:

  Long term financial objectives are objectives that are accomplished within more than 5 years

  These goals are broad and general

  E.g Increase profits, Increase market share
• Conflicts between short term and long term objectives

  
  

  Potential conflicts between short-term and long-term financial objectives can arise due to decisions like expansion or investments in research and development that may reduce short-term profits but enhance the business's overall value in the long run.

  
  

  E.g Investing in research is very expensive and is bad in the short term due to expenses, but in the long run, can make the company lots of money.
• Interdependence with other Key Business Functions

  
  

  KBF - Key Business Functions

  
  

  Finance, Operations, Human Resources, Marketing

  
  

  Each KBF are interdependent on each other, without one another a business would struggle to achieve goals and perform.

  
  

  E.g A business wanting to implement monetary rewards Interdependence: Finance and HR (High Cost being used for employee satisfaction)
• Influences on financial management

  • Sources of finance (Internal source and external sources)
  • Financial Institutions (BUF SAIL)
  • Influence of government (ASIC, Company taxation)
  • Market Influences (Economic Outlook, Availability of funds, Interest rates)
• Sources of financeInternal sources of finance

  
  

  Internal sources of finance refers to the business funds that are generated from within the business.

  
  

  Retained profits refers to the accumulated amount of funds saved after a specific period of time. 50% of savings are put aside for future reinvestments

  
  

  ADV

  • No increased debt levels
  • No interest
  • Doesn't disrupt ownership

  DISADV

  • Funds might be wasted
  • Limited funds can be generated depending on business retained profits
• External sources of finance

  
  

  Debt (Business borrowing funds)

  Short term sources of finance (pay back within 12 mths)

  
  

  Overdraft (short term loan)

  • Under $100 000
  • Not secured against assets
  • High interest rates
  • Accessible with cash shortfall
• External sources of finance

  Debt (Business borrowing funds)

  Short term sources of finance (pay back within 12 mths)

  
  

  Commercial Bill (short term loan secured against

  assets more credible)

  • Loan of more than $100 000
  • Borrow between 30 - 180 days 
  • High interest rates
  • Secured against business assets
• External sources of finance

  Debt (Business borrowing funds)

  Short term sources of finance (pay back within 12 mths)

  
  

  Factoring (Selling accounts receivable)

  • Business can raise funds immediately
  • Businesses can receive up to 90% of their accounts receivable
  • Never receive the full amount back
  • Sell accounts receivables to firms at discount price (factoring or finance firms)
• External sources of finance

  Debt (Business borrowing funds)

  Long term sources of finance (pay back for over 12 mths)

  
  

  Mortgage (Long term loan for property)

  • Banks lend businesses loan for property
  • Access to large loans
  • Interest charged
  • Secured against assets
• External sources of finance

  Debt (Business borrowing funds)

  Long term sources of finance (pay back for over 12 mths)

  
  

  Unsecured Notes (A debenture that is not secured against

  business assets)

  • More safe for business owners (asset protection)
  • Fixed interest rate
  • Maintains ownership of company for business

  Company offers debenture (fixed interest payments) to investors without asset secured against business
• External sources of finance

  Debt (Business borrowing funds)

  Long term sources of finance (pay back for over 12 mths)

  
  

  Leasing (Business renting assets)

  • No interest
  • Tax benefits
  • Don't own asset
  • Accesible
  • No upfront amount
• Financial Institution

  Acronym BUF SAIL

  
  

  Banks (main sources of finance providing short and long term)

  Unit trust or Mutual funds (company pulling money from investors)

  Finance companies (non bank provide short/ medium term loan, purchase assets)

  Superannuation (Federal reserve program)

  ASX (Market for shares)

  Investment banks (provide funds and advice on merging etc)

  Life Insurance (Insurance for death)
• External sources of finance

  Equity (Business selling shares)

  Ordinary shares (shares of business)

  
  

  New Issue (Shares sold on the ASX for the first time)

  • Shares sold for the first time
  • Also called primary shares or new offerings 
  • IPO (Initial Public Offering)
  • Individuals become part owners and receive dividends 
  • Process of issuing shares is expensive and time consuming
  • Ownership is diverse
• External sources of finance

  Equity (Business selling shares)

  Ordinary shares (shares of business)

  
  

  Rights Issue (Shares sold to existing shareholders)

  • Privilege for existing shareholders to have first offers
  • Faster process than initial public offering of new issue process
  • Less possible buyers
• External sources of finance

  Equity (Business selling shares)

  Ordinary shares (shares of business)

  
  

  Placement (Offer for more shares for new or

  existing shareholders at discounted price)

  • Discount persuades potential investors to invest in company
  • Cheaper and faster than IPO or New issues
• External sources of finance

  Equity (Business selling shares)

  Ordinary shares (shares of business)

  
  

  Share Purchase Plan (Existing shareholders have

  choice of dividends or new shares

  • Shares could be offered at discount
  • Dividend for investors, their payment for investing in business
• External sources of finance Equity (Business selling shares)

  
  

  Private equity (Money invested in private company that is not listed on the Australian securities exchange)
• Financial Institution

  BUF SAIL

  
  

  Banks

  Main sources of finance, providing short term and long term debt and is regulated by the RBA

  Individual savings are lended out by banks

  E.G Westpac, Commonwealth, ANZ
• Financial Institution

  BUF SAIL

  Unit Trust or Mutual Fund is a company

  When funds are taken from a small group of investors and Unit trust company invests them in specific types of financial assets.

  Unit trust are companies who pool money from investors, they aim to achieve high profits for investors

  E.g Unit trust or mutual funds have invested in real estate, silver, oil and gold.
• Financial Institution

  BUF SAIL

  Finance Companies

  Finance companies are non-bank financial institutions that provide mainly short-term and medium-term loans. They offer loans to help businesses purchase assets to achieve their objectives.

  Finance companies are supervised by APRA (Australian Prudential Regulation Authorities)

  E.g Goods purchased include equipment, machinery.
• Financial Institution

  BUF SAIL

  Superannuation

  Federal Government program where employers contribute a portion of an employees income to a fund which provides benefits when they retire
• Financial Institution

  BUF SAIL

  ASX (Australian Securities Exchange)

  The Australian Securities Exchange is a market where businesses sell and trade shares to source finance (ASX is a market where shares are bought and sold).

  The ASX acts as both primary and secondary markets

  Primary markets deal with the new issue of ordinary shares

  Secondary markets deal with the purchase of existing ordinary shares.
• Financial Institution

  BUF SAIL

  Investment Banks

  Provide businesses with funding, advice on mergers and acquisitions, asset management , private equity, securities exchange transactions etc

  They provide loans to help businesses reach specific requirements.

  E.g Goldman Sachs, JP Morgan
• Financial Institution

  BUF SAIL

  Life Insurance

  A non bank financial institution that provides insurance for people in the event of death. Customers pay premiums on a plan which provides Life insurance companies funds to lend to businesses.
• Influence of government – Australian Securities and Investments Commission, company taxation 

  
  

  Influence of Government refers to how governments can influence business financial management decisions as economic policies such as monetary policy (RBA changes cash rate for banks) and fiscal policies (Taxation revenue expa and contract depending on government budget) can limit decisions.

  
  

  ASIC and Company tax influence financial management
• Influence of government – Australian Securities and Investments Commission, company taxation ASIC (Australian Securities and Investment Commission)Enforce financial laws (corporation Act 2002) for businesses ensuring transparent practices that protect consumers from frauds.ASIC influences businesses financial management:

  • ASIC regulates financial laws limiting choices for businesses to operate freely
  • ASIC protects consumers, laws ensuring certain products such as risk assessment and design and marketing impacting strategies such as product (4’ps designing/packaging)
• Global Market Influences

  Economic outlook, Availability of funds and Interest rates

  Global Market Influences refer to the uncontrollable external factors that influence a business such as economic outlook, availability of funds and interest rates. Business can use financial management strategies to lower the impact.
• Global Market Influences

  Global economic outlook, Availability of funds and Interest ratesGlobal Economic Outlook

  
  

  Global Economic Outlook refers to the levels of economic growth throughout the world.

  
  

  Outlook is positive economic growth increases influencing business

  E.g Increase demand for goods and services --> Influences business to increase production or expand

  
  

  Outlook is negative economic growth decreases influencing business

  E.G Reduced consumer spending due to individual savings results to lower sales/revenue --> Influences businesses to dismiss staff or lower prices
• Global Market Influences

  Global economic outlook, Availability of funds and Interest rates

  
  

  Availability of funds

  Availability of funds refers to the ability in which a business can access funds on the international financial market (Institutions, companies and governments than lend $)

  
  

  Lower interest rates make it more accessible for businesses to access funds to reinvest.

  
  

  In 2008-2009 the global financial crisis impacted the availability of funds causing an increase in interest rates
• Global Market Influences

  Global economic outlook, Availability of funds and Interest rates

  
  

  Interest Rates

  Interest rates refers to the cost for borrowing money. The higher the risk of lending the higher the interest rate.

  High risk borrowers pay a high interest rate as they have to compensate for the unlikelihood for repaying the loan.
• Processes of Financial Management (Financial needs, budget, record system, financial risk, financial control)

  
  

  Planning and implementing how a business will achieve objectives via

  1. Financial Needs
  2. Budget
  3. Record System
  4. Financial Risk
  5. Financial Control
• Processes of Financial Management (Financial needs, budget, record system, financial risk, financial control)

  
  

  Financial Needs

  Financial Needs refers to how much finance will be needed to achieve the businesses objectives, financial information will be needed before plans can be made. 

  Financial needs are determined by:

  • size of the business
  • current stage of the business cycle
  • future plans for growth and development
  • capacity to source finance (debt and/or equity).
• Processes of Financial Management (Financial needs, budget, record system, financial risk, financial control)

  
  

  Budget

  Forecasts how much finance needed and when finance is needed

  
  

  3 types of budgets

  Operating budgets: Expenses for operating involves business's core activities. E.g production, materials

  Project Budgets: Spending finance on assets and research for future projects planned by business

  Financial Budgets: A financial budget summarises all the financial data and expenses for both current and future plans of a business.
• Processes of Financial Management (Financial needs, budget, record system, financial risk, financial control)

  
  

  Record Systems

  A system designed to accurately and reliably gather and store information. Record systems minimise errors in the recording process and produce accurate and reliable financial statements.
• Processes of Financial Management (Financial needs, budget, record system, financial risk, financial control)

  
  

  Financial Control

  Policies and procedures that can be controlled to ensure the plans of a business will be achieved in the most efficient way.

  Businesses can control separation of duties, rotation of duties, control of cash, protection of assets and control of credit procedures

  (what a business can control that can result to objectives achieved )
• Debt and Equity financing (adv and disadv)

  
  

  Debt (Businesses borrowing short and long term funds)

  ADV

  Funds available

  Interest payments are tax deductible

  Maintains ownership

  DISADV

  Interest rates, bank charges

  Regular payments

  Must be credible

  Lenders have authority to seize assets

  
  

  Equity (Businesses selling shares)

  ADV

  No regular payments

  No interest payments

  Maintains ownership

  Shareholders retain control on how equity is used

  Less risk for business and owner

  DISADV

  Lower profit/returns

  Long process and expensive

  Ownership is diverse

  Lenders have authority to seize assets
• Matching the terms and sources of finance to business purpose

  
  

  Small businesses should use the right type of finance for specific needs. Short-term finance for short-term purposes/assets like buying inventory, and long-term finance for long-term purposes/assets like a new building.

  
  

  Small businesses can avoid financial issues and make the most of their cash flow.
• Monitoring and Controlling (cash flow statement, income statement, balance sheet)

  
  

  Monitoring and controlling is essential for financial management as consistent methods of reviews and control systems impact viability of business. Monitoring and controlling requires monitoring of external and internal factors that can impact the business

  
  

  Main financial monitoring and control systems

  • Cash flow statement
  • Income statement 
  • Balance sheet