Finance

• Strategic Role of Financial Management?

  Budgeting, estimating future income & expenditure, monitoring and controlling finances.

  • long term direction & financial plan
• Objectives of Financial Management?

  PLEGS
• PLEGS?

  Profitability - short-term

  Liquidity - short-term

  Efficiency - short-term

  Growth - long-term

  Solvency - long-term
• Profitability?


  It measures financial returns achieved overtime through owner's investment and generation of revenue through sales less costs and expenses

  • To increase revenue management must adopt revenue controls, cost controls, fixed and variable costs, cost centres, and expense minimisation.
  • Expressed as a %
• Liquidity?


  Capacity of a business to repay short-term (current) liabilities when they fall due by using their current assets to do so.
• Current Assets?


  Short-term financial resources available to an organisation that can be transformed quickly into cash. Less than 12 months

  CRI:

  • Cash
  • (Accounts) Receivables
  • Inventory
• Current Liabilities?


  Short-term financial obligations that the organisation owes and must pay back to creditors such as lenders and borrowers

  PLO

  • (Accounts) Payables
  • Loans
  • Overdrafts
• Accounts receivables?

  Funds owed to business
• Accounts payables?

  Funds owed to a creditor
• Efficiency?


  -Measures how effectively cash is collected from debtors and how expenses are minimised to maximise profit

  • how efficient a business is at collection accounts receivables from debtors
• Growth?


  Increase in size or value of a business overtime can be organic or acquisitive

  • measured by:
  • sales
  • liquidity
  • profit
  • dividend amount
  • share price
• Organic Growth?


  Growth which occurs from reinvestment
• Acquisitive growth?


  Growth from the acquisition of other businesses
• Solvency?


  The capcity of a business to meet and repay all liabilities when they fall due.
• Short-term Objectives?

  Tactical plans

  • 1-2 years
• Long-term objectives?

  Strategic plans

  • 5+ years
• Conflicts between ST and LT?

  Liquidity (ST) and growth (LT)

  Profit (ST) and growth (LT)
• Interdependence with other key functions?

  Mutual reliance between functions to meet goals of the organisation.
• Operations & Finance?

  -Economies of scale (lowers average unit cost) (OPERATIONS) -> profit maximisation, cost reduction (FINANCE)

  -Budgets (FINANCE) -> constrained based on the limit finance provide them (OPERATIONS)

  • required for inputs, machinery and land to create value whilst receiving ROI
  • Operations manages stock and outsourcing whilst finance monitors the cost of it
• Operations & Marketing?


  Generates sales which assists with the short-term financial goal of managing cash flow

  • Finance establishes budgets and forecasts marketing must follow
• Operations & HR?


  Finance provides funds for wages/salaries & HR provides strategies such as training/development.
• Influences on Financial Management?

  SIGG
• SIGG?

  Sources

  Institutions

  Government

  Global Market Influences
• Internal Sources of finance?


  Owner's Equity

  Retained Profits
• Owner's equity?

  Contributed by owners to establish and build the business; owners can contribute additional equity to fund expansion.
• Pros + Cons of Owner's Equity?

  + full control of business maintained

  + does not need to be repaid

  _ constrained by amount of finance owner has

  _ personal savings at risk
• Retained Profits?


  Internal sources of finance of net profits after tax from previous years which are redistributed back into the business.
• Pros + Cons of Retained Profits?


  + Simplest form of financing

  + No dilution of ownership

  _ no tax benefits

  _ profits take time to build up
• External Sources of Finance ?

  Debt

  • short-term borrowing (FOC)
  • long-term borrowing (DULM)

  Equity (SPRN)
• FOC?

  Factoring

  Overdraft

  Commercial Bills
• Factoring?


  Selling of accounts receivables for a discounted price to a factoring company.
• Pros & Cons of Factoring?


  + Immediate Cash Flow

  + Improves liquidity

  _ damages relationships with customers

  _ expensive
• Overdraft?


  When a bank allows a business to overdraw their account for an agreed amount of time.

  • used to help overcome temporary cash shortfall
• Pros & Cons of Overdraft?


  + Assists with liquidity

  + Convenient

  _ High daily interest fees

  _ Account fees
• Commercial Bills?


  Short term loans issued by financial institutions for large amounts (up to $100,000) for 30-180 days.
• Pros & Cons of Commercial Bills?

  + Lower interest rates

  + Cheapest form of finance

  _ Must be repaid within a short period
• DULM?

  Debentures

  Unsecured Notes

  Leasing

  Mortgages
• Debentures?


  Invite for other companies to loan funds to a business and other companies benefit by receiving interest payments.

  • fixed term
  • 3-5 years
  • up to $500,000 per debenture
• Pros & Cons of Debentures?

  + Fixed interest rates

  + Fixed period of time

  _ Prospectus required

  _ Debenture holder has claims over other assets
• Unsecured Notes?

  Form of borrowing where the lender does not have the security of a floating charge over assets.