FINANCE

• Financial management


  How a business can operate, grow and achieve goals through management of financial resources
• It is necessary for a business to achieve its financial goals


  To avoid bankruptcy (sole trader/partnership) or insolvent (company)
• Developing a strategic plan as part of a business's financial management


  Ensures that the business survives and grows
• Strategic role of management

  1. Setting financial objectives that are realistic and achievable

  2. Sourcing financing e.g. bank loan

  3. Preparing budgets and financial statements

  4. Maintaining sufficient cash flow
• Strategic plans of a business

  Long term (e.g. renting a warehouse)
• Tactical/operational plans of a business


  Short-term (e.g. buying a warehouse)
• Financial resources


  Resources in a business that have a monetary or money value
• Assets


  Items of value owned by a business
• Capital


  The money available to pay for everyday operations and to fund for future growth
• Ineffective management of financial resources

  • Insufficient cash to pay suppliers
  • Inadequate capital for expansion
  • Too many assets that are not productive
  • Possible business failure
• Effective management of financial resources

  Achievement of objectives
• Objectives for financial management

  • Maximise profitability
  • Increase growth
  • Increase efficiency
  • Increase liquidity
  • Increase solvency
• Profitability


  The financial gain a business makes from its operations after all expenses are accounted for
• Growth


  The expansion of business activity and size
• Efficiency


  The ability of a business to minimise its costs and manage its assets - maximum profit is achieved with the lowest possible level of assets
• Liquidity


  The ability of a business to pay its short term debts as they fall due (less than 12 months)
• Solvency


  The ability of a business to pay its long-term debt as they fall due (longer than 12 months)
• Gearing


  The proportion of debt finance compared to equity finance
• Successful financial management relies on setting short-term and long-term objectives
• Short and long term objectives


  Often cause conflict
• Long term financial objectives

  • Profitability
  • Efficiency
  • Growth
  • Solvency
  • Liquidity
• Businesses need to establish operational (short term) and tactical (medium term) goals in order to achieve their long term goal
• Interdependence


  The mutual dependence that key business functions have on one another
• Finance managers rely on HR, Operations and Marketing to ensure success of the business' financial plan
• HR, operations and Marketing rely on finance to provide appropriate funding/budgets
• Businesses continually strive for synergy of these functions to achieve business goals
• Business success can be directly linked to its ability to coordinate key business functions efficiently and effectively
• Retained earnings


  Profit that is made by the business that is not distributed
• Positive effects and implications of retained earnings

  • Immediate access/use to fund business activities
  • Does not increase debt levels
  • No interest repayments/debt servicing costs
  • Can be used for expansion activities
  • Reduces expenses
• Negative effects and implications of retained earnings

  • Available funds may be limited
  • May take time to accumulate funds
  • Could result in decreased dividend payments to shareholders
• Commercial bills


  A bill of exchange/business loan issued by financial institutions for larger amounts usually over $100,000 for a period of 30-180 days
• Positive effects and implications of commercial bills

  • Allows a business to borrow significant funds
  • Borrower generally receives the funds immediately
  • Flexible source of funds
  • Interest rate may be cheaper
• Negative effects and implications of commercial bills

  • Have to pay interest
  • Establishment fees need to be paid
  • Usually secured against company assets - lose assets if default on payment
• Overdraft


  A facility where a bank allows a business to overdraft its amount to an agreed limit
• Positive effects and implications of overdrafts

  • Immediate access to funds when experiencing short-term liquidity/cash flow problems
  • More flexible source of finance compared to bank loans
  • May not need to be secured against company assets
• Negative effects and implications of overdrafts

  • Have to pay relatively high interest/debt servicing costs
  • Fees associated with initial set-up
  • Banks required some form of security
  • Interest repayments must be made regardless of level of profitability
• Factoring


  A short term debt finance tool where a business can raise immediate cash by selling its accounts receivable to another business at a discount
• Types of factoring


  • With recourse - any bad debt remains the responsibility of the business
  • Without recourse - any bad debts are the responsibility of the factoring company
• Positive effects and implications of factoring

  • Immediate access to funds
  • Saves time and associate costs of following up unpaid accounts
  • Improves cash flow/cash on hand - business in a more liquid position
• Negative effects and implications of factoring

  • Business does not receive full value of accounts receivable
  • May impact customer relationships
  • Business responsible for unpaid debts with recourse factoring
  • Detrimental impact on the current ratio