business

• Financial management


  The planning, organizing & controlling of financial or monetary resources
• Strategic role of financial management


  • Ensure the business continues to operate, grow and provide substantial profits to the owners
• Financial managers


  Need strong accounting knowledge/skills to interpret & analyze financial data
• Objectives of Financial Management


  • Profitability
  • Growth
  • Efficiency
  • Liquidity
  • Solvency
• Profitability


  Ability to make a financial return from business activities
• Growth


  Increase in size and value of a business over time
• Efficiency


  Generating maximum returns for minimum costs
• Liquidity


  The ease with which an asset can be converted into cash
• Solvency


  Ability of business to pay both short-term & long-term liabilities as they fall due
• Long term objectives


  Achieved through short term objectives
• The overall long-term objective of financial management is to increase owner's wealth
• Finance is required for inputs, machinery, land etc. to create value


  Operations manages these whilst finance monitors the cost
• Marketing generates sales


  Assists with the short-term financial goal of managing cash flow
• Finance provides funds for wages/salaries & HR strategies

  Human Resources
• Internal Sources of Finance


  • Owners equity
  • Retained profits
• Short-term borrowing


  • Bank overdraft
  • Commercial bills
  • Factoring
• Long-term borrowing


  • Mortgage
  • Debentures
  • Unsecured notes (bonds)
  • Leasing
  • Term Loan
• Equity


  Finance raised by a company by issuing shares to the public
• Types of Equity


  • New issues
  • Rights issues
  • Placements
  • Share purchase plan
• Private Equity


  Money invested in a private company not listed on the ASX
• Financial Institutions


  • Banks
  • Investment Banks
  • Finance and Insurance Companies
  • Superannuation
  • Unit Trusts
  • Australian Securities Exchange (ASX)
• ASIC


  Independent statutory commission that enforces/administers the Corporations Act
• Company Taxation


  Australian businesses pay 30% (flat rate) of net profit to the government
• Economic Outlook


  Expected levels of economic growth of individual nations around the world
• Availability of Funds


  Ease with which a business can access funds on the international financial market
• Interest Rates


  The higher the level of risk, the higher the interest rate
• Processes of Financial Management


  • Financial Needs
  • Developing Budgets
  • Record Systems
  • Financial Risks
  • Financial Controls
• Advantages of Debt Finance


  • Funds usually readily available
  • Tax deduction for interest payments
  • Increased funds, increased earnings
  • Profits not shared with lender of loan
• Disadvantages of Debt Finance


  • Regular repayments must be made
  • Interest may be charged (rates can also increase)
  • Higher financial risk as debt to equity ratio increases
  • If loan is secured, defaulting will lead to loss of asset
• Advantages of Equity Finance


  • No interest charges
  • No impact on gearing or financial risk
  • Dividend payments are flexible
  • Greater potential for growth and investment
• Disadvantages of Equity Finance


  • Proportion of profits go to additional new owners
  • Dividends not tax deductible
  • More expensive - shareholders require higher return due to higher risk
  • Diluted ownership & less control (external equity)
• Matching Principle


  The term of the loan should match with the economic lifetime of the asset
• Cash Flow Statement


  Document summarizing cash transactions that have occurred over a period of time
• Income Statement (profit and loss)


  Outlines income and expenses of a business over a set period of time, indicating the business's operating efficiency & profitability
• Balance Sheet


  Represents a business's assets and liabilities at a particular point in time & presents the net worth of a business
• Financial Ratios


  • Liquidity
  • Gearing
  • Profitability
• Current ratio (working capital)


  Measures how well business can meet its current liabilities from the current assets
• Debt to equity ratio


  Gearing ratios determine the firm's solvency (ability to trade long term) and shows the extent to which the firm is relying on external sources (debt)
• Balance sheet components


  • Assets: current (turned into cash in 12 months) or non-current (not expected to be turned into cash in 12months)
  • Liabilities: current or non-current
  • Owner's equity
• Financial ratios


  Used to analyse a business's financial position and performance