Finance management

• Role of Financial Management

  • Strategic role of financial management
  • Objectives of financial management - profitability, growth, efficiency, liquidity and solvency (long and short-term)
  • Interdependence with other key business functions
• Financial management is the planning and monitoring of the business's financial resources to achieve its financial objectives
• Strategic plans


  Strategies used by a business to achieve its long-term goals (3-5 years) e.g. setting financial objectives, sourcing finances and preparing budgets and making forecasts
• Overall financial management at McDonald's is concerned with how assets are deployed, how these assets are financed (either via debt or equity) and the overall profitability of the company
• Objectives of financial management

  Profitability - ability to maximise profits

  Growth - ability to expand and increase in size

  Efficiency - ability to minimise costs and manage assets to achieve profits fast and effectively

  Liquidity - extent to which a business can meet short-term financial commitments

  Solvency - extent to which a business can meet long-term financial commitments
• Long-term objectives (strategic, generally 5yrs+) are broader goals achieved through short-term objectives (tactical plans, 1-2 years) which are reviewed more regularly
• The overall long-term objective of financial management is to increase the owner's wealth; this is dependent on profitability in the short-term resulting from increased operating efficiency
• Interdependence with Other Key Business Functions

  • Operations - Finance is required for inputs, machinery, land etc. to create value whilst receiving a return on investments

  Marketing - Generates sales which assist with the short-term financial goal of managing cash flow, Finance establishes budgets and forecasts marketing must follow

  Human Resources - Finance provides funds for wages/salaries & HR strategies such as training/development
• Internal sources of finance

  • Retained profits
  • Taking on another business partner
  • Seeking funds from investor
  • Selling unproductive or inefficient assets
  • Issues of selling shares
• Retained profits


  The total cumulative amount of profits that the company has retained in the business rather than distributed as dividends
• External sources of finance

  • Debt - overdraft, commercial bill, factoring, mortgage, debentures, unsecured notes, leasing

  Equity - ordinary shares and private shares
• Overdraft


  When a bank allows a business or individual to overdraw their account up to an agreed amount and for an agreed amount of time, typically used to help overcome a temporary cash shortfall
• Commercial draft


  Short-term loans issued by financial institutions for large amounts (up to $100,000) for generally 30-180 days
• Factoring


  Selling of accounts receivable for a discounted price to a factoring company
• Mortgage


  A loan secured by the property of the borrower (business)
• Debentures


  An invite for other companies to loan funds to a business and the other companies benefit by receiving interest payments
• Unsecured Notes


  A loan from investors for a set period of time, but they are not secured against the business's assets
• Leasing


  Involves the payment of money, for the use of equipment that is owned by another party
• Financial Institutions


  • Banks

  Investment banks

  Finance companies

  Superannuation Funds

  Life insurance companies

  Unit Trusts

  Australian Securities Exchange
• Australian Securities and Investments Commission (ASIC)


  Independent statutory commission that is accountable to the Commonwealth Parliament, enforces and administers the Corporations Act 2001
• Company taxation


  Both private and public Australian businesses are required to pay company tax on their profits earned in the financial year
• Global market influence


  Uncontrollable by the business, must implement appropriate financial management strategies to minimise any negative effects
• Economic outlook


  Global economic outlook - specifically to the project changes to the levels of economic growth throughout the world
• Availability of funds


  The ease with which a business can access funds on international financial markets
• Interest rates


  The cost of borrowing money
• Qantas needs funds to be able to grow and expand the business, they access this from a variety of sources, both debt and equity
• Qantas uses equity finance, funds from its owners, such as retained earnings and sale of assets and selling shares through the ASX
• Qantas also sources from debt finance, between 2020 - 2022 Qantas raised $2.4 billion in additional debt in loans to raise cash to offset the impact of COVID-19
• The government influences Qantas through economic policies which impact the demand for air travel, changes in tax and government spending, as well as interest rates
• The global market impacts Qantas and the business must respond to challenges in the global market, the availability of funds for Qantas to borrow from financial institutions, and interest rates impact the cost of borrowing money
• Financial needs


  Businesses need to determine their financial needs using financial information such as cash flow statements, income statements, balance statements, forecasts, budgets and financial ratios
• Budgets


  Provide information in quantitative terms (figures) about the requirements to achieve a particular purpose, can show cash required, cost of capital expenditure, expenses, use and cost of raw materials/inventory
• Operating budgets


  Relate to the main activities of a business and may include budgets relating to sales, production, raw materials, direct labour, expenses and cost of goods sold
• Project budgets


  Relate to capital expenditure, and research and development
• Financial budgets


  Relate to the financial data of a business, the predictions of the operating and project budgets are included in the budgeted financial statements
• In 2019, McDonald's plans to outlay US$2.3 billion in capital expenditure - with around US$1 billion being spent on updating 2,000 stores in the United States
• Record systems


  Mechanisms employed by a business to ensure that data are recorded and that the information provided by record systems is accurate, reliable, efficient and accessible
• McDonald's franchisees have to agree to use McDonald's methods of operation - including bookkeeping and accounting, at the core of this record system is the Point of Sale (POS) system used at the front counter, called NewPOS (NP6)
• Financial risks


  Risks to a business of being unable to cover its financial obligations - debt, including credit risk, market risk, liquidity risk, and operational risk
• McDonald's may use interest rate swaps to manage financial risks