finance

• Assets: liabilities + total equity
• Role of financial management

  Strategic role of financial management
• Objectives of financial management

  Profitability, growth, efficiency, liquidity, solvency
• Influences on financial management


  • Internal sources of finance - retained profits
  • External sources of finance - debt (short-term borrowing, long-term borrowing), equity (ordinary shares, private equity)
  • Financial institutions (banks, investment banks, finance companies, superannuation funds, life insurance companies, unit trusts, Australian Securities Exchange)
  • Influence of government (Australian Securities and Investments Commission, company taxation)
  • Global market influences (economic outlook, availability of funds, interest rates)
• Processes of financial management


  1. Planning and implementing (financial needs, budgets, record systems, financial risks, financial controls)

  2. Debt and equity financing (advantages and disadvantages of each)

  3. Matching the terms and source of finance to business purpose

  4. Monitoring and controlling (cash flow statement, income statement, balance sheet)
• Financial ratios


  • Liquidity (current ratio)
  • Gearing (debt to equity ratio)
  • Profitability (gross profit ratio, net profit ratio, return on equity ratio)
  • Efficiency (expense ratio, accounts receivable turnover ratio)
  • Comparative ratio analysis (over different time periods, against standards, with similar businesses)
• Financial management strategies


  1. Cash flow management (cash flow statements, distribution of payments, discounts for early payment, factoring,)

  2. Profitability management (cost controls - fixed and variable, cost centres, expense minimisation; revenue controls - marketing objectives)
• working capital management: the control of current assets ( cash, account receivables), and the control of current liabilities (payables, loans).
• working capital strategies:

  • leasing: the business making regular payments, under a lease agreement, in return-use of assets.

  benefits: cheaper than buying, lease payments are tax redactable.

  
  

  • sale and lease back: a business selling an assets, and leasing for a specific period of time, sometimes with rebuying the asset at end of lease period.

  benefit: heavy input of cash, applicable to both current and non current debt.
• current ratio:

  • indicate business state of liquidity.
  • whether or not business can pay their short-term financial obligations.
  • ideal ratio: 2:1.
  • ratio too low- business cannot pay their short-term debts.
  • ratio too high: -business not selling assets quick enough, too much stock (cost- warehousing).
• cashflow management:

  • control the inflows and outflow of cash in the business.
  • maintaining a cyclical cashflow, matching outflows with inflows.
  • through the use of cashflow statement (formal - shareholder, company reports. informal - small business owners).
• cashflow statement:

  • formal, or informal.
  • tracks cash sales.
  • formula: opening balance + cash in - cash out = closing balance.
• Cashflow strategies


  1. Distribution of payment: spread payments throughout a selected time period

  2. Discounted for early payments: offering a discount on debts for early payment

  3. Factoring: selling accounts for discount to specialised company, to track down unpaid accounts receivables
• Distribution of payment


  Spread payments throughout a selected time period to avoid cash shortfalls
• Discounted for early payments

  Offering a discounter for debts for early payment, most effective on debtors with large debt
• Factoring


  Selling accounts for discount to specialised company, to track down unpaid accounts receivables
• Benefits of factoring


  • Save costs of tracking unpaid accounts
  • Improve cashflow
  • Improve working capital
  • Improve efficiency (through improving accounts receivable turnover ratio)
• Cons of factoring


  • Reduce profitability - sold at discount = factoring fees
  • Damage customer loyalty and perception
• cash inflows > cash outflows: cash surplus.

  cash inflows < cash outflows: cash deficit.
• solution of cash deficits: having adequate cash reserves to cover cash shortfalls and seasonal fluctuations.
• profitability management:

  • controlling over both the revenue and costs of the business.
  • revenue: income produce by main activity of business, usually being sales.
  • cost: fixed, and variable costs.
• fixed costs: costs that do not change with the level of operation / volume of sales (units). e.g. rent, insurance. variable costs are dependant of the level of operation / volume of sales, e.g. materials, labour.
• revenue control strategies:

  • clear understanding of market objectives -> knowing the level of sales required cover costs, and create a profit. cost-revenue-profit-analysis, to determine the sales required to break even. knowing your market-target market, prior to diversifying product range or ceasing production to maximise profit.
  • pricing strategies-price skimming, price below competition.
  • diversifying product range.
• Cost strategies


  Approaches used by businesses to manage and reduce costs
• Cost centre


  • Area within the business that incur costs, but does not generate income
  • Function is to track expenses
  • Through monitoring expenses, efficiency and order is maintained, providing more control over costs, and minimising it
• Expense minimisation


  Reducing of wasted expense in the workplace, use of policies and guidelines to encourage staff for expense minimisation
• JIT (Just in Time)

  1. Ordering inventory only when required

  2. Reduce warehouse and storage cost

  3. Minimise waste

  4. Cons: Risky due to potential delay in stock, resulting in delay of entire production, damage to sales
• Global sourcing


  • Business outsourcing supplies or services from other countries
  • Cost advantages
  • New technologies
  • Labour specialisation
  • Minimise cost and improve sales
• planning and implementing cycle:

  
  

  1. determine financial needs -> developing budgets -> maintain record systems -> identify financial risks -> establish financial controls
• debt:

  • advantages: flexible (borrows fund for days (overdraft) or up to ten years (mortgage), fund readily available, lower cost, convenience(easier to organise than shares).
  • disadvantage: regular repayments, cost vary based on interest, required security, increase debt to equity ratio - financial risk).
• equity:

  • advantage: no interest charged, no impact on gearing, owners maintain control, less risk.
  • disadvantage: higher costs than debt, dividends are not tax reductions, lower profits and thus lower owner's return.
• internal sources of finance- either fund contributed by owners/partners, or profits of business activities.

  owner's equity: fund contributed by owner/partner, mainly to establish.

  retained profits: profits that are not distributed, but rather kept within the business as cash reserves or accessible source of finance.
• comparative ratio analysis: comparison made of percentages, figures, and ratios against previous time periods, industry average, or general standards.
• debt: financial relying on sources outside the business owners.

  short term borrowing: bank overdrafts, commercial bills, and factoring.

  long-term borrowing: mortgages, leasing, unsecured notes, and debentures.