Courses arts business 1509766661 2017 Business Studies HSC PDF

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HSC Business Studies Study Notes – Finance Chapter 9 - Role of Financial Management 9.1 Strategic Role Strategic Role of Financial Management o Financial Management is the planning and monitoring of a business’s financial resources to enable the business to achieve its financial objectives. Examples of the strategic role of financial management o Setting financial objectives and goals and ensuring they can be met. o Sourcing finance o o o o

Preparing budgets and forecasting future finances Preparing financial statements Maintain sufficient cash flow Distributing funds to other parts of the business.

9.2 Objectives Aim of Financial Management o The objectives of financial Management are to maximise the business’s: Profitability

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Ability to make a financial return from business activities  to max. profit bus. Must carefully monitor its revenue and pricing policies, costs and expenses, inventory levels and level of assets.

Growth

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Increase in size and value of a business over time  achieved by increasing value of assets, increasing market share, taking over a competitor, opening more branches/offices in Australia or overseas.

Efficiency

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Generating maximum returns for minimum costs  involves increasing the amount of output with same number of inputs, or achieving the same amount of profit with a smaller amount of assets.

Liquidity

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The ease with which an asset can be converted into cash  refers to the extent to which a business can meet its short-term debt (current liabilities).

Solvency.

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Ability of a business to pay both short-term and long-term liabilities as they fall due.

9.3 Interdependence Operations o Finance is required for inputs, machinery, land etc. to create value whilst receiving a return on investments. o Operations manages stick and outsourcing whilst finance monitors the cost of it. Human Resource o Finance provides funds for wages/salaries and HR strategies such as training and development.

Marketing o Generates sales which assists with the short-term financial goal of managing cash flow. o Finance establishes budget and forecasts marketing must follow

Chapter 10 - Influences of Financial Management 10.2 Sources of Finance Internal Sources of Finance o Internal finances comes either from the business’s owners (investment of equity) of from the outcomes of business activities (retained profits) Owners’ Equity

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Funds invested by owners or partners to establish and build the business Equity can be raised internally by asking owners to invest more.

Retained Profits = PART OF OWNERS EQUITY

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Earnings that instead of being distributed to shareholders in dividends, are kept in the business as a cheap and accessible source of finance.

External Sources of Finance o Funds provided by sources outside the business. o Examples include: DEBT

Short-Term o Overdraft: occurs when a bank allows a business to overdraw its account to an agreed limit  assists with short term liquidity problems. o Commercial Bills: short-term loans issued by financial institutions, for larger amounts (usually over $100 000) for a period between 30 to 180 days. o Factoring: enables a business to raise funds immediately by selling accounts receivable at a discount to a firm that specialises in collecting accounts receivable. Long-Term o Mortgage: a loan secured by the property of the borrower. Used to finances property purchases, such as new premises – factory or office. They are repaid with interest over regular payments. o Unsecured Notes: a loan from investors for a set period of time. Not secured against the business’s assets and therefore present the most risk to the investors. o Debentures: a promise made by a company to repay money that has been lent to the business. o Leasing: involves the payment of money for the use of equipment that is owned by another party. EQUITY

Ordinary Shares o New Issues: a security that has been issued and sold for the first time on a public market. o Rights Issues: the privilege granted to shareholders to buy new shares in the same company. o Placements: allotment of shares made directly from the company to investors. o Share Purchase Plan: an offer to existing shareholders in a listed company to purchase more shares in that company without brokerage fees. 10.3 Financial Institutions Where can you access external finance? Banks

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The main providers of finance to businesses and consumers. They receive savings and deposits which is then invested in the form of loans to borrowers.

Investment Banks

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Banks that specialise in the provision of services to corporations  functions include arranging international finance, providing advice on mergers/takeovers and managing portfolio investment.

Finance and Insurance Companies

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Insurance Companies = gain large amounts of funds from policy and premium payments, which they then use to invest and provide loans to other businesses. Finance companies = raise capital through debenture issues and are major providers of loans, lease finance and factoring  typically have higher interest rates than banks but less strict criteria.

Superannuation

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Receive long-term funds from super contributions and provide them to the corporate sector by investing in shares, government securities and property.

Unit Trusts

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Formed under a trust deed and is controlled/managed by a trustee.

ASX

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Primary stock exchange in Australia which acts as a primary market for businesses and enables a company to raise capital through new shares. Acts as a secondary market through the purchase and selling of pre-owned securities.

10.4 Influence of Government ASIC o Independent statutory commission that enforces/administers the Corporations Act. o Protects consumers, investors & creditors by ensuring companies adhere to law and conduct fair transactions. o Assists in reducing fraud & unfair financial practices. o Collects information about Australian companies & provides it to the public. Company Taxation o Australian businesses pay 30% (flat rate) of net profit to the government. o Company tax is paid before profits are distributed to shareholders. o Government plans to reduce the rate as it would invite foreign investment, create new jobs & higher economic growth. 10.5 Global Market Influences Economic Outlook o Refers to the expected levels of economic growth of individual nations around the world. o This affects demand for products and interest rates on internationally borrowed funds. o Influences business decision as a negative outlook discourages risk taking. o Positive outlook = increased demand.

Availability of Funds o Refers to the ease with which a business can access funds on the international financial market. o Australia is seen as a low-risk country for investment, with relatively good rates of return. o Global financial problems significantly decrease availability of funds, making it difficult for businesses to borrow and raising interest rates. Interest Rates o The higher the level of risk, the higher the interest rate. o Australian businesses tend to borrow from overseas when wanting to expand as interest rates are cheaper  risk of currency flucturations.

Chapter 11 – Processes of Financial Management 11.1 Planning and Implementing Plan and Implement Financial Needs o The financial needs of a business are often determined by the: - Size of the business - Current phase of the business cycle - Future plans for growth and development - Capacity to source finance

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Management skills for identifying financial needs and planning

Budgets o Budgets provide information in quantitative terms about what a business requires to achieve a particular objective. o They show:

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- Cash required for planned outlays for a particular period - Cost of capital expenditure - Estimated use and cost of raw materials and inventory - Number and cost of labour required for production - Forecasted earning capacity. Budgets enable constant monitoring and review of objectives and provides the ability to control finance.

Types of Budgets

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Operating Budgets - Relate to everyday main activities of a business and may include budgets relating to sales, production and raw materials. Project Budgets - Relate to specific capital expenditure and research and development Financial Budgets - Relate to financial data of a business and include the budgeted income statement, balance sheet, and cash flows.

Financial Risks o The risk to a business of being unable to cover its financial obligations. o Risk can be calculated and factored into decision making. Financial Controls o Financial problems and losses prevent businesses from achieving their objectives. o Financial controls are the policies and procedures that ensure that these problems are minimised. o Some common approaches are: -

Clear authorisation channels and responsibilities for staff. Separation of duties. Monitoring and recording of all cash transactions Protection of assets.

11.2 Debt and Equity Financing Choosing between debt and equity o The finance for a business comes from both external and internal sources. o External debt finance is a liability to a business as it is money owed to external sources. This creates a risk in terms of bankruptcy. Debt finance Advantages of Debt  Funds are usually available and can be acquired at short notice.  Increased funds should lead to increased earnings and profits.  Interest payments are tax deductible.  Flexible payment periods and types of debt are available.  It will not dilute the current ownership in the business.

Disadvantages of Debt  Increased risk.  Security is required by the business.  Regular payments have to be made.  Lenders have first claim on any money if the business ends in bankruptcy.

Equity finance Advantages of Equity  Does not have to be repaid unless the owner leaves the business.  Cheaper than other sources of finance as there are no interest payments.  The owners who have contributed the equity retain control over how that finance is used.  Low gearing (use resources of the owner and not external sources of finance).  Less risk for the business and the owner.

Disadvantages of Equity  Lower profits and lower returns for the owner.  The expectation that the owner will have about the return on investment  Long expensive process to obtain funds this way  Ownership is diluted i.e. the current owners will have less control.

11.3 Matching Terms and Sources of Finance to Business Purpose Is it the right type of finance o The terms of finance must be suitable for the purpose for which the funds are required. o Finance managers should match the length or term of the loan with the economic lifetime of the asset the finance is being used to purchase. - The use of long-term finance to fund short-term situations or assets means the business is still paying off the loan and interest costs after the stock or asset has been used. This hurts profits. - The use of short term finance to fund long – term assets however means that the amount borrowed needs to be repaid before the assets have the time to generate a return – hurting the liquidity of the business. 11.4 Monitoring and Controlling External sources of finance o If a business does not monitor finance it will compromise the financial decision making process. o The main financial controls used for monitoring include: 1. Cash Flow Statement 2. Income Statements 3. Balance Sheets

Cash flow statement o A financial statement that indicates the movement of cash in, around and out of a business. o Provides info about liquidity and the business’ ability to pay its debts. o Cash flow statements show whether a business can: Generate favourable cash flow Pay its financial commitments as they fall due

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Income statements o Summary of income earned and the expenses incurred over a period of trading. o Shows where money is coming from and where it is being spent. o It can show: -

Gross Profit = Revenue – COGS Net Profit = Gross Profit – All Expenses Including Tax

11.5 Calculating Financial Ratios Balance Sheets o Ratios are used to measure the performance of a business by identifying and comparing the performance of key areas in the business’ financial performance. o They measure: - Liquidity

Ratios Ratio

Current Ratio

Debt to Equity Ratio

Gearing Profitability Efficiency

Formula

Current Assets ÷ Current Liabilities

Total Liabilities ÷ Total Equity

Analysis of which aspect of the financial statement Liquidity

Gearing (Solvency)

What does it show/interpretation of results

Shows short-term stability and liquidity Ratio of 2:1 is considered a good financial position Extent to which the business is relying on debt finance Higher the ratio, the less solvent the business is and hence carries higher risk ‘Negative Gearing’ when ratio is below zero and the investment generates more than its cost

Gross Profit Ratio

Gross Profit ÷ Sales

Profitability

Net Profit Ratio

Net Profit ÷ Sales

Profitability

Return on Equity Ratio

Net Profit ÷ Total Equity

Profitability

Expense Ratio

Total Expenses ÷ Sales

Efficiency

Accounts Receivable Turnover Ratio

Sales ÷ Accounts Receivable

Efficiency

A business is highly geared if there is a lot of debt Shows percentage of sales that result in profit Higher the ratio the better Represents the profit or return to owners Higher the better Shows how effective funds contributed are; shows if it is a good investment 10% is sought after and the higher the better Shows the amount of sales that are allocated to individual expenses???? Lower the better Effectiveness of a firm’s credit policy and how efficiently it collects debt Higher the better

11.6 Limitations of Financial Reporting Limitations of Financial Reporting o Normalised Earnings - Process of removing one time or unusual influences o Capitalising expenses - Done by adding a capital expense to the balance sheet so it becomes an asset rather than listing it as an expense on the income statement.

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Valuing assets - Process of estimating the value may be inaccurate and can often be used to inflate or deflate assets. Timing issues - Financial reporting is over a year but may not be accurate due to seasonal fluctuations Debt repayments - Reports don’t often mention the terms of debt repayments which can distort whether a business is solvent. Notes to financial statements -

Contains additional information left out of financial reports that might help stakeholders made sense of financial statements or abnormalities.

11.7 Ethical Issues Audited Accounts o An audit is an independent check of the accuracy of financial records and procedures, three types - Internal Records – Conducted internally by employees to check procedures and accuracy - Management Audits – These are conducted to review the firm’s strategic plan and determine if changes need to be made (Bald guy from TRU) - External Audits – Requirement of the Corporations Act 2001 (cwlth) and are conducted by an external accountant to guarantee authenticity. Record keeping o Proper financial records must be kept for a minimum of 5 years o Tempting for businesses to not record ‘cash in hand’ to minimise profit and tax paid on that profit o Large penalties if the ATO catch you, can harm reputation and alienate customers Reporting practices o Stakeholders such as creditors and investors are entitled to access accurate financial reports o Entitled to an annual report o False reporting is illegal and can result in fines, imprisonment and being banned from being the director of a company

Chapter 12 – Financial Management Strategies 12.1 Cash Flow Management Cash Flow o The movement of cash in and out of a business for a period of time. Matching cash flow into the business and out of the business is essential for ensuring liquidity in the business. o There are 3 strategies to manage cash flow: 1. Distribution of Payments: payments to creditors over months to avoid large single sum payments. 2. Discounts for Early Payments: offering creditors discounts for early payments improves accounts receivable efficiency. 3. Factoring: this is the selling of accounts receivable for a discounted price to a specialist factoring company (debt collector).

12.2 Working Capital Management Working Capital o Working capital management is determining the best mix of current assets and current liabilities needed to achieve the objectives of the business.

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Requirements for working capital differ for each business: - A fast food shop requires relatively low working capital as its cash flow cycle is short. - A snowboard manufacturer requires a higher level of working capital as its cash flow cycle is a lot longer.

Control of Current Assets o Vital for monitoring working capital – excess inventory or lack of control over receivables lead to an increased level of unused assets o Cash – The levels of cash in a business can ensure a business can meet short-term obligations. Cash levels are generally held at a minimum, opting for securities or cash reserves to preserve liquidity o Receivables – The timing of receivables will ensure there are adequate cash resources. Checking credit ratings, following up on accounts overdue, reasonable repayment periods and use of debt collectors can help this o Inventories – Control and monitoring will ensure there is not an excess, or insufficient, level of inventory in the business. Excess stock is an unnecessary expense that needs to be flipped into cash. Insufficient stock reduces profitability Control of Current Liabilities o Payables – Paying on the due date, taking advantages of discounts, and ensuring payments are not late can ensure liquidity is maximised. Use of Floor Stock Finance and Consignment is another alternative o Loans – Accessing short-term debt finance may improve liquidity at the cost of paying high rates of interest. Control of Loans is essential o Overdrafts – Convenient and relatively cheap, enables a business to overcome temporary short falls Strategies of Managing Working Capital o Leasing – Hiring of an asset to free up cash which can be used elsewhere and improves working capital o Sale and Lease Back – Selling an owned asset to a lessor and leasing back through fixed payments over years (ADVANTAGE IS LIQUIDITY DUE TO SALE) 12.3 Profitability Management Revenue Controls o Marketing Objectives – Marketing Strategies should lead to increased sales and revenue, and hence the pricing of the product should allow for a profit margin, but still an attractive price. Cost Controls o Fixed and Variable Costs – Total costs for a business – Fixed Costs remain the same (RENT), Variable will increase the more you produce (MATERIALS) o Cost Centres – Particular areas where a cost can be attributed to. o Cost Minimisation – Could find a cheaper supplier, Renegotiate better prices, Find efficiencies by identifying cheaper operations 12.4 Global Financial Management Controlling Risk

Controllable risks  Methods of international payment  Hedging  Derivatives

Uncontrollable risks  Currency exchange rate fluctuations  Interest rate changes  Overseas borrowing
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