Finance extended business HSC 2021 PDF

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An essay based off the stimulus:
"EVALUATE THE IMPORTANCE OF FINANCIAL MANAGEMENT STRATEGIES IN IMPROVING BUSINESS PERFORMANCE"...

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EVALUATE THE IMPORTANCE OF FINANCIAL MANAGEMENT STRATEGIES IN IMPROVING BUSINESS PERFORMANCE Financial management strategies are highly important in improving business performance and ensuring strategic role and financial objectives are met. These objectives are growth, efficiency, liquidity, profitability and solvency. Financial management strategies include sale and lease back, discounts for early payment, expense minimisation and hedging and the importance of these financial management strategies is evident in the success of businesses such as Woolworths, Qantas, and HPM Electrical. Sales and lease back is a highly effective working capital management strategy used by business to improve liquidity in the short term and profitability in the long term. Sale and lease-back is the selling of an owned asset to a lessor and then hiring the asset back through fixed payments for a certain time period. This way leasing frees up cash that can be used elsewhere in a business, so the level of working capital is improved. Leasing is also a tax deductible and increases the number of assets, allowing businesses to increase their profits. A sale and leaseback arrangement effectively separates an asset value from the asset’s utility value, enabling a business to improve worth and divert the capital tied up in a low-yielding asset back into their business at higher rates of return in a more productive use. Hence financial management strategies are highly important in improving business performance. The success of this strategy is seen through Woolworths who have raised $15.3 million through the sale and leaseback of 10 Woolworths fuel service stations across New South Wales and Queensland in 2016. By doing this Woolworth were able to effectively regulate cash flow and receive tax deductions. The funds were also used for expansion of other operations, including its push into the smaller convenience style format stores, exemplifying the success of financial management strategies in improving business performance. Profits can be weakened if the expenses of a business are high, as they consume valuable resources within a business and financial management strategies such as profitability management are necessary in establishing expense minimisation. Efficiency is a financial objective of a business to minimise business costs and manage assets so that maximum profit is achieved with the lowest possible level of assets. Strategies such as expense minimisation aims to achieve the most cost effective way of delivering goods and services to the required level of quality and can allow a business to improve efficiency by reducing goods and services that are least attractive in the product mix. A business that aims for efficiency must monitor the levels of inventories, cash and the collection of receivables and have corrective control measures in place to monitor assets, to avoid the issue of overcapitalisation. Considering outsourcing non-core business and negotiating better prices with suppliers are other prominent ways a business can reduce expenses and improve the expense ratio enabling businesses to fund other key business functions, or expand the business through goods and service differentiation. Qantas is a prime example which utilises expense minimisation by cutting commissions to travel agents, outsourcing more business functions and by encouraging more sales over the internet. This has enabled Qantas to increase efficiency by decentralising labour intensive processes evident in their 2018 financial report denoting that for every $1.00 of sales generated $0.88 of expenses. In 2016, every $1.00 in sales generated $0.84 in expenses. Although high, the expense ratio for Qantas is improving which depicts the effectiveness of financial management strategies. Qantas has also undertaken a restructuring of management, an 18 month wage freeze on major unions, fleet reconstruction and entered strategic alliances with other airlines like Emirates which allowed the business to minimise its costs by $557 million in 2016. Additionally, this aids in maximising business profitability, as Qantas’ availability of funds increased, allowing them to invest, for example in business lounges in airports. Conclusively,

it can be said that management strategies such as expense minimisation improve business expense ratio, thus efficiency and overall business performance. If a business is not efficient in collecting their accounts receivable, they need to implement strategies to improve this, specifically offering discounts for early payments. This is a cash flow management strategy and is most effective when targeted at those creditors who owe the largest amounts over the financial year period. By offering discounts creditors are more willing to pay their accounts payable through the offer of saving money, which is always an attractive deal as it can reduce their expenses. This can improve business’s cash flow status as there would be more current account assets, such as cash, accounts receivable and inventories which could be used to pay off business’s current liabilities. This helps with the management of cash inflows and outflows if there are any predicted shortfalls or surpluses of cash, such as in peak times like Christmas and Easter. Liquidity is a short-term financial objective which is the ability of a business to meet its short term financial obligations meaning a business can take advantage of profit opportunities when they arise, as well as meet short-term financial obligations, pay creditors on time to claim discounts, pay tax and meet payments on loans and overdrafts. This can be achieved by using discounts for early payments thus improve liquidity and business performance. Businesses like HPM Electrical offer big customers like Bunnings a 2% discount for payment within 10 days on its usual 30day credit terms. By doing this the business obtains their accounts receivables within 7 days, across 89% of Bunnings stores throughout NSW with an averaging $37,000 cash flow improvement each year. This improved their current ratio, improving business liquidity and thus business performance. Global financial management in regard to exchange rates through the use of hedging significantly improves business performance. Exchange rates refer to the value of one country’s currency expressed in terms of the value of another currency and can impact on business transactions. Hedging involves the use of hedging programmes and derivatives to minimise the risk associated with international trade and market fluctuations. This helps improve business performance by minimising the cost of capital and making future expenses more predictable which creates financial stability in the future. This can also improve a business's competitiveness and profitability. A successful business like Qantas is exposed to the risk from fluctuations in foreign exchange rates and changes in international markets affect fuel supply contracts, operational expenditures like lease payments, interest repayments, and capital expenditure such as new planes purchased in foreign currency. Also, as Qantas generates revenue in other currencies, it is important to monitor appreciations and depreciations to maximise profit. Qantas uses derivatives like forward exchange contract and options contract to hedge future fuel purchases, interest payments and future capital expenditure which enables the business to lock profits. For example, in 2017 Qantas has hedged 90% of their fuel needs in the form of options. This gave Qantas the ability to protect its capital base and remain more cost-efficient in the case of any increase in fuel prices. Therefore it is vital that business such as Qantas employ hedging as a global financial management strategy, as it allows for a better control on transactional and operation costs, improving efficiency and profitability thus improving business performance. Evidently, as demonstrated by successive businesses, it can be seen that financial management strategies are highly important in improving business performance. The strategies of sale and lease back, expense minimisation, discount for early payment minimisation and hedging, enable businesses to achieve their financial objectives of profitability, efficiency, growth, liquidity and solvency. Thus, financial management strategies are extremely important in improving business performance....