Please enable JavaScript.
Coggle requires JavaScript to display documents.
Processes of Financial Management, Financial Management Strategies, Role…
Processes of Financial Management
Planning and Implementing
Definition
A business plans out the finance required, the proposed sources of finance and a range of financial statements
Financial planning determines how a business' goals will be achieved
Financial Needs
Determined by the capacity to source finance and the management team skills for assessing financial needs
Used to help seek finance/determine financial needs
Balance Sheets
Income Statements
Cash flow statements
Budgets
Provide information in facts and figures about requirements to achieve a particular purpose
Preparing a cash budget enables a business to predict cash shortages
Cash required for future plans
Cost of capital expenditure and other expenses in comparison to the revenue and earning capacity of the business
Estimated use and cost of inventory
Number and labour hours required for production
Types
Operating
Those related to the main activities of a business
Examples
Sales
Production
Labour
Expenses
Raw Materials
COGS
Project
Relate to capital expenditure and Research and Development
Financial
Relate to the financial data of a business
Include the:
Income Statement
Balance Sheet
Cash Flow
Record Systems
Mechanisms employed by businesses to ensure that data become released and the information provided by the record systems are accurate, reliable, efficient, and accessible
Double entry system; recording all items twice to minimise errors
Financial Risks
Financial risk is the risk to a business of being unable to cover financial obligations, such as debt that a business incurs through borrowings
Financial Controls
The policies and procedures that ensure that the plans of a business will be achieved in the most efficient way
Financial Problems Include:
Theft
Damage/Loss of Assets
Fraud
Errors in Record
Debt to Equity
Debt Finance
Is a liability to a business as it is money owed to external sources
Equity Finance
Relates to the internal sources of finance in the business
Advantages vs Disadvantages
Debt
Advantages
Funds readily available
Increased funds should lead to increased earnings and profits
Be acquired at short notice
Interest payments are
tax-deductible
Flexible payments periods and types of debt are available
It will
not dilute the current ownership
in the business
Disadvantages
There is an increased risk if debt comes from financial institutions because
investment bank charges
and
government charges may increase
Security
is required by business
Regular
repayments
Lenders
have
first claim
on any money if the business ends in bankruptcy
Equity
Advantages
Does not have to be repaid
unless the owners leaves the business
Cheaper than other sources of finance (no payments)
The owners who have contributed to the equity retain control over how finance is used
Disadvantage
Lower profits
and
lower returns
for owners
The expectation that the owner will have about the return on investment
Ownership is diluted
Debt versus Equity
Debt
Lenders have prior claim in the event of liquidation
Debt must be repaid by periodic repayments
Interest payments are tax deductible
Lenders usually require a lower rate of return
Interest payments are fixed
Debt provided have no voting rights
Equity
Shareholders have a residual claim on assets
Equity has no maturity date
Dividends are not tax deductible
Shareholders require higher return due to higher risk
Dividend payments are not fixed and may be reduced through
lack of funds
Equity holders have voting rights
Matching the Terms and Source of Finance to Purpose
Terms, flexibility and availability of finance
Cost of each source of funding
Structure of the business
Level of control maintained by the business
Monitoring and controlling
Definition
Business uses accounting information to monitor and control the business functions
Cash Flow Statement
Income Statement + Balance Sheet
Income Statement (Revenue Statement)
Operating income such as sales of inventory and services plus other earning from interest and dividends
Operating income such as the:
Purchase of Inventory
Payment of Services
Other Expenses
Rent
Advertising
Insurance
Sales
COGS
Opening Stock + Purchases
Closing Stock
Gross Profit
Expenses
Net Profit
Balance
Assets
Current Assets
Cash
Accounts Receivables
Inventory
Non-current Assets
Plants
Equipments
Buildings
Liabilities
Current Liabilities
Accounts Payable
Overdraft
Short Term Loans
Non-current Liabilities
Mortgages
Long Term Loans
Debentures
Owner's Equity
Retained Profits
Predict a business' status
Show whether a firm can generate a suitable cash flow, pay financial commitments, have sufficient funds for future expansion
Records
Records movement of cash receipts and payments
Cash receipts
Credit sales
Cash sales
Other income (return on investments)
Cash payments
Payments for stock
Expenses
Non-operation expenses
Financial Ratios
Liquidity
Current Ratio
2:1
Gearing
Debt to Equity
60%
Profitability
Gross Profit
30%
Net Profit
Return on Equity
20%
Efficiency
Expense Ratio
Accounts
Receivable Turnover
< 14
Comparative Ratio Analysis
Identifies areas for improvements, while financial ratios are useful for financial management when used comparatively
Over Different Time Periods
Compare current results with past perfromance
Against Standards
Against standards
Example
Benchmarks (Australian or Global Standards)
With Similar Business
Limitations to Financial Reports
Normalised Earnings
Process of removing one time influence from the balance sheet to show the true earnings of a company
Example
Removal of a land site
it would achieve :arrow_up: capital gain
Capitalised Expenses
Process of adding capital expense to the balance sheet that is regarded as an asset rather than an expense
Examples
Research and Development
Development Expenditure
Valuing Assets
Process of estimating the market value of assets or liabilities. These valuations can be used in a variety of contexts for a business
including:
Investment Analysis
Mergers
Acquisitions
Financial Reporting
Historical Value
Value of Intangibles
Timing Issues
A record over one year may not be a true representation due to fluctuation issues
actual accounting (order), cash based accounting
Debt Repayments
Financial reports do not have the capacity to disclose specific information about debt repayments
May provide a more favourable outcome to the business at that time than is accurate
Notes to the Financial Statements
Report details and additional information that are left out of the main reporting documents
Ethical Issues Related to Financial Reports
Auditors
By auditing financial reports, an independent person is checking the accuracy of your account
Businesses have an ethical and legal obligation to comply with GST reporting requirements
Accuracy is for taxation and stakeholder purposes
Inappropriate asset valuations, hidden expenses and liabilities, fictitious revenues
Financial Management Strategies
Financial Management Strategies
Global Financial Management
Exchange Rates
Definition
Foreign rate is the ratio of one currency to another
Appreciation vs Depreciation
Appreciation
Exporters
Reduced the international competitiveness of Australian businesses who exports
Due to exports becoming more expensive to overseas buyers
$Foreign < $Aus
Importers
$AUS > $Foreign
Australian businesses have improved buying
Depreciation
Exporters
$Foreign > $AUS
:arrow_up: international competitiveness of business who exports
Due to exports becoming less expensive to overseas buyers
Importers
$AUS < $Foreign
Australian businesses have less power as prices of imports :arrow_up:
Interest Rates
Advantages vs Disadvantages
Advantages
Cheaper
Repayments :arrow_down:
Appreciation makes interest on repayments cheaper
Fewer Restrictions
Disadvantages
Interest could :arrow_up: making repayments for expensive
Depreciation of AUD makes interest repayments more expensive
Repayments are affected by overseas economic management and cycle
Methods of International Payment
1 being lowest risk and 4 being highest
Payment in Advance
Letter of Credit
Bill of Exchange
Clean Payment
Payment in Advance
International payment whereby the seller does not ship the product until it is received payment from the buyer
Advantage vs Disadvantage
Advantage
No risk to server
Disadvantage
Very few buyers will agree
Letter of Credit
Definition
A method whereby the bank gurantees payment on behalf of a buyer as long as seller meets conditions laid out in the letter
Requires payment prior to sending the good
Advantage vs Disadvantage
Advantage
:arrow_down: Risk of non-payment for sellers
:arrow_down: Risk of non-delivery to buyer
Disadvantage
Buyer's bank will take a commission
Clean Payments (Open Accounts)
When buyers buys a product on credit (from server)
The buyer does not pay the seller until after product has been received
Advantage vs Disadvantage
Advantage
No risk to buyer
Sellers can't take out insurance to protect themselves from:
Non-payment
Damage
Transit
Theft
Disadvantage
:arrow_up: risk for seller potential of no payment
Need to be trustworthy
Bill of Exchange
Involves acting as an intermediary for buyer and seller
A document issued by the seller to the buyer, ordering that the buyer pays a specified amount at a specified time to the bank
When bank is satisfied that the seller has shipped the goods (sighting shipping documentation_ it transfers that money toe the seller
Advantages vs Disadvantages
Advantage
Guaranteed Payment
Guaranteed Receival of Goods
Disadvantage
Bank as an intermediary costs both seller and the buyer
Hedging
Definition
Process of minimising risk of currency fluctuations
Establish Offshore Subsidiaries
Arrange import payments and export receipts denominated in the same foreign currency -> losses from exchange rates will be offset by gains from the other
Put money in the other country
Derivatives
Simple financial instruments that can be used to lessen the exporting risks associated with currency fluctuation
Forward Exchange Contract
Contract to exchange one currency for another at an agreed exchange rate on a future date after 30, 70, 180 days
Options
Gives the buyer the right -not obligation- to buy/sell foreign currency in the future
Currency Swap
Agreement to exchange currency in the sport market with an agreement to reverse transaction in future
Cash Flow Management
Definition
The movement of cash in and out of the business over a period of time
Identifies patterns/potential problems can be used to construct a cash flow projection - future cash forecasts
Cash Flow Statements
Definition
Record actual cash inflows and outflows over a period of time
Determines a firm's ability to pay its debt on time + identifies trends that can be used to predict change
People with interest
Creditors
Owners
Lenders
Shareholders
Distribution of Payments
Definition
Involves the business spreading expense payments throughout the year so cash shortfalls do not occur
Types
Instalments
Paying on due date
Prepay expenses
Discounts for Early Payments
Involves offering creditors a discount for making payments before due date
Factoring
Definition
Factoring is the selling of accounts receivable for a discounted price to a factoring (or finance) company
Immediate funds but won't receive full amount
Working Capital Management
Definition
Working capital refers to funds available for the short-term financial commitments of a business
Equation
Working Capital
Current Assets - Current Liabilities
The control of these is called working capital management
Control of Current Assets
Cash
Definition
Money in the hands of the company and ensures the business can repay its debts, loans, and accounts in the short term
Cash surplus (excess) should be avoided, they should be used to grow the business or invested to earn interests
Receivables
Definition
Work that has not been payed for yet by customers
Sending customer's statements monthly by debtors know when to expect accounts
Following up on unpaid accounts
Specifying a pay period
Inventories
Too much inventory/ slow-moving inventory will lead to cash shortage
Insufficient inventory on popular items may lead to a loss of customers
Inventory is a cost of the business if it remains unsold
Too much, unnecessary expenses
Inventory turnover must be sufficient to generate cash to pay for purcahses and pay suppliers on time so that they will be willing to give credit in the future
Control of Current Liabilities
Definition
Minimising the costs related to a firm's current liabilities is an important part of the management of working capital
Being able to convert current assets into cash to ensure business' creditors are paid
Types
Payables
Holding back accounts payable until due date
Cheap means to improve a firm's position
Result of some suppliers allowing a period of interest free trade credit before requiring payment for purchased goods
Take advantage of discounts offered by creditors
Loans
Costs for establishment, interest rates, and ongoing charges must be investigated and monitored to minimise costs
Alterative sources of funds from different banks and financial institutions
Overdrafts
Require regular payments - keeping fees, establishment fees and interest
Businesses should have a policy for using and managing bank overdrafts and monitor budgets on a daily or weekly basis so that cash suppliers can be controlled
Strategies
Leasing
Definition
The hiring of an asset from another person or company who has purchased the asset and retains ownership of it
Frees up cash (opposed to buying)
:arrow_up: working capital
Regular fixed payments
Sale and Lease Back
Selling of an owned asset to a lessor and leasing the asset back through fixed payments for a specified number of years
:arrow_up: liquidity
Cash is then used as working capital
Profitability Management
Equation
Profit = Total Revenue - Total Costs
Cost Control
Fixed and Variable
Fixed
Costs of production that stays the same regardless of the level of output
Examples
Salaries
Rent
Lease Payments
Insurance Premiums
Interest Payments on Loans
Variable
Costs of production that varies depending on the level of output
Examples
Advertising Expenses
Warehousing Storage Costs
Transportation Costs
Phone Bills
Cost Centres
Departments of a business to which costs can be directly attributed
Managers of cost centres are then given budgets and are held accountable for costs that they incur
Expense Minimisation
Process of reducing costs in an effort to increase profitability
Revenue Control
Marketing Objectives
Increasing Market Share
Expanding the Product Mix
Improving Customer Service
Geographical Expansion
Ways of Doing So
Goal Setting
Reporting System
Discounting fares
Role of Financial Management
Role of Financial Management
Definition
Financial management is the planning and monitoring of a business resource to enable the business to achieve its financial objectives
Interdependence with Other Key Business Functions
Marketing, Operations and HR rely on Financial Management to allocate their adequate funds
Examples
Operations
To purchase Inputs
Pay for Transformation Processes
Marketing
Funds to Undertake Promotion
Human Resources
Funds to Pay Staff
Assesses Effectiveness of Work Force
Strategic Role of Financial Management
Deals with:
Analysis
Interpretation
Evaluation of Financial Records
Ensures:
Operation
Growth
Achieving Goals and Objectives
Goals include:
Increase dividends to shareholders
Maintain an environmentally friendly business
Become a market leader within five years
Objectives of Financial Management
Profitability
The ability for a business to maximise its
profits
:arrow_up: COGS
Growth
The ability for a business to increase its
size
in the long term
Efficiency
The ability for a business to use its
resources effectively
in ensuring financial stability and profitability
:arrow_down:
costs
:arrow_up:
profits
with :arrow_down:
level of assets
Liquidity
The extent to which a business can meet its
financial commitments
in
short term
Liquid
Cash or current assets that will soon be cash
Solvency
The extent which the business can meet its
financial commitments
in the
long term
Gearing
Tells you how much debt (or leverage) its operations are compared to the use of equity finance
Short-term and Long-term goals
Short
Includes:
Operational Plans
Day to day
Tactical Plans
One to two years
Reviewed regularly
Long
Strategic Plans
5 years
Examples
:arrow_up: Profits and Market
Reviewed Annually
Influences of Financial Management
Influences of Financial Management
Influences
Influence of the Government
Australian Securities and Investment Commission (ASIC)
Independent government body that regulates the corporate sector seeking to improve
corporate governance and protect consumers and potential investors
Sets rules about information that must be disclosed when issuing shares + info in annual financial reports
Covers issues such as takeovers and insolvency
Failure to comply may result in fines or imprisonment
Enforces legislation which companies have to obey
E.g. The Corporations Act
Company Taxation
The tax a business must pay to the government on the profit which they earn
All businesses pay a flat rate of 30%
Some activities and financial activities can be deducted from the taxable income
E.g. Leasing
Global Market Influences
Economic Outlook
Can Cause:
:arrow_up: or :arrow_down: demand for products
:arrow_up: or :arrow_down: in the interest rates on funds borrowed internationally
Refers specifically to the projected changes to the level of economy growth throughout the world
Availability of Funds
Refers to the ease with which a business can access funds on the international financial markets
Conditions and rates will depend on: risk, demand and supply, and domestic economic conditions
Interest Rates
The costs associated with borrowing money
The :arrow_up: risk involved with lending, the :arrow_up: interest rate
Australian Interest rates are typically :arrow_up:, therefore most businesses borrow overseas
Exchange rates become a problem
Sources
Internal Sources of Finance
Definition
Owner's Equity
Funds contributed by owners or partners to establish and build the business
Funds provided by the owners of the business (finance) or from the outcomes of business activities
Retained Profits
Profit from business that is left over after taxation and dividend payments have been made.
Sales of Assets
External Sources of Finance
Debt
Short-term Borrowing
Overdraft
Allows a business to overdraw their account to an agreed limit for a specified time
Commercial Bills
Type of bill exchange (loan) issued by an institute other than banks
30 - 180 Days
Cheapest
Factoring
The selling of accounts receivable for a discounted price to a finance or factoring company
Long-term Borrowing
Mortgage
Loan secured by the property of the borrower (business)
The property asset becomes the security for the repayment
Debenture
Issued by a company for a fixed rate of interest and for a fixed period of time
Usually secured to a specific asset, interest fixed
Debentures can be sold; no rights to a business
Unsecured Notes
A loan for a set period of time but is not back by any collateral or assets
:arrow_up: Interest rates due to :arrow_up: Risk
Leasing
Money paid for the use of equipment that is owned by another party
Financial Lease
Leasor purchases on behalf of leasee
Life of asset, 3 - 5 years
Examples
Plant, vehicles, furniture
Penalties for breaking agreements
Cheaper than operational lease
Operational Lease
Assets leased for a short period of time
(Shorter than Life of Asset)
Owner Carries Maintenance
Can be cancelled without penalty
Advantages vs Disadvantages
Advantages
Long term financing without :arrow_down: control/ownership
Repayments and tax deductions fixed
Payments include maintenance, insurance and finance costs
Disadvantages
Cannot use a leased asset as security for other loans
:arrow_up: interest
Equity
Definition
Money raised by issuing shares
Ordinary Shares
Definition
Sold through Australian Stock Exchange (ASX)
Types
New Issues
A security issued and sold for the first time
Examples
Primary Shares
New Offerings
Rights Issues
The privilege granted to shareholders to buy more shares in the same company at a special price
Placements
Involve directly selling shares to a limited number of investors, rather than through public offering
Additional Shares are offered at a discount
Specific Example
NAB recently offered an allotment of shares to existing shareholders at a discount price
Share Purchase Plan
An offer to existing shareholders in a listed (public) company the opportunity to purchase more shares (up to a maximum of $5000) in that company without brokerage (commission) fees
Can be offered at a discount
Private Equity
Definition
Sale of shares to raise finance for a private company
Benefits
Businesses can raise finance without increasing level of debt
Benefits of being a private company including
Limited Liability
Financial Institutions
Banks
Main source of finance for businesses
Since 2008 - 2009 global financial crisis, banks are more cautious; loans only provided with an accepted level of risk
Investment Banks
Banks that specialise in trading
money, securities,
and others
Financial requirement to large corporations
Arranges long term finance
Advisor on mergers and takeovers
Arranges overseas finance
Examples
Commonwealth Private
JP Morgan
Deutscher
Financial Companies
Non-bank financial institution loans to consumers and businesses
:arrow_up: Interest rates
Less strict criteria for loans than banks
Raises capital through shares issues (debentures)
Credit cards
Leasing
Factoring
Regulated by Australian Prudential Regulation
Superannuation
Growth rapidly over the past 20 years due to tax incentives & compulsory super introduced by the government
Long term securities as company share, government & company debt because of the long term nature of their funds
Life Insurance Companies
Insurance companies provide loans to the corporate sector through receipts of insurance premiums (amount needed to pay for covers) which provide capital funds
Unit Trusts
Also known as mutual funds, take funds from a large number of small investors and invest them in specific types of financial assets
Short Term Money Market
Shares
Mortgages & Property
Public Securities
Australian Securities Exchange
Definition
Acts as both primary and secondary market for the sale of shares to the public
Created by the merger of ASX & sydney futures in July 2006
Offers products and services:
Shares
Futures
Contracts for assets bought at agreed prices but delivered and pay for later
Exchange Traded Options
Warrants
Interest Rate Securities
Securities
1 more item...
Contracts for Difference
Exchange Traded Funds
Real Estate Investment Trusts
Listed Investment Commitments
Primary Market
Deals with the new issue of debt instruments by the borrower of funds
Secondary Market
Deals with the purchase and sale of existing securities
Finance
