Finance: Summary
Ethical issues related to financial reports
- Business's have an ethical and legal responsibility to provide accurate financial records - Laws relating to corporations regulate the conduct of directions and the requirement for disclosure of all information and to be accurate. This is very important to lenders and shareholders of companies who make decisions about investments bases on the information provided by the business. - An audit is an independent check of the accuracy of financial and accounting procedures and are an important part of the control function of the business - There are three main types of audits including; - internal audits: conducted by the business's employees. - management audits: conducted to review the business's strategic plans - external audits: conducted by interdependent and specialized audit accountants. These types of audits are a requirement of the Corporations Act 2001 (Commonwealth) - All accounting processes depend on how accurately and honestly data is recorded in financial reports. - Businesses have ethical and legal obligations to comply with GST reporting requirements. - Accurate financial reports are necessary for taxation purposes as well as for other stakeholders.
Cash flow management - cash flow statements - distribution of payments, discounts for early payment, factoring
- Cash flow is the movement of cash in and out of the business over a period of time. Management is required to make sure payments are made and received with out creating a cash flow problem. - A cash flow statement provides important information regarding a firms ability to pay it's debt on time. - A cash flow statement can assist in identifying periods of potential shortfalls and surpluses. - Management strategies for cash flow include; - identify when the distribution of payment can be and are made. - using discounts for early payments. - factoring
Strategies on financial management
- Cash flow management - cash flow statements - distribution of payments, discounts for early payment, factoring - Working capital management - control of current assets - cash, receivables, inventories - control of current liabilities - payables, loans, overdrafts - strategies - leasing, sale and lease back profitability management - cost controls - fixed and variable, cost centres, expense minimisation - revenue controls - marketing objectives - Global financial management - exchange rates - interest rates - methods of international payment - payment in advance, letter of credit, clean payment, bill of exchange - hedging - derivatives
External sources of finance - debt - short-term borrowing (overdraft, commercial bills, factoring), long-term borrowing (mortgage, debentures, unsecured notes, leasing) - equity - ordinary shares (new issues, rights issues, placements, share purchase plans), private equity
- External finance is the funds provided by sources outside the business such as financial institutions, governments and suppliers. - External sources of finance are broadly categorized as either debt or equity- each will influence the financial management decisions of a business. - Debt finance can be short-term borrowings such as overdrafts, commercial bills and factoring, or long-term borrowings such as mortgages, debentures, unsecure notes and leasing. - Equity refers to the cash raised by a company by: - Issuing ordinary shares to the
Strategic role of financial management
- Financial management is the panning and monitoring of a businesses financial resources in order to allow the business to achieve its financial objectives - The strategic role of financial management refers specifically to the strategies that are adopted by the business to achieve its short-term and long-term objectives. - The goals of a business can include increasing market share and profit. These goals are translated into objectives that aim to provide greater details and outcomes. This means they can be measured and evaluated for current and future plans.
Planning and implementing - financial needs, budgets, record systems, financial risks, financial controls - debt and equity financing - advantages and disadvantages of each - matching the terms and source of finance to business purpose
- Financial planning is essential if a business is to achieve its goals. Financial planning determines how a business's goals will be achieved. - Planning processes involve the setting of goals and objectives, determining the strategies to achieve these goals and objectives, identifying and evaluating alternative courses of action and choosing the best alternative for the business. - Financial needs are essential to determine where a business is needed and how it will get there, it is important to know what these are. - Budgets provide information in quantitative terms (facts and figures) about requirements to achieve a particular purpose - Budgets are often prepared to predict a range of activities relating to short-term and long-term plans and activities. - Budgets can be classified as operating, projects or financial budgets. - Record systems are the mechanism employed by a business to ensure that data are recorded and the information provided by record systems is accurate, reliable, efficient and accessible. - Financial risks is the risk to a business of being unable to cover its financial obligations, such as debts that a business incurs through borrowings, both long-term and short-term. - To minimize financial risk, businesses must consider the amount of profit that will be generated. - The most common causes of financial problems and losses are: - theft - fraud - damage or loss of assets - errors in records systems - Financial controls ensure that the plans that have been determined will lead to the achievement of the businesses goals in the most efficient way. DEBT-TO-EQUITY FINANCING: - Finance for a business can come from either external or internal sources. - External (or debt finance) is a liability as it is owed to sources external to the business. Equity finance relates to internal sources of finance. - Most businesses have a combination of both internal and external finances. - Although repayments of interest to an external provider of funds are costs to the business, the debt finance can be attractive as it is readily available and interest payments can be tax deductible. - Equity finance is the most important sources of funds for a business as it remains in the business for an indefinite time and doesn't need to repaid on a set date MATCHING TERMS: - When a business identifies and plans to meet its financial objectives, it is necessary to match the terms of finance with its purpose. This requires a business to consider: - the terms, flexibility and availability of finance -the cost of each source of funding - the structure of the business.
Global financial management - exchange rates - interest rates - methods of international payment - payment in advance, letter of credit, clean payment, bill of exchange - hedging - derivatives
- Global financial management refers to strategies implemented by businesses to deal with the export component of business activities. - Currency fluctuations create risks for global business. Depreciation and appreciations will impact both import and export levels and the payments made to overseas businesses or financial intermediaries. - Domestic and international businesses will source funds internationally and will therefore need to consider the interest rates offered on borrowings. The repayment of this debt must also allow for fluctuations in currency. - The main methods of international payments include: - payment in advance - letter of credit - clean payment - bill of exchange - Hedging is the process of minimizing the risk of currency fluctuations. Hedging helps reduce the level of uncertainty involved with international financial transactions. - Derivatives are simple financial instruments that may be used to lessen the exporting risks associated with currency fluctuations.
Global market influences - economic outlook, availability of funds, interest rates
- Global market influences increasingly affect business financial decisions, and this is specifically evident in the availability of funds for loans and the interest rates charged for these loans. - The changes to the global economic outlook relate specifically to changes in the economic growth rates of individual economies throughout the world. - The need to maximize profits and the capacity to source funds internationally will impact on financial management decisions.
Interdependence with other key business functions
- Interdependence of the key business functions means that each function is not able to operate in isolation successfully - it relies on the others to perform its role in achieving the broader goals of a business. - Finance plays a crucial role in funding extra resources.
Influences on financial management
- Internal sources of finance - retained profits - External sources of finance - debt - short-term borrowing (overdraft, commercial bills, factoring), long-term borrowing (mortgage, debentures, unsecured notes, leasing) - equity - ordinary shares (new issues, rights issues, placements, share purchase plans), private equity - Financial institutions - banks, investment banks, finance companies, superannuation funds, life insurance companies, unit trusts and the Australian Securities Exchange - Influence of government - Australian Securities and Investments Commission, company taxation - Global market influences - economic outlook, availability of funds, interest rates
Monitoring and controlling - cash flow statement, income statement, balance sheet
- Monitoring and controlling is essential for maintaining business viability, and the affect all aspects of business operations- especially financial management. - The main financial controls used for monitoring include cash flow statements, income statements and balance sheets. - A cash flow statement provides the link between the income statements and the balance sheet. It provides information about a firms ability to pay its debts on time - The cash flow statement specifically records the movement of cash receipts and cash payments that result from transactions over a given time. - Creditors, lenders, owners and shareholders all use cash flow statements to assess the ability of the business to manage its cash and identify trends in cash flow over time. - The income statement shows: - operating income such as sales of inventory and services plus other earning from interest and dividends - operating expenses such as the purchase of inventory payment of services and other expenses such as rent, advertising and insurance. - Profit is the difference between revenue and expenses. - The balance sheet shows the outcome of the accounting process. - The accounting equation, which forms the basis of the accounting process, shows the relationship between assets, liabilities and owners equity.
Processes on financial management
- Planning and implementing - financial needs, budgets, record systems, financial risks, financial controls - debt and equity financing - advantages and disadvantages of each - matching the terms and source of finance to business purpose - Monitoring and controlling - cash flow statement, income statement, balance sheet - Financial ratios - liquidity - current ratio (current assets ÷ current liabilities) - gearing - debt to equity ratio (total liabilities ÷ total equity) - profitability - gross profit ratio (gross profit ÷ sales); net profit ratio (net profit ÷ sales); return on equity ratio (net profit ÷ total equity) - efficiency - expense ratio (total expenses ÷ sales), accounts receivable turnover ratio (sales ÷ accounts receivable) - comparative ratio analysis - over different time periods, against standards, with similar businesses - Limitations of financial reports - normalised earnings, capitalising expenses, valuing assets, timing issues, debt repayments, notes to the financial statements - Ethical issues related to financial reports
Profitability management - cost controls - fixed and variable, cost centres, expense minimisation - revenue controls - marketing objectives
- Profitability management involves the control of both the business's cots and its revenue. - Cost controls involve: - understanding and monitoring the levels of both fixed and variable costs - accounting for and identifying the source and amount of cots through the use of cost centres. - ensuring expenses are minimized. - Revenue controls are also important part of profitability management and specifically address the sale objectives, sales mix and pricing policy.
Role of financial management
- Strategic role of financial management - Objectives of financial management - profitability, growth, efficiency, liquidity, solvency - short-term and long-term - Interdependence with other key business functions
Financial ratios - liquidity - current ratio (current assets ÷ current liabilities) - gearing - debt to equity ratio (total liabilities ÷ total equity) - profitability - gross profit ratio (gross profit ÷ sales); net profit ratio (net profit ÷ sales); return on equity ratio (net profit ÷ total equity) - efficiency - expense ratio (total expenses ÷ sales), accounts receivable turnover ratio (sales ÷ accounts receivable) - comparative ratio analysis - over different time periods, against standards, with similar businesses
- The financial statements of a business must be analysed to gain a thorough understanding of the activities of a business. The analysis involves comparing similar figures contained in the financial statements and balance sheets. - The main types of analysis include: vertical (within one year), horizontal (between different years) and trend (over 3-5 years) - The analysis of financial statements is usually aimed at areas of financial stability (liquidity and gearing), profitability, efficiency. - Liquidity is the extent to which the business can meet its financial obligations in the short-term. This means, a business , must not have enough resources to pay its debt and cover unexpected expenses. - Current assets and current liabilities determine the liquidity or short-term financial stability of a business. - A current ratio of 2:1 indicates a sound of financial position. - Gearing measures the relationship between debt and equity. - Gearing is the proportion of debt (external finance) and the proportion of equity (internal finance) that is used to finance the activities of a business. - Profitability is the earning performance of the business and indicates its capacity to use resources to maximize profits. - The income statement is used to measure the profitability or earning capacity of the business. Figures from this statement are used to calculate gross profit and net profit ratios. - The return on equity ratio shows how effective funds contributed by the owners have been generating profit, and hence a return on their investment. - Efficiency is the ability of the business to use its resources effectively to ensure financial stability and profitability. It specifically to management's ability to achieve its goals and objectives. - The two main ways to calculate efficiency include the expense ratio and the accounts receivable turnover ratio
Influence of government - Australian Securities and Investments Commission, company taxation
- The government influences the financial management of a business through the implementation of economic policies (fiscal and monetary) and through the implementation of current and changing legislation. - The Australian Securities and Investment Commission (ASIC) aims to reduce fraud and unfair practices in financial markets and financial products. - Companies and cooperation's in Australia pay company tax on profits. - Globalisation has created more interdependence between economies and their business (and finance)sectors, which relies on trade for expansion and increased profits.
Objectives of financial management - profitability, growth, efficiency, liquidity, solvency - short-term and long-term
- The main objectives of financial management include profitability, liquidity, efficiency, growth, solvency - short-term and long-term. - The short-term objectives of a business include both tactical and operational plans of a business, which would be reviewed regularly to determine if targets are being met. - The long-term objectives of a business include strategic plans of a business and are set for a period of time more than five years. They form the basis on which all short-term goals are established.
Internal sources of finance - retained profits
- The main sources of internal finance are owners equity and retained profits, which are the business profits that are not distributed by shareholders but are commonly used as a source of finance for current or future expenses such as capital equipment.
Limitations of financial reports - normalised earnings, capitalising expenses, valuing assets, timing issues, debt repayments, notes to the financial statements
- There are limitations to financial reports. They can be misinterpreted and can be misleading, both of which will impact on the decision making of management and potentially put the business at risk. - Limitations can include the influences on information when recorded, such as those that are 'one offs' that will distort the true earnings of a company. - The limitations of financial reports are: - normalized earnings - capitalizing expenses - valuing assets - timing issues - debt repayments - notes to the financial statements
Working capital management - control of current assets - cash, receivables, inventories - control of current liabilities - payables, loans, overdrafts - strategies - leasing, sale and lease back
- Working capital management is determining the best mix of current assets and current liabilities needed to achieve the business objectivities. - The current (working capital) ratio shows if current assets can cover current liabilities - that is, a business can determine whether it can pay its immediate debts. - Control of current assets refers to management process that determines the optimal amount of each current assets held. This includes: - cash: money in the hands of the company and ensures the business can pay its debts, loans and accounts in the short term. - receivables: the sums of money due to a business from customers to whom it has supplied goods and services. - inventories: refers to the stock a business holds. A business must manage its inventory in order to remain solvent. - The current liabilities of a business refers to the financial commitments that must be paid by a business in the short term. - A business must monitor and manage current liabilities such as: - payables: sums of money owed by the business - loans: sums of money borrowed from financial institutions. - overdrafts: cheap and convenient short-term borrowing. - The main strategies for working capital management include: - leasing: hiring an asset from another business. - sale and lease back
Financial institutions - banks, investment banks, finance companies, superannuation funds, life insurance companies, unit trusts and the Australian Securities Exchange
The main financial institutions are: -Banks: these are the major operators in the financial market and are the most important source of funds for the business. - Investment banks: these are one of the fastest growing sectors of the financial market and provides specialized advice and services for businesses financial needs. - Finance and life insurance: these are non-bank financial institutions and act primarily as financial intermediaries. - Superannuation funds: these are able to invest the contribution of members into a range of short-term and long-term investments with the aim of maximizing a return. The business sector increasingly uses superannuation funds for long-term investment in growth and development. - Life insurance: - Unit Trusts: - Australian Securities Exchange: (ASX) this was created by the merger of the Australian Stock Exchange and the Sydney Futures Exchange in 2006. The ASX acts as both a primary and secondary market for the sale of shares to the public.
