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38 Cards in this Set
- Front
- Back
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Financial Planning and Management
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Role of Financial Planning
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• The Role of Financial Management
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• Financial planners must estimate the cost of business activities, cost and allocate resources
and make decisions on funding options. |
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Objectives of Financial Management
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• Increase dividends to shareholders
• Maintain environmentally friendly organisation • Prepare financial reports • Main roles: liquidity, profitability, efficiency, growth and return on capital |
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• The Planning Cycle
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• Addressing the present financial position
• Determining the financial elements of the business plan - balance sheet, ratios, etc. • Developing budgets - statement of resources allocated to specific areas in the business • Planning cash flows - forecast inflows and outflows to ensure debts can be paid • Preparing financial reports • Interpreting financial reports • Maintaining record systems - mechanism used to ensure all data is accurate, reliable and efficient. • Planning financial controls • Minimising risk and loss |
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Financial Markets Relevant to Business Financial Needs
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• Major Participants in Financial Markets
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• Banks - largest provider of funds to businesses
• Finance companies - get funds by issuing debentures to the public, provide short to medium terms funds to business. • Insurance companies - provide payment if a future event occurs • Merchant banks - get funds from short term borrowing, lends mainly to large corps. • Superannuation - get funds from people preparing for retirement • Companies - have surplus funds from operations and invest funds into money market • Government - ensures gaps in supply of funds are filled |
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• Role of the Australian Stock Exchange
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• Allows new businesses to raise necessary capital
• Designed for individuals and institutions to invest their savings • Allows businesses to exchange ownership of other businesses • Governed by uniform rules and regulations |
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• Overseas and Domestic Market Influences
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• Technological developments
• Globalisation of financial markets • Taxation, GST, capital gains tax • Commodity prices • Risk management securities • Share ownership & accounting standards |
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Management of Funds
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• Sources of Funds
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• Internal
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• Owners equity - funds contributed by the owners of the business
• Retained profit - all profit kept within the business |
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• External
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• Bank overdraft - bank allows the business to exceed their current balance up to a certain
agreed level • Bank bills - bill of exchange given for large amounts in short term • Mortgages - loan secured by the property of the borrowers • Debentures - issued by a company for a fixed amount and a fixed rate of interest • Leasing - involves payment of money for use of equipment owned by another party • Factoring - Selling of accounts receivable for a discounted price to a finance company • Venture capital - funds supplied by private investment org for innovative / new ideas • Grants - funds given by the government to promote business and ideas |
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• Financial Considerations
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• Set-up costs
• Interest costs • Availability of funds • Flexibility of funds • Level of external control • Match the terms and source of finance to the business purpose and structure |
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• Debt and Equity Financing
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• Short term debt expenditure by short term finance
• Long term finance funded by long term finance • Debt financing • Provides tax deductible interest payments • Loan has to be repaid • Provider of finance don’t own part of the business |
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• Equity financing
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• No interest payable
• Non-Tax-Deductible payments must be made • Providers of finance own part of business |
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Using Financial Information
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• The Accounting Framework
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The Accounting Framework
• Provides most of the information for the decision making process • Financial statements • Revenue statement - summarises the activities of an organisation over a period of time, showing operating results and revenue. • Balance sheet - represents an organisation’s assets and liabilities at a point in time • Accounting equation - shows the relationship between assets, liabilities and owners equity. Assets = Liabilities + Owners Equity |
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Types of Financial Ratios
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Liquidity
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the ability of an organisation to pay its debts as they fall due
Current Ratio = Current Assets / Current Liabilities |
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Solvency
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the extent to which the business can meet it’s long term financial commitments
Debt to Equity = Total Liabilities / Owners Equity |
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Profitability
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the economic performance of a business and indicates the capacity to use
it’s resources to maximise profit. Gross Profit Ratio = Gross Profit / Revenue Net Profit Ratio = Net Profit / Revenue Return on Equity = Net Profit (After Tax) / Owners Equity |
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Efficiency
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The ability of a firm to use it’s resources effectively in ensuring the financial
stability and profitability of the business. Expense Ratio = Expenses / Revenue AR Turnover Ratio = 365 / ( Revenue / AR ) |
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Comparative Ratio Analysis
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Used to indicate trends, strengths, weaknesses and relationships between financial items
• Time comparison - compares current period to prior financial periods • Industry average - business results are compared to industry averages |
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Limitations of Financial Reports
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Historical costs - process of valuing the business assets by their cost at the time the
transaction took place • Value of intangibles - rights, rather than objects, not generally recorded on the balance sheets unless the business has been or will be purchased. |
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Effective Working Capital (Liquidity) Management
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Working Capital Ratio
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Capital Ratio
WC Ratio = Current Assets / Current Liabilities |
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Control of Current Assets
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Cash controlled using budgets, which detail expected inflows and outflows
• Accounts receivable controlled using credit checks on borrowers, and offer incentives for early payment while using factoring as a last resort. • Inventory controlled by detailing acceptable inventory policies or JIT if suited. |
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Control of Current Liabilities
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• Accounts payable are controlled by paying as late as possible and choosing suppliers carefully
• Incorrect use of overdrafts can cost money in high interest payments • Short term loans should be controlled by planning borrowing carefully and finding alternate sources of finance. |
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• Strategies for Managing Working Capital
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Factoring - Improves working capital by selling accounts receivable to a third party
• Sale and lease back - selling an asset to a lessor and leasing it back through fixed payments. • Leasing - hiring of an asset owned by another company or person who has purchased the asset and retains ownership. |
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Effective Financial Planning
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• Effective Cash Flow Management
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Cash flow statements
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financial statements indicating the flow of cash resulting from
transactions |
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Management Strategies
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• Distributing of payments - involves spreading payments over a period of time to coincide
with surpluses of cash • Discounts for early payments - business provides a percentage reduction from the purchase price if the buyer pays within a certain period of time. |
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• Effective Profitability Management
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• Cost Control
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• Cost centres - departments in a business to which costs can be directly attributed
• Expense minimisation - improves competitive position of the business while maintaining production levels, e.g.. downsizing. |
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• Revenue Controls
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• Sales objectives - set objectives in revenue budgets by forecasting sales
• Sales mix - the range of products offered for sale, financial managers need to analyse the breakdown and contribution margins for each product. • Pricing policy - The aim is to protect or increase market share while meeting profitability objectives, managers have to ensure products are correctly priced. |
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Ethical and Legal Aspects
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• Audited Accounts
• Independent check of the accuracy of financial reports / records and accounting procedures • Inappropriate Cut Off Periods • A business incorrectly matches the period in which revenues occur with when major outflows occur • Misuse of Funds • Business funds are used for purposes other than originally delegated • Australian Securities and Exchange Commission • Enforces and administers corporations law and protects consumers in the areas of investments, superannuation, life insurance, etc. • Corporate Raiders • The process of buying an undervalued company and increasing profit or selling off the businesses assets. |
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