HSC Finance Topic 3

refers to the specific planning and management of a businesses financial resources in order to assist in achieving its financial objectives ➡️LPEGS

LPEGS:
Liquidity - ability to meet short term financial obligations
Profitability - maximising profits
Efficiency - minimising costs, whie maximising profits
Growth - the physcial/financial increase of a business
Solvency - ability to meet long-term debts/obligations

Finance supports the transformations process and achievement of a competitive advantage by sourcing and allocating financial capital to:
- Purchasing of raw materials/stock
- Financing of machinery, plants and technology
- Funds new product design and innovation

Finance supports the developing of strong relationships with customers through the provision of budgets to:
- Market research and product design
- Advertising and promotion, supporting their quest to inform, persuade and remind customers of its products

Finance plays a crucial role in supporting HR by:
- Budgeting and allocating sufficent funding towards HR processes like aquisistion and development. Thus maximising efficiency/productivity by ensuring staff are properly trained and highly skilled
- Funds the employment of highly skilled employees

SIGG
Sources of finance (Internal and external) ⬅️two seperate
Financial institutions (I for institutions)
Government Influences
Global market influences

Refers to the funds generated and obtained from within the business. ➡️ Retained earnings and owners contribution

Retained profits enhance business growth oppurtunities and their reliance on debt

Refers to the funds provided by sources outside the business. Eg: Debt or equity

How a business obtains/sources finance, their access to those funds and/or the cost of those funds will affect growth and other financial objectives

Overdraft - the allocation of cash withdrawals from their account to overcome a temporary cash shortfall

Commercial bills - Short term loans issued by a financial institution for larger amounts/longer periods (still short)

Factoring - The selling of accounts recievable

Mortgage - long term loan secured by the property of the burrower

Debunctures - issued by a company for a fixed rate/time

Leasing - the payment of money for assets owned by another company

Unsecured note - long term loans from investors without collateral/that are not secured

New issue = share sold for the first time on a public market

Rights issue = privellege granted to shareholders to buy new shares of the same company

Placements = allocating of shares made directly from the company to investors (eg; shares at a discounted price)

Share purchase plan = an offer to existing shareholders in a listed company to pruchase more shares without brockerage fees

Organisations that offer financial services to individuals and businesses. BUFSAIL
- Banks
- Unit trusts
- Finance companies
- Superannuation
- Australian securities Exchange (ASX)
- Investment banks
- Life insurance

Banks recieve savings as deposits and inturn, make investments and loans to burrowers

Investment banks provide services in borrowing and lending, primarily to the business sector

Finance companies are non-bank financial institutions that specialise in smaller commercial finance

A scheme set up by the federal government which requires employers to make a financial contribution to an employees a fund which benefits employee's when they retire

The primary stock exchange group in Australia

Companies that provide cover or lump sum payments of money in the event of death

Where money is pooled together and invested in short and long term assets such as fixed interest bank deposits, land or shares.
- usually funds from smaller investors

- Australian Securities and Invesments Commission (ASIC)
- Company taxation

Australia's financial markets conduct regulator. ASIC is responsible for promoting a fair, transparent and efficient financial system for all.

- protects consumers in the areas of investments, life / general insurance, supperannuation and banking in Australia

The mandatory payment of a proportion earnings to the government.
- All companies are subject to a federal tax rate of 30% on their taxable income, except for 'small or medium business' companies, which are subject to a reduced tax rate of 25%
- Taken directly from the employees wage and is based on a progressive scale, ie. the more you make, the more you pay

It will influence the decisions businesses make about their finances. Business must ensure they comply with legal obligations such as legislation (taxation and ASIC)

- Economic outlook
- Availability of Funds
- Interest rates

The projected changes to the level of economic growth throughout the world. EG: COVID and The great depression

The ease with which a business can access funds (for borrowing) on the international financial markets.
- Determined by risk, supply and demand, and domestic economic conditions

The costs related to the borrowing of money
- Interest rates differential refers to the differences between interest rates of specific countries

Results in foreign borrowing which is the borrowing of offshore funds,
- currency risks = evaluation effect
- currency fluctuations could eliminate the advantageenefit of foreign borrowing

PM's Fuck Little Elves
planning and implementing
monitoring and controlling
financial ratios
limitations of financial reports
ethical issues related to financial reports

- Financial needs
- Budgets
- Record Systems
- Financial risks
- Financial controls

The process finincial management takes to ensure the business has enough funds to operate/meet short term obligations

Financial needs of a business are determined by factors such as: the size, current phase of business cycle, future plans, capacity to finance and the financial management skills of the business

Budgets provide information in quantitative terms about requirements to achieve a particular purpose.
- Operating budgets = budgets given to the main activities
- Project budgets = capital expenditure and r&d costs
- Financial budgets = relate to the financial data eg balance sheets

The mechanisms employed by a business to ensure that data are recorded and the information provided by record systems is accurate, reliable, efficient and accessible

The risk of a business unable to cover its financial obligations

The policies and procedures that ensure that the plans of a business will be achieved in the most efficient way

Advanatages:
- Readily available
- Access to larger sums of money
- Flexibility: Negotiations in terms of loan eg; period, interest rate

Disadvantages:
- Application fees
- Increased financial risk
- Interest expenses ➡️reduces profibility
- limitations on borrowing ability

Advantages:
- No interest, but dividends payments must be paid
- Equity is cheaper than debt
- Reduced risks
- Improved gearing (debt to equity ratio)

Disadvantages:
- Dilute ownership ➡️more complex management, slower decision making, dilute profits
- Takes a long time to accumulate and raise equity funds
- Owner expectations on return on investment (ROI)

Recording expenses incured with its respective generated revenue. If this is not done you may overstate or understate profits

The tools (financial statements) used by a business to monitor (measure actual performance against planned performance) and indicate whether control (the taking of corrective action to ensure objectives are achieved) is needed.

- Cashflow statement
- Income statement
- Balance sheet

Revenue Statements summarise revenues and expenses of a business helping calculate the profit or loss

Cashflow statements summarise the cash inflows and outflows in a business

Balance sheets present a businesses financial positions at a point in time

Normalised earnings
Capitalising expenses
Valuing assets
Timing issues
Debt repayments
Notes to the financial statements

The earnings that have been adjusted to take into account changes in the economic cycle or to remove one offnusual expenses falsley representing profibility

- Help to understand a businesses true earnings
- Give a true/fair representation of the business

An accounting method where businesses records an expense as an asset on the balance sheet, rather than an expense on the income statement.

- Understates the expenses and overstates the profits
- Most commonly seen in research and development

The process of estimating the value of assets when recording them on the balance sheet possibly resulting in an false and unjsut evaluation of the business.

Some assets are difficult to estimate so financial managers will record an assest as its historical cost (what it was bought for)

The issues regarding the timing of cash inflows and outflows. Accountants may adjust the timing of revenue inflows and debt repayments to make business appear profitable

- The use of the matching principle helps avoid this

Refers to the inability of financial statements to disclose information regarding debt repayments. EG; How long the business has been recovering/holding debt or the amount owing in recievables.

Notes that report the details and additional information that is undisclosed or left out of the main reporting documents such as the balance sheet.

The notes contain information that may be useful to stakeholders to make sense of the financial statements and situation.
- If done well, it will enhance knowledge, transparency
- If done poorly, it will be highly misleading

Financial statements are a numerical representation of a business in which when done correctly, improves a businesses transparency, knowledge to investors/managers and accurately depict the financial position of the business

Similarly, when done poorly/incorrectly it may result in a misrepresentation of the businesses financial position

Audited accounts: A legal requirement of all public companies, clubs and associations annually. An audit is an independant check of the accuracy of financial records and accounting procedures that can be done internally or externally.
- An ethical issue if they do not give a true and fair financial picture of the business

Record Keeping: The keeping of true and fair financial records, removing temptations to unethically manipulate records. EG: Overstating profits

Good Work Charlie's Penis:
Global financial management
Working capital management
Cash flow management
Profitability management

Refers to the strategies put in place to ensure that cash is available to make payments when they are due (expenses). -

- Budgets and cashflow statements can allow the business to do this

Indicate the movement of cash reciepts and payments resulting from transactions over a period of time (inflows/outflows)

- Can be used to identify positive cashflow over time and predict change
- Used to assess the businesses ability to manage its cash

Offering discounts for early payments to reduce acounts recievable, increasing cahs reserves/current assets
- 10% Discount for upfront payments for Mcdonalds

Distrubuting payments throughout the year so that cash shortfalls dont occur
- Payments are made in a quartely basis to Mcdonalds and its other external providers such as Martin Brower

Factoring - selling of accounts recievable (sold at a discount)

Determining the best mix of current assets and current liabilities needed to achieve business objectives
- Control of current assets
- Control of current liabilities
- Strategies (sale and lease back, leasing)

Controlling cash: Excess cash is a cost if left unused, thus by planning timing cash reciepts/payments a business can avoid cash shortfalls

Controlling recievables: Poor credit collection will increase delays in cash reciepts, thus meaning more money is needed as working capital for cash shortfalls - Mcdonalds has a 30 day credit policy on accounts recievable

Controlling Inventories: Must be carefully monitored so that excess cash or insufficient levels of stock do not occur. Mcodnalds has a goal of 2% reductions on input costs per annum

Control of accounts payables: businesses need to be mindful of the timing of cash reciepts/payments to meet accounts payable

Loans; Overdrafts: Allow businesses to access funds to cover temporary cash shortfalls (used as working capital)

Minimising loans and liabilities in general will benefit working capital

Leasing: the payment of money for assets owned by another company (cheaper than purchasing the asset)

Sale and Lease back: The process of selling an owned asset to a lessor and then leasing the asset back through fixed payments for a period of time.
- Improves liquidity/working capital as it gives the business a large sum of cash.

Involves the the control of both the businesses costs and its revenue
- Cost controls
- Revenue controls (marketing objectives)

Fixed and variable cost controls: Businesses must have a clear idea of whats its costs are, and aim to decrease variable costs by improving efficiency. eg; JIT and new technology

Cost centres: Particular areas, departments or sections of the business to which businesses measure, grant budgets for and control costs. EG: Marketing sector

Expense Minimisation: This is a cost control measure that involves the process of reducing financial, administrative and selling costs in an effort to boost profitability. ➡️minimsing expenses etc

Revenue controls include the Marketing Objectives:

- Mcdonalds Revenue controls: Digital ordering and home delivery / 30 days, 30 deals and Mcdonalds monoply

- The sales mix: the make-up of products, business must consider what product generates the most revenue

- The pricing policy: the pricing of G+S, overpricing may fail to attract customers while underpricing may result in cash shortfalls despite high sales.

Refers to the strategies that can be adopted to deal with the financial risks and influences on global businesses.

It involves identifying external risks and means of reducing/minimisng risks

Fluctuations (appreciations/depreciations) in these rates create risks for global business. Depreciation and appreciations will impact on both import and export levels and the payments made to overseas businesses or financial intermediaries.

eg; depreciations in the AUS dollar will make exported goods less expensive in foreign currency terms/make imported goods more expensive in AUS dollar terms

Businesses can borrow money from other countries that have lower interest rates but they may experience exchange rate risks.
- Thus, Domestic and international businesses will source funds internationally and will therefore need to consider the rates offered on borrowings. The repayment of this debt must also allow for fluctuations in currency.

Payment in advance
Letter of credit
Clean payment
Bill of exchange

A method of payment where the buyer (importer) pays the seller (exporter) before receiving the goods or services.

Most secure (low risk) for exporter, high risk for importer

Document issued by the buyer's bank in which the bank promises to pay the seller a specified amount under specified conditions

Occurs when the exporter ships the goods directly to the importer before payment is received.

(High risk for exporter, low risk for importer) --> Payment after delivery

A document stating the holder (exporter) was legally promised payment of a set amount on a set date, controlling accounts recievable. (Buyers bank sends money to sellers bank)
- Document against payment (D/P) - when a buyer (importer) has to settle the payment with the bank before the documents are released, thus he can only collect goods after paying
- Document againts acceptance (D/A) - when a buyer (importer) legally accepts the bill of exchange but doesn't pay it until after the goods are recieved. He pays the seller within terms

The process of managing/minimising the risk of future currency fluctuations. Hedging involves reducing the risk related to international transactions such as forex (foreign exchange rate)

When businesses adopt strategies to minimse forex risk.
- Establishing offshore subsidaries
- Transactions made in same currency

Simple financial instruments that may be used to lessen the exporting risks associated with currency fluctuations.
- Forward exchange contract
- Options contract
- Swap contract (currency swap)

A contract to exchange one currency for another at an agreed rate on a future date

An agreement between two parties to facilitate a potential transaction involving an asset at a preset price and date.

An agreement to exchange currency in the spot makret with an agreement to reverse the transaction in the future.

- Forward exchnage contract
- Options contract

- Swap contracts

Payment in advance: For long standing suppliers of over 3 years. eg: beef/chicken(inghams)/potatoes(Mcain)/packaging. (mcdonalds is happy with quality and wants to ensure a positve customer/supplier relationship)

Clean Payment: For happy meal toy suppliers. Often changing so clean payment within the first 12 month is preffered. to develop relationship and trust

Bills of exchange: Payment for suppliers providing special inputs for limited time offers OR for new products requiring new inputs not used in existing production (eg; serious lamb burger)

Shows how effectively finance is being used in a business. They also provide information on whether the business has sufficient funds to meet unforeseen circumstances.

Revenue - COGS

Opening Stock + Purchases - Closing stock

Gross Profit - Expenses

A financial statement that measures business profibillity

A financial statement that monitors cash inflows and outflows in a business ultimately monitoring the liquidity of the business.

To show the financial stability of the business at a point in time

Things the business own of value

Things that the business owe

The financial contribution from owners to the business
eg: Retained Earnings, Drawings, Owners Equity etc

Refers to short term; less than 12 months

Assets that can be converted into cash within 12 months

eg; Cash, Inventory (stock), accounts receivable (debtors)

Those that need to be paid within a short time

eg; overdraft, accounts payable, credit cards

Accounts Recievable = money owed by debtors to the business (Assets)

Accounts Payable = Money owed by the business (liability)

Debts to be paid over the long term
(longer than 12 months)

eg; Mortgage, bank loans, land, goodwill

Assets = Liabilities + Owner's Equity

Sales
______________
Less Cogs
_________________
Gross Profit
-------------
Less Expenses

List All Expenses

-------------
Net Profit

Current assets divided by current liabilities

Shows the businesses ability to meet short-term financial commintments. (Working capital)

A business has the double the amount of assets to cover its liabilities.

- To low = bad liquidity
- To high (>2) = not utilising assets efficiently (poor efficiency)

Total liabilities / Total equity

Shows the extent to which the firm is relying on debt/external sources to finance the business. Solvency

- Greater business risk (less solvent), but also greater potential for profit
- Business is utilising its assets efficently/not relying on debt

Gross profit (sales-COGS) - sales

Shows the percentage of sales revenue that results in gross profit. Profibility

Net profit (gross profit - expenses) / sales

Represents the profit or return to the owners, the higher the better

Net profit / total equity

Shows how effective the equity funds (from the owners) have contributed to generating profit, thus showing the return on investment (ROI), The higher the better

Total expenses / sales

Indicates the amount of expenses required to generate sales, thus the efficiency of the business.

The lower the ratio the better

Sales / accounts recievable (/365 *if asking how many days)

Measures the effectiveness of a firms credit policy and how efficiently it collects its debts

High turnover ratio's indicates efficient debt collection

The capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities.