Transcript Year 12 Business Studies

Year 12 Business Studies
FINANCE REVIEW
Role of Financial Management
 Strategic role of financial management is to ensure
that a business operates with a ROI and continues to
grow and meet its objectives
 Financial objectives identify what the owners of a
business want to achieve:
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Profitability
Growth
Efficiency
Liquidity
Solvency
Role of Financial Management
 What is profit?
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What is left over after all expenses have been paid
 Retained profit is reinvested back into the business as
capital
 Profitability is represented by the gross profit and net
profit earned in a financial year
 What is efficiency?
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Achieved when a business can generate a greater output with the
same level of inputs (or same output using less inputs)
 What does liquidity show?
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It shows how well working capital is being managed and whether the
business can meet its short-term obligations
Role of Financial Management
 A business needs to hold liquid assets
 The most liquid asset is cash
 Current assets are more liquid than non-current
assets
 What is solvency?
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The ability of the business to pay its debts as they fall due
 The higher the gearing or debt compared to equity
finance, the greater the financial burden and the
greater the risk.
Influences on Financial Management
 How can a business finance money?
 Internally
 Externally
 Internal sources of funds are called equity
(reinvested profits and capital contributed by
owners)
 External sources of finance include debt finance
(borrowed money) and equity in public and private
companies
 Types of debt financing are short and long term.
Influences on Financial Management
 Short term types include bank overdrafts, commercial
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bills and factoring
Long term types include mortgage loans, debentures,
unsecured notes and leasing
Leasing allows a business to finance an asset by
effectively hiring it for a given time frame
Factoring enables a business to increase its cash to
finance the payment of short term liabilities and
expenses
Private equity refers to selling shares by inviting people
to become owners of the business in a private company.
Influences on Financial Management
 What does the Australian Securities Exchange do?
 A market that allows companies to issue shares on the primary
market to raise equity finance
 Facilitates the buying and selling of shares on the secondary
market
 Deregulation of the Australian financial sector
means Australian businesses can now choose from a
greater number of financial products and services at
more competitive prices
 Businesses can acquire finance from overseas stock
exchanges and overseas financial institutions.
Processes of Financial Management
 Financial management is responsible for the
financial planning of the business
 A business may acquire funds from both equity and
debt sources:
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Equity is lent to the business in exchange for ownership
Debt is made up of borrowed funds that must be repaid with
interest
 What are the three main financial statements?
 Cash-flow statement
 Income statement
 Balance sheet
Processes of Financial Management
 What is the income statement?
 A summary of the income and expenses of a business over a
set period of time.
 What can you calculate from the income statement?
 Total revenue
 COGS
 Gross profit
 Net profit
 A summary of the profitability and efficiency of the
business over a period of time
Processes of Financial Management
 What is the balance sheet?
 A summary of the assets, liabilities and equity of the business
as at a particular date
 It provides a look at the financial stability or net
worth of the business.
 Information can also be used to determine the
business’s liquidity and gearing.
Processes of Financial Management
 Financial ratios are management tools used to
analyse the financial statements of a business
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Liquidity: current ratio
Gearing: debt to equity ratio
Profitability: gross profit ratio, net profit ratio and return on
equity ratio
Efficiency: expense ratio and account receivable turnover ratio
 Ratios can be compared with those of previous years
(same period) or with industry averages
(benchmarking) and competitors.
Financial Ratios
 Liquidity – current ratio (working capital ratio)
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Current assets/current liabilities
 Gearing – Debt to equity ratio
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Total liabilities/equity
 Profitability – Gross profit ratio, net profit ratio and
return on equity
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Gross profit/sales x 100, net profit/sales x 100, net profit/total equity
x 100
 Efficiency – Expense ratio, Accounts receivable turnover
ratio
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Total expenses/sales x 100
Number of days in a year, 365 divided by sales/accounts receivable.
Financial Management Strategies
 A business must be able to pay for its expenses and
short-term liabilities when they are due
 Cash-flow statements can be used to predict a
business’s cash inflows and outflows over a length of
time to identify a period when the business may have
liquidity problems
 Working capital is the current assets used in the dayto-day running of a business
 Net working capital = current assets – current
liabilities
Financial Management Strategies
 What does inventory include?
 Raw materials
 Work-in-progress
 Finished goods
 Businesses must control their current liabilities
(accounts payable, short-term loans and overdrafts)
 By stretching accounts payable, a business can hold
onto its money for longer and pay more urgent
expenses on time
 Fixed expenses do not change when a business
produces more goods (eg. Rent)
Financial Management Strategies
 Global businesses:
 May borrow from financial markets in other countries
 Need to take account of the exchange rates in their financial
planning
 Hedging is used to reduce the financial risk in global
transactions due to changes in the exchange rate
 Derivatives, a from of hedging, includes forwards
exchange contracts, currency option contracts and
swap contracts.