Business Studies
HSC
Lectures
Len Nixon – Finance © 1
Len Nixon – Finance © 2
Len Nixon – Finance © 3
The role of Financial Management – to ensure there is sufficient finance to meet the financial needs of the business
Financing decision
Profits and Losses Surplus or deficit Source of finance-Debt and or Equity
generated from business activities
Financial objective: Solvency
Financial objective: Profitability Vision
Mission Statement
The perimeter of the cycle is the flow
of funds. These are funds to finance
strategies such as marketing, HR and
Long term Goals operations.
Objectives
Strategies
Minimisation of costs and an
indicator of how assets are Current assets and current liabilities
contributing to generating revenue Monitoring and Ability to pay short debts
and profits evaluation Financial objective: Liquidity
Financial objective: Efficiency
Len Nixon – Finance © 4
Role of financial management – continued
Objectives of financial management Interdependence with other key business functions
There are a number of financial objectives to be established in order to achieve The key business functions are:
the business’s strategic or long-term financial goal. Human Resources
Marketing
Strategic or Finance
long-term Operations
Long term goal. Short term
E.g. 5 years E.g. to Within a year
increase All these functions or activities must interact with each other if a
Profitability business is going to achieve the business’s strategic, tactical and
operational goals and objectives. In other words, they are
dependent on each other.
Profitability Growth Efficiency Liquidity Solvency Finance
Increase Increase Decrease Control cash Ability to pay
Net profit Market share expenses flow off long term
debt
Profitability________________________________________________
Marketing Operations Human Resources
Growth ___________________________________________________
Efficiency__________________________________________________
Outline how finance is related operations
Liquidity ___________________________________________________
____________________________________________________
Solvency____________________________________________________
____________________________________________________
Len Nixon – Finance © 5
Finance – Internal and external sources of funds and financial objectives
HSC 2012
Section 4
Extended response
How can different sources of funds help a business achieve its financial objectives?
Answers could include:
• Objectives of financial management
• profitability, growth, efficiency, liquidity, solvency
• short-term and long-term
• • Sources of funds
• 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
Issues in answering the question
Directive term use- what does it mean?
How means
How to, how might, how would, how can and why are and why is? – explain – show
cause and effect
How? – evaluate / make a judgement
Know the syllabus
Case study material
Len Nixon – Finance © 6
1. What type of finance to use?
Sources of finance
Internal - Equity External - Debt
Debt
Current Liabilities (external debt)
Short Term means -
_______________________________________________________________
1.
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Use ___________________________________________________________
2.
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Use ___________________________________________________________
3.
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Use ___________________________________________________________
4.
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Len Nixon – Finance © 7
Use ___________________________________________________________
Long Term – (External) Non-Current Liabilities
Long term means__________________________________________________
1.
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Purpose
________________________________________________________________
2.
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Purpose___________________________________________________________
3.
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Purpose _________________________________________________________
4
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Purpose
________________________________________________________________
Len Nixon – Finance © 8
Financial Management issues
The use of short and long-term debt will affect:
Profitability - ______________________________________________
Solvency ___________________________________________________
Efficiency __________________________________________________
Important financial management principle
The matching the terms and sources of finance to the purpose
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
Equity – internal and external equity
Internal Equity – relates to an Unincorporated business structures such as
_______________________________________________________________
Sources of funds
__________________________________________________________
External Equity sources – relates to Incorporated business entity such as
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Purpose
___________________________________________________________
2014 HSC
Emu Manufacturer Uniform
You have been hired as a consultant to write a report to the management. In your
report: • recommend a source of finance for the factory expansion
Sales are increasing
They need to expand. To do this they will have to outsource overseas OR expand
their current factory sixe
Len Nixon – Finance © 9
Recommend a source of finance for the factory expansion
Suggestions?
Advantages and disadvantages of using debt finance
Advantages Disadvantages
Advantages and disadvantages of using Equity finance
Advantages Disadvantages
Other Financial institutions
Australian Securities Exchange _________________________________________
Insurance companies’ __________________________________________________
Superannuation Funds_________________________________________________
Unit trusts__________________________________________________________
Len Nixon – Finance © 10
Global market influences – global economic outlook, availability of funds and interest rates. These external influences are out of the
direct control of management but can affect a business in the following areas:
Growth
Liquidity
Solvency
Profitability
Efficiency
Global economic outlook Availability of funds Interest rates
Case Study Businesses can access funds from overseas This is the cost of borrowing funds.
For example, assume global demand for Debt markets Note that interest rates are an expense and
building products increases. Equity markets hence will affect financial efficiency of the
For Doors R US, being an Australian business together with net profitability.
company, this trend represents an Because of the removal of many barriers by
opportunity to sell more of its products owing to the removal of regulations, many At present, Australian interest rates are
overseas. Australian businesses have been able to lower than many of its trading partners
The financial implications for the business raise funds in European and USA debt and such as Japan and USA.
are the following: equity markets.
There are a number of management issues
Increased prof______________ to be considered when undertaking such a
Increased growth strategy. This include:
Increased market share Interest rates
Need to finance operations through Interest rate __________________
debt and equity - Solvency Exchange rate __________________
The bigger pool of funds available
The length time of the loan
Sec______ required against the loan
Len Nixon – Finance © 11
Processes of financial management
Limitation of financial reports
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
HSC 2013 Why are ethical considerations play a role in the valuing of current
Auditors have discovered that the value of legal fees paid has been assets such as
included in the asset value of a new warehouse purchased by a Accounts Receivable
business. What limitation of financial reports does this show? Inventories
(A) Capitalised expenses
(B) Debt repayments
(C) Normalised earnings
(D) Timing issues
What is Capitalising expenses means?
Issues with debt payment
Len Nixon – Finance © 12
Processes of financial Management Financial Ratios
Ratio Formula Calculation Interpretation
Direct Links
Sales generated = Marketing
Advertising = Marketing
Cost of Goods Sold = Operations
Franchise Fees = Operations
Rent = Operations
Wages = Human Resources
Len Nixon – Finance © 13
Liquidity Current Assets
Industry Average
0.75:1 Current Liabilities
Gearing Total Debt
Industry Average
1:1 Total Equity
Profitability Gross Profit
Industry Average Total Sales
Gross Profit : 80%
Net Profit
Net Profit: 40%
Total Sales
Return on Owner’s Equity:
58%
Net Profit
Total Equity
Efficiency Total Expenses
Industry Average
40% Total Sales
Importance of comparative ratio analysis- must be used in answering a question such as
Evaluate the importance of financial management strategies in improving business performance. (HSC 2014)
Len Nixon – Finance © 14
Financial strategies
Report 2013
Kingland Office Supplies operates in a large NSW city in a highly
competitive market. A paid manager is responsible for the day to day
running of the business. The owners are concerned about the low
profitability of the business. Investigations by the owners indicate the
following problems:
• customers find the product mix unappealing
• poor management of cash flow
• poor accounts receivable turnover compared to similar businesses.
The manager has also identified low prices offered by larger competitors
as a cause of the low profitability.
Write a report recommending financial strategies to improve the
performance of the business.
providing reasons for financial strategies such as cash flow
management, working capital and profitability management
to address the issues identified in the hypothetical situation
Len Nixon – Finance © 15
Financial
Objective
Ca lcula te d ability to
Wor king capital manage ment CA/CL Liquidity pa y short
Liquidity term de bts
Types of
Problems and Solutions short te rm
de bt
found in
Us e of
funds
Sourc es
Current Ba lance Current Ba nks
As sets Sheet Liabilities Fina nce
Companies
La rge
Companies
Types
Too much
or Problems Ca sh Solutions
Ca sh Financial management strategies
Budgets
Too little
Ba nk
Ov e rdraft The use of all t hese
type s of finance will be
a cost or expense t o
Storage
Transport the business.
J.I.T
Insurance Problems Stock /
Solutions Stock ta kes Their use will decreas e
Costs Inv entory Tw o Bin Ac counts profit s
method. Pa yable
Poor credit
policies
Cleric al Fa ctoring
Ac counts
problems Solutions Ca sh only Credit
Problems Re ceiv able
High Discounts Ca rd
Ac ounts Credit
Re ceiv able restrictions
Turnov er
Age
ac counts
Financial Management
Problems with the current
Curr ent Ass ets = Current Liabilit ie
asse ts will have and effect Ba nk Bill
on the business's cashflow
cycle
Len Nixon – Finance © 16
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Financial manage men t iss ues related to
Profitability
Re v enue inflow
Sale s Influenc ed by Outflow
reve nue Sa les obj ectiv es Profit Cost control Expenses
Pric ing policy
De termined by
Outlays to ge nerate Administration
Se lling
Profit may increa se or Cost of rev enue and profit Huma n
Marketing
de cre ase ow ing to s ales. Ca lcula tions goods s old Re source s
Marketing
This is the outc ome of Gross Profit
Issues and
good or poor mark eting Margin Stra te gies and
strate gies
de cisions Ne t Profit Good and poor Solutions
Margin manage ment c entres Fina ncial
Re turn on on the purc has e of
Equity stoc k
Ra tes of arising from
Marketing
intere st
resea rc h
(borrow ed
Ope ning funds)
Inv entory + Ba d Debts
Purchase s (A/C
Market Segmentation less e nding Re ceiv able More efficient
stoc k manage ment
of mark eting
Employment
Ta rget Problems relations and
Market and Costs opera tions
Ex pens es directly affe ct
Storage the EFFICIENCY of a
Liquidity
Solutions Ordering Business
issues
Transport
Too much
Cost control
Not enough
4P Stock Manage ment
Pric e Promotion
strate gies
Fixe d
J. I. T Va riable
Costs
Stock ta kes Costs
Tw o Bin
Place Product Method
Cost ce ntre s
These transactions a re to be found in a business's Profit and Loss Statement
Known as a Statement of Financial Per formance
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