Topic 3: Finance Study Notes

Finance
Role of Financial Mgmt.
strategic role of financial mgmt. Financial mgmt: planning & monitoring business’s financial resources allowing the business to achieve its
financial objectives.

Strategic role: ensure business goals & objectives are achieved by managing finances effectively, this
includes;
➔ setting financial objectives & ensuring they can be achieved
➔ sourcing finance
➔ preparing budgets & forecasting future finances
➔ preparing financial statements
➔ maintaining sufficient cash flows
➔ distributing funds to other parts of business

objectives of financial mgmt. Profitability: the excess of revenue or income over expenses.
- profitability, growth, ➔ enable max. profitability, business must monitor revenue & pricing policies, costs & expenses,
inventory levels & levels of assets
efficiency, liquidity,
solvency Growth: ability of business to increase its size in the longer term.
- short-term & long-term ➔ dependant on ability to develop & use assets structure to increase sales, profits & market share
➔ ensures business’s sustainability

Efficiency: ability of a business to minimise its costs & manage its assets, so max. profits achieves w/ lowest
possible level of assets
➔ to achieve max. efficiency levels of inventories & cash & collectable receivables must be monitored

Liquidity: the extent to which a business can meet its financial commitments in the short term (<12 months)
➔ sufficient cash flow available to achieve financial obligations or ability to convert current assets into
cash quickly
➔ controlling cash flow ensures supplies of cash are available when needed
 Solvency: extent to which business can meet its financial commitments in the long term (>12 months)
➔ business’s solvency determined by gearing ratio - external finance & internal finance used to finance
business activities
➔ indicates business’s ability to repay amounts borrowed for investments in capital

Short-term financial objectives: are reviewed regularly to see if targets are being met & resources are being
used to best advantage, two types;
➔ tactical, 1-2 yrs
➔ operational, day-to-day

Long-term financial objectives: broad goals requiring short-term goals to assist its achievements, reviewed
annually to determine if change is necessary, one type;
➔ strategic plans, 5+ years

interdependence w/ other key Other functions rely on financial mgmt. to provide adequate funds;
business functions ➔ operations: funds to purchase inputs & carry out transformation processes
➔ marketing: funds to undertake promotion
➔ HR: funds to pay staff

Finance dependant on other functions;

➔ operations: produce products
➔ marketing: promote products
➔ HR: manage staff

Influences on Financial Mgmt.

internal sources of finance - Internal finance: funds generated from inside the business
retained profits
Retained profits:
➔ common internal finance, aren’t distributed but kept as cheap & accessible source for future activities

external sources of finance External finance: funds provided by sources outside the business
- debt - short-term ➔ debt finance, relates to short-term & long-term borrowing from external sources
➔ equity, as external source of funds, refers to fiance raised by company through inviting new owners
borrowing (overdraft,
commercial bills, Debt short-term borrowing, provided by financial institutions, used to finance temporary shortages in cash
 factoring), long-term flow or finance for working capital
borrowing (mortgage, ➔ overdraft, bank allows business/individual to overdraw their account up to agreed limit & for a specified
time to help overcome temporary cash shortfall
debentures, unsecuring ◆ assist w/ short-term liquidity problems
notes, leasing) ◆ typically variable interest rate, interest paid daily, flexible
- equity - ordinary shares ◆ costs are minimal, lower interest rate than other forms of borrowing
(new issues, right issues, ➔ commercial bills, primarily short-term loans issued by financial institutions for larger amounts
placements, share (>$100,000) for period of generally between (30-180 days)
◆ borrower receives sum immediately & repays full amount w/ interest at end of period
purchase plans), private ◆ flexible in interest rate & repayment period
equity ◆ usually secured against business’s assets & rolled over till borrower has funds to repay loan in
full
➔ factoring, selling of accounts receivable for a discounted price to a finance or factoring company
◆ business receives -90% of amount of receivables in 48 hrs of submitting invoices to factoring
company → improving cash flow & gearing
◆ factoring company offer two services;
● ‘w/ resource’, bad debts are business responsible
● ‘w/o resources’, business transfers responsibility for non-collection to factoring company
◆ increased likelihood of unpaid debt
◆ expensive as business responsible for debts that remain unpaid & commission paid on that
debt

Debt long-term borrowing, funds borrowed for >12 months, typically used for major assets (recorded as
non-current liability in balance sheet)
➔ mortgage, loan secured by property of the borrower
◆ used to finance property purchases
◆ repaid w/ regular repayments including interest over agreed period
➔ debentures, issued by a company for fixed rate of interest & for fixed period of time
◆ investor lends funds to company in return company issues debenture w/ regular interest
repayments
◆ funds typically secured against business’ assets, upon maturity company repays amount of
debenture by buying back debenture
◆ fixed rate of interest, amount of profit no effect on rate of interest
◆ debenture products have prospectus, tells investors info on company, how they use funds & the
terms of investment
 ➔ unsecured notes, loan from investors for set period of time, not secured against business’s assets
◆ higher interest rate than secured notes
◆ business sells unsecured notes to generate money for own initiative
➔ leasing, involves payment of money for use of equipment that’s owned by another party
◆ business choose equipment, arrange for finance company to purchase it, lease it from finance
company which retains ownership for lease period
◆ lesse uses equipment, lessor owns & leases equipment
◆ two types of leases;
● operating leases, assets leased for short period, owner undertakes maintenance, can
be cancelled usually w/o penalty
● financial leases, lessor purchases asset on lesse’s behalf, fixed for economic life of
asset, penalties for cancellation - cheaper than operating leases

Ordinary shares:
➔ purchase of ordinary shares makes individual part-owners of publicly listed companies, giving them
voting rights depending on num. of shares & dividends
◆ dividends, distribution of company’s profits to shareholders & is calculated as num. of cents of
share
➔ types of ordinary shares;
◆ new issue, a.k.a, primary share/new offerings/initial public offering (IPO) , a security issued &
sold for first time on public market, prospectus required for investors to make informed
decisions
◆ rights issue, occurs after IPO & grants shareholders to buy new shares in same company in
proportion to num. of shares they currently own
◆ placements, allotment of shares made directly from company to investors, meaning addition
shares offered at discount to persuade specific investors to invest in company
◆ share purchase plan, offer to existing shareholders in listed company to purchase more shares
in that company w/o brokerage fees (can offer discounts), no prospectus needed, max. $15,000
new shares to each shareholder

Private equity, money invested in private company on Australian Securities Exchange (ASX)
➔ aim: raise capital to finance future expansion/investment of business

financial institutions - banks, Financial Institution: collects funds & invest them in financial assets, provide financial services & focus on
investment banks, finance financial transactions
➔ banks, receive savings as deposits from individuals, businesses and govs, in return make investments
companies, superannuation & loans to borrowers
funds, life insurance ➔ investment banks, provide borrowing & lending services to primarily business sector
◆ can customise loans to business needs
companies, unit trusts & the ◆ may require equity in business borrowing funds
Australian Securities Exchange ◆ services include;
● trade in money, securities & financial futures
● arrange long-term finance for company expansion
● provide working capital
● arrange project finance
● advise clients on forgien exchange cover
● advise on mergers & takeovers
● provide portfolio investment mgmt. services
● underwrite corporate & semi-gov issues of securities
● operate unit trusts
● arrange overseas finance
➔ finance companies, non-bank financial intermediaries, specialise in smaller commercial finance
◆ provide short/medium-term loans to businesses through consumer hire-purchase loans,
personal loans & secured loans
◆ raise money through debentures
◆ if business fails, lender entitled to sell assets to recover initial loan
◆ typically high interest rate
➔ superannuation funds, scheme set up by federal gov, which requires all employers to make a financial
contribution to a fund which will provide benefits to an employee when they retire
◆ in calendar month, employees aged 18-69 who’re paid more than $450 before tax are eligible &
under 18s who work 30+ hrs a week
◆ employers must pay 9.5% of employees salary in super fund account
◆ they invest money received from superannuation contributions so members earn investment
returns on the money
➔ life insurance companies, non-bank financial intermediaries, provide cover & lump-sum payment in
event of death
◆ policy holders pay regular premiums & insurer guarantees to pay designated beneficiary money
upon insured person death
◆ provides equity & loans through receipts of insurance premium payments, provides funds for
investment
➔ unit trusts, take funds from large num. of small investors & invest them in specific types of financial
assets
 ◆ They invest in any mixture of cash, Australian/international shares, fixed interest securities or
property

➔ Australian Securities Exchange (ASX), primary stock exchange group in AUS, functions as market
operator, clearing house & payments system facilitator
◆ consists of primary & secondary market;
● primary markets, deal w/ new issue of debt instruments by the borrower of funds
● secondary markets, deal w/ purchase & sale of existing securities
◆ secondary market increases liquidity of financial assets → influencing primary market for
securities

influence of gov. - Australian Australian Securities & Investments Commission (ASIC): independent statutory commission, enforces and
Securities & Investments administers Corporations Act 2001 & protects consumers in areas of investments, life & general insurance,
superannuation & banking (except lending) in AUS.
Commission, company taxation ➔ aim: reduce fraud & unfair practices in financial markets & financial products
 ➔ business breaches law, ASIC can investigate matter & determine appropriate remedy based on
seriousness of misconduct
➔ failure to comply w/ Corporations Act → negative publicity for business

Company Taxation:
➔ incorporated businesses, tax levied at 30% of net profit - small businesses, tax levied 27.5% w/ <$10
million turnover
➔ AUS gov undertaking reformation of federal tax system to improve international competitiveness,
attracting investors → long-term economic growth

global market influences - Global Economic Outlook: specifically projected changes to level of economic growth throughout world
economic outlook, availability ➔ economic growth impacts business financial decisions, may include;
◆ increasing demand of products & services, therefore increase production, requiring funds to
of funds, interest rates purchase equipment, employ/train staff, expand business size
◆ decrease in interest rates on funds borrowed internationally from financial money market from
decreased risk associated w/ repayments

Availability of Funds: ease w/ which a business can access funds (for borrowing) on international financial
markets
➔ financial crisis 2008-09 caused sharp increase in interest rates → high-risk lending

Interest Rates: cost of borrowing money

➔ high risk lending to business → higher interest rate
➔ AUS business may borrow finance from overseas source for lower interest rates, but exchange rate
risk, meaning ‘cheap’ interest rate can cost more
Processes of Financial Mgmt.
planning and implementing – Planning & Implementing Cycle:
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

Step 1: Determine financial needs

financial info shows business can generate return for investment being sought, financial needs determined by;
➔ size of business
➔ current phase of business cycle
➔ future plans for growth & development
➔ capacity to source finance
➔ mgmt. skills for assessing financial needs & planning

Step 2: Developing budgets

budgets, provide info in quantitative terms about requirements to achieve a particular purpose, can be
classified as;
 ➔ operating budgets, relate to main activities of a business & include budgets relating to sales,
production, raw materials, direct labour, expenses and cost of goods sold
➔ project budgets, relate to capital expenditure and R&D
➔ financial budgets, relate to financial data of business & include budgeted income statement, balance
sheet & cash flows

enables mgrs. to plan for future, monitor past & present performance, & coordinate plans made by different
sections of business

Step 3: Maintaining record system

record systems, mechanisms employed by business to ensure data is recorded & the info provided by record
systems is accurate, reliable, efficient & accessible
➔ mgmt. base decisions on info - minimise error to maintain reliable & accurate info
➔ double entry system, record all items twice to find errors quicker

Step 4: Identifying financial risk

financial risk, the risk to a business of being unable to cover its financial obligations
➔ minimise financial risk → profit generated considered, must be sufficient to cover cost of debt &
increasing profit to justify high risk for owners & shareholders

Step 5: Establishing financial controls

financial controls, policies and procedures that ensure plans of business are achieved in the most efficient way
➔ policies & procedures that promote control:
◆ clear authorisation & responsibility for tasks
◆ separation of duties
◆ rotation of duties
◆ control of cash
◆ protection of assets
◆ control of credit procedures
➔ budgets & variance allow prediction of cash shortfalls so business can prevent it\
Debt Finance:

Equity Finance:
 Matching terms & source of finance to business purpose:
finance mgrs. Match term of loan w/ economic lifetime of asset finance is used to purchase
➔ short-term finance → short-term assets
➔ long-term finance → long-term assets

monitoring and controlling – monitoring & controlling sig., inconsistent methods impact viability of business & require mgmt. to monitor
cash flow statement, income internal & external factors that impact ops financially
statement, balance sheet Cash flow statement: financial statement, indicates movement of cash receipts & cash payments from
transactions over period
➔ demonstrates whether firm can;
◆ generate favourable cash flow
◆ pay its financial commitments as it falls due
◆ have sufficient funds for future expansion/change
◆ obtain finance from external sources when needed
 ◆ pay drawings to owners/dividends to shareholders
➔ three types of business activities;
◆ operating activities, cash inflows & outflows relating to main activity of business
◆ investing activities, cash inflows & outflows relating to purchase & sale of non-current assets &
investments
◆ financing activities, cash inflow & outflows relating to borrowing activities

Income statement: summary of income earned & expenses incurred over period of trading, helps identify
exactly how much money has come into business as revenue, how much has gone out as expenditure and
how much has been derived as profit.
➔ shows;
◆ operating income earned from main function of business
◆ operating expenses
➔ completing income statement involves;
1. record income earned by business
2. record cost of goods sold, value of stock business has sold its customers
3. calculate net profit, difference between gross profit & expenses

Balance Sheets: represents business’s assets & liabilities at particular time, expressed in money terms, &
represent net worth of business
➔ show level of current & non-current assets, & current & non-current liabilities;
◆ assets, items of value owned by business, two types;
● current, can be turned into cash within 12 months
● non-current, can’t be turned into cash within 12 months
◆ liabilities, claims by people other than owners against assets & represent what’s owned by
business, two types;
● current, must be paid within 12 months
● non-current, must be paid after 12 months
◆ owner’s equity, funds contributed by the owner/s & represents net worth of business
➔ demonstrates financial stability, analysis can indicate whether:
◆ business has enough assets to cover debts
◆ interest & money borrowed can be paid
◆ assets of business are being used to maximise profits
◆ owners of business are making good return on investment
financial ratios Liquidity: extent to which business can meet financial commitments in short-term, <12 months
- liquidity – current ratio ➔ current ratio measures ability to pay back current liabilities w/ current assets
◆ high current ratio → more capable of meeting short-term financial obligations
(current assets ÷ current
liabilities) 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 =
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
- gearing – debt to equity
ratio (total liabilities ÷ Gearing: proportion of debt & proportion of equity used to finance the activities of a business, gearing ratios
total equity) determine the business’s solvency
- profitability – gross profit ➔ debt to equity ratio show extent business is relying on debt to finance activities
ratio (gross profit ÷ ◆ higher ratio → less solvent firm OR high risk for investors
sales); net profit ratio - 𝑡𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
(net profit ÷ sales); 𝑑𝑒𝑏𝑡 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 = 𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦

return on equity ratio

Profitability: earning performance of business & indicates capacity to use resources to maximise profits
(net profit ÷ total equity) ➔ gross profit ratio shows changes from one accounting period to another, indicates effectiveness of
- efficiency – expense ratio planning policies concerning pricing, sales, discounts & valuation of stock
(total expenses ÷ sales), ◆ low ratio → alternative suppliers may be needed & competitors investigated
accounts receivable
𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
turnover ratio - (sales ÷ 𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑟𝑎𝑡𝑖𝑜 = 𝑠𝑎𝑙𝑒𝑠
accounts receivable)
- comparative ratio ➔ net profit ratio shows profit/return to owners
analysis – over different ◆ low net profit → strats. to reduce expense & increase revenue must be investigated
time periods, against 𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑟𝑎𝑡𝑖𝑜 =
standards, with similar 𝑠𝑎𝑙𝑒𝑠

businesses
➔ return on equity ratio shows how effective funds contributed by owners have been in generating profit,
& hence a return on their investment
◆ higher ratio/percentage → better return for owner/s

𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 = 𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦

Efficiency: ability of business to minimise costs & manage assets so maximum profit is achieved w/ lowest
possible level of assets
 ➔ expense ratio indicates amount of sales allocated to individual expenses
◆ high ratio may result from poor mgmt.

𝑡𝑜𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑟𝑎𝑡𝑖𝑜 = 𝑠𝑎𝑙𝑒𝑠

➔ accounts receivable turnover ratio measures effectiveness of firm’s credit policy & how efficiently it
collects its debt
◆ high ratio indicates efficient debt collection

𝑠𝑎𝑙𝑒𝑠
𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑟𝑎𝑡𝑖𝑜 = 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒

figures, percentages & ratios don’t provide full analysis, business needs comparisons w/ past performance,
similar businesses & against common industry standards for efficient analysis

limitations of financial reports Normalised earnings: earnings that’re adjusted to take into account changes in the economic cycle or to
– normalised earnings, remove one off or unusual items that will affect profitability
➔ easier to compare profitability figures from one year to next & other businesses
capitalising expenses, valuing
assets, timing issues, debt Capitalising expenses: accounting method where business records expense as asset on balance sheet
repayments, notes to the rather than as expense on income statement
financial statements ➔ inaccurate financial condition → understates expenses & overstates profits & assets

Valuing assets: process of estimating value of assets when recording them on balance sheet
➔ sometimes assets recorded in historical cost, accounting method where assets are listed on balance
sheet w/ purchased value, due to depreciation & appreciation this value is incorrect, giving false
impression of business’s worth

Timing issues:
➔ matching principle used to avoid timing issues, when recording revenue, any expenses directly related
to that revenue are also recorded → accurate financial position representation

Debt repayment: financial reports don’t have the capacity to disclose specific info about debt repayments,
distorting reality of business’s status
 Notes to the financial statements: report details & additional info that’s left out of main reporting documents,
allow stakeholders to understand business’s reality

ethical issues related to Ethical Financial Report Practices

financial reports Audited accounts:
➔ audit, independent check of accuracy of financial records & accounting procedures, three types;
◆ internal, conducted internally by employees to check accounting & accuracy of financial records
◆ mgmt., conducted to review firm’s strategic plan & to determine if changes should be made
◆ external, requirement under Corporations Act 2001 (Cth), firm’s financial reports are
investigated by independent & specialised audit accountants to guarantee authenticity

Record keeping:
➔ poor record keeping can lead to tax evasion, which harms business’s reputation & alienates
customers who desire honesty & ethicalness

Reporting practices:
➔ accurate financial reports are needed for taxation purposes
➔ unethical reporting practices are illegal & makes it difficult for business to source fiance

Financial Mgmt. Strategies

cash flow mgmt. Cash flow: movement of cash in & out of business over period
- cash flow statements
Cash flow statement: indicates movement of cash receipts & cash payments from transactions over period,
- distribution of payments, provides info regarding firm’s ability to pay debts on time
discounts of early
payment, factoring Mgmt. strats.
Distribution of payments: involves distributing payments throughout the month, year or other period so large
expenses don’t occur at same time & cash shortfalls don’t occur
➔ more equal cash outflow each month rather than large outflows in certain months

Discounts for early payment: involves offering debtors a discount for early payments, most effective when
targeted at debtors that owe large amounts at end of financial year

Factoring: involves selling accounts receivable for discounted price to finance/specialist factoring company
 ➔ business saves on costs involved in following up on unpaid accounts & debt collection

working capital mgmt. Working capital: funds available for short-term financial commitments of business
- control of current assets - ➔ working capital mgmt., determining best mix of current assets & current liabilities needed to achieve
business objectives
cash, receivables,
inventories Control of current assets: mgmt. process that determines optimal amount of each current asset held,
- control of current includes;
liabilities - payables, ➔ cash, ensures business can pay debts, repay loans & pay accounts in short term, & business survives
loans, overdrafts long term - try to keep cash balances at mini. & hold marketable securities as reserves of liquidity
➔ receivables, sums of money due to business from customers to whom has supplied goods/services,
- strategies - leasing, sale & must be monitored to ensure their timing allows adequate cash resources to be maintained
lease back ➔ inventories, level of inventory must be carefully monitored to prevent excess/insufficient stock which
can lead to loss of sales & customers, & unnecessary expenses
◆ ensure inventory turnover is sufficient to generate cash to pay purchases & suppliers on time,
so they’re willing to give credit in future

Control of current liabilities: mgmt. process that determines optimal amount of each current liability held,
includes;
➔ payables, sums of money owed by business to other businesses from whom it purchased G&S,
monitored to ensure their timing allows adequate cash resources to be maintained
➔ loans, important as costs for establishment, interest rates & ongoing charges must be investigated &
monitored to minimise costs
◆ control of loans involves investigating alternative sources of funds from different banks &
financial institutions
➔ overdrafts, cheap & convenient form of short-term borrowing, used for temporary cash shortage
◆ policy must be implemented for using & managing overdrafts & monitor budgets on daily/weekly
basis so cash supplies are controlled
Strats.:
➔ leasing, contract between lessor (owner of asset) & lessee (user of asset), lets lessee rent asset for
period in exchange for periodical payments, advantages include;
◆ cash outflows related to leasing are spread over several years as opposed to one-off large cash
outflow that occurs when purchasing assets outright, improving working capital.
◆ allows business to utilise good quality assets
◆ are considered operating expenses → tax deductible
◆ flexibility of upgrading new & better assets w/o purchasing new equipment
 ◆ reduces risk of technological obsolescence as leased asset can be upgraded
◆ reduces risk of unpredictable costs, like repairs & maintenance of equipment
◆ help w/ cash flow forecasting & budgeting as payments are fixed for specified time
➔ sale & lease back, process of selling owned asset to lessor & then leasing asset back through fixed
payments for specified period → improves liquidity

profitability mgmt. Profitability mgmt.: involves the control of both the business’s costs and its revenue
- cost controls - fixed &
Cost controls:
- variable, cost centres, ➔ fixed & variable costs, clear understanding of what costs are to control them
expense minimisation ◆ fixed, not dependent on level of operating activity, don’t change when level of activity changes,
- revenue controls - must be paid regardless of what happens in business
marketing objectives ◆ variable, vary in direct relo to levels of operating activity/production
➔ cost centres, particular areas/departments/sections of business to which costs are directly attributed
◆ helps mgmt. utilise resources efficiently as it provides better understanding of how resources
are being used
◆ allows mgmt. to measure, budget & control costs for each specific function
➔ expense minimisation, high expenses weaken profit, due to valuable resources consumption
◆ guidelines & policies established to encourage staff to minimise expenses where possible

Revenue controls: determining acceptable level of revenue w/ view to maximising profits, business must
have clear ideas & policies about its marketing objectives
➔ marketing strats. & objectives should lead to increase in sales, resulting in increased revenue
➔ cost-volume-profit analysis determines level of revenue needed to cover fixed & variable costs to
break-even, & predict effect on profit of changes in level of activity, prices or costs

global financial mgmt. Global financial mgmt.: strats. that are adopted to deal w/ financial risks & influences on global businesses
- exchange rates
Exchange rates:
- interest rates ➔ fluctuations in exchange rate create risks, depreciation & appreciations impact import & export levels &
- methods of international payments to overseas businesses/financial intermediaries
payment - payment in ◆ appreciation increases price of $AUS → exports are expensive & imports are cheaper
advance, letter of credit, ◆ depreciation lowers price of $AUS → exports are cheaper & imports prices rise
clean payment, bill of
Interest rates:
exchange ➔ domestic & international businesses can source funds internationally, therefore must consider interest
- hedging rates offered on borrowings, repayment of debt must allow for fluctuations in currency
- derivatives
Methods of international payment:
➔ payment in advance, allows exporter to receive payment & arrange for goods to be sent, often used if
other party is subsidiary or credit worthiness of buyer is uncertain
➔ letter of credit, document that buyer can request from bank that guarantees payment of goods are
transferred to seller - issued by importer’s bank to exporter promising to pay them specified amount
once certain terms are met
➔ clean payment, occurs when exporter ships goods directly to importer before payment is received, only
used when exporter is confident importer will pay by agreed time
➔ bill of exchange, document drawn up by exporter demanding payment from importer at specified time,
two types;
◆ document against payment, importer can collect goods only after paying for them, importer
receives documents that allow them to collect goods after payment
◆ document against acceptance, importer can collect goods before paying for them, importer sign
acceptance of goods & terms of bill of exchange to receive documents that allow them to pay
for goods at a later date

Hedging: process of minimising risk of currency fluctuations, helps reduce level of uncertainty involved w/
international financial transactions, two types;
➔ natural hedging, business adopts strats. to eliminate/minimise risk of foreign exchange exposure, e.g.;
◆ establishing offshore subsidiaries
◆ arrange for import payments & export receipts in same foreign currency, so losses from
movement in exchange rate are offset by gains from other
◆ implementing marketing strats. that reduce price sensitivity of exported products
◆ insisting both import & export contracts denominated in Australian dollars
➔ financial instruments hedging, financial products used to minimise/spread risk of exchange rate
fluctuations

Derivatives: simple financial instruments, used to lessen exporting risks associated with currency fluctuations,
three types available to exporters;
➔ forward exchange contract, contract to exchange one currency for another at agreed exchange rate on
future date, usually 30-180 days
➔ options contract, gives the option holder right, but not obligation, to buy/sell foreign currency some time
in future, protection from unfavourable exchange rate fluctuations, while maintaining opportunity to
gain exchange rate movements
➔ swap contract, agreement to exchange currency in spot market w/ agreement to reverse transaction in
future