HSC Business Studies: Financial Management Lecture Notes

Comprehensive practice flashcards covering the role, objectives, influences, processes, and strategies of financial management based on the lecture notes.

What is the strategic role of financial management?

Financial management involves the planning and monitoring of a business’s economic resources to allow the achievement of its financial objectives through four key tasks: planning (setting objectives, budgeting), monitoring (preparing financial statements), sourcing (debt and equity), and allocation (distributing funds).

What are the steps to achieve the long-term objective of efficiency?

1. Increase sales revenue. 2. Decrease expenses. 3. Improve recovery of receivables (ensuring those who owe money pay).

Define liquidity in a short-term context.

Liquidity refers to how easily assets are turned into cash and the ability of a firm to pay its short-term debt obligations (such as overdrafts, accounts payable, and inventory purchases) as they fall due.

What was the strategic response of Kathmandu Holdings Limited (KHL) during the COVID-19 pandemic?

The company adjusted by raising capital to strengthen its balance sheet, reducing costs, adjusting its operating structure, and exploiting online opportunities to meet demand in an uncertain retail environment.

How do Finance and Marketing exhibit interdependence?

Finance provides the necessary funds for promotion and advertising, while marketing generates the sales and new customers that provide the income required by the finance department.

What are the advantages and disadvantages of using retained profits as a source of finance?

Advantages: Does not increase debt, no extra shareholders to split profits with, and no interest payments. Disadvantages: Requires the business to be making enough money and can be seen as inefficient compared to using others' money for investment.

Define factoring and its impact on working capital.

Factoring is selling accounts receivable to a third party (debt collector) at a discounted price for immediate cash. It improves working capital but reduces profit margins as the business receives less than the total value (usually $80 \%$).

What is a debenture?

A debenture is a long-term loan secured from investors (rather than banks) where the business promises to make regular interest payments for a fixed period of time.

Distinguish between a Rights Issue and a Placement in the context of ordinary shares.

A Rights issue allows existing shareholders to buy more shares at a special price after an IPO, whereas a Placement is the private sale of shares to sophisticated investors (like banks) and is not available on the ASX.

What is the role of the Australian Securities and Investments Commission (ASIC) in financial management?

ASIC reduces fraud and unfair practices by regulating companies and monitoring them under the Corporations Act 2001, collecting company information for the public, and enforcing rules through fines or imprisonment.

What are the standard company taxation rates in Australia as set by the Australian Taxation Office (ATO)?

The tax rate is set at either $27.5 \%$ or $30 \%$ of net profit, depending on the business's turnover.

How does a positive global economic outlook influence financial decisions?

A positive outlook (projected increase in world economic growth) impacts decisions by increasing demand for Australia's exports, leading businesses to expand.

What categories are included in a cash flow statement for incorporated entities?

1. Cash from operating activities (normal trading). 2. Cash from investing activities (purchase/sale of assets). 3. Cash from financing activities (changes in debt and equity).

What are the fundamental equations for Gross Profit and Net Profit in an income statement?

$\text{Gross Profit} = \text{Sales} - \text{COGS}$ and $\text{Net Profit} = \text{Gross Profit} - \text{Expenses}$

What is the formula for the Current Ratio (Liquidity) and what is the 'Golden Ratio'?

The formula is $\frac{\text{Current Assets}}{\text{Current Liabilities}}$. The golden ratio is $2:1$, meaning for every dollar of current debt, the business has two dollars in current assets.

What is the formula for Gearing (Solvency) and what does a ratio higher than $100 \%$ indicate?

$\text{Debt to Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Total Equity}}$. A ratio higher than $100 \%$ indicates a highly geared and highly risky business, meaning operations are funded more by lenders than shareholders.

How is the Return on Equity (ROE) ratio calculated and what is the preferred percentage?

$\text{ROE} = \frac{\text{Net Profit}}{\text{Total Equity}}$. A return of $15 \%$ or more is generally preferred compared to other investment choices.

What is the formula for the Accounts Receivable Turnover Ratio in days?

$\text{Ratio} = \frac{\text{Credit Sales}}{\text{Accounts Receivable}}$. To get days: $\frac{365}{\text{Accounts Receivable Turnover Ratio}}$. An ideal result is $12$ times a year (roughly $30$ days).

What are 'Normalised Earnings' and why are they a limitation of financial reports?

Normalised earnings involve removing one-off or abnormal events from financial data to show core earnings. It is a limitation because it can make it hard for investors to trust the data and may involve 'claiming' sales before they are confirmed.

Define 'Capitalising Expenses' as a limitation of financial reporting.

This occurs when an expense is removed from the income statement and placed on the balance sheet as a non-current asset. This overstates both profits and assets and is considered irregular unless legally allowed.

What is the 'Distribution of Payments' strategy in cash flow management?

Distributing payments throughout a period (month or year) so that large expenses do not occur simultaneously, preventing cash shortfalls. While it improves cash flow, it may worsen profitability if suppliers charge more for non-upfront payments.

How does 'Sale and Leaseback' improve business liquidity?

A business sells an asset for a large cash injection (used as working capital) and then leases it back through fixed payments to maintain continuity of use.

What is the difference between direct and indirect costs in profitability management?

Direct costs (like inventory/COGS) are directly involved in production, while indirect costs (expenses) are general costs of running the business like rent or advertising.

How do currency appreciations and depreciations affect Australian exporters?

Appreciation: AU dollar is stronger, imports are cheaper, but the price of AU exports rises (less attractive). Depreciation: AU dollar is weaker, imports are expensive, but AU exports become more affordable/attractive to the world.

Distinguish between a 'Clean Payment' and 'Payment in Advance' in international trade.

Payment in Advance: The seller ships goods only after receiving payment (risk on the importer). Clean Payment: The buyer pays only after receiving the goods (risk on the exporter).

What is a 'Derivatives' strategy in global financial management?

Derivatives are financial instruments (like Futures, Options, and Swaps) used to lessen risks associated with currency fluctuations by 'locking in' a specific exchange price for a future date.