HSC Business Studies - Finance

Strategic Role

Provide financial resources to allow the implementation of the business plan

Profitability

Ability to increase profits, monitored through revenue, costs and expenses

Gross Profit = Gross Profit ÷ Sales x 100

The higher the ratio, the better as it shows the amount of sales that is available to meet expenses

Net Profit = Net Profit ÷ Sales x 100

The higher the ratio, the better as it showes the profit/return to the owners

Return on Equity = Net Profit ÷ Total Equity x 100

The higher the percentage, the better as it shows how effective the funds that the owners contributed to in creating profit

Growth

Ability to increase its size in the long term

Efficiency

Abilitiy to increase its costs and manage its assests

Expense = Total expenses ÷ Sales x 100

The lower the ratio, the better as it indicates efficiency in the individual expenses

Accounts receivable turnover = Sales ÷ Accounts Receivable x 100

High turnover ratios indicate that the business has efficient debt collection. The bigger the number, the worse it is

Liquidity

Ability to pay short term liabilities

The amount of current assests should be higher than its debts

Current Ratio = Current Assets ÷ Current Liabilities

2:1 is considered in a good, stable financial position

Solvency

Meeting financial commitments in the long term (12+ months)

Debt to Equity Ratio = Total Liabilities ÷ Owner's Equity

The higher the ratio, the more the business relies on debt

Short Term Objectives

Can be both tactical (1 -2 years) or operational (day to day). These are mainly focused on cash flow and positive current assets and liabilities

Long Term Objectives

Usually refers to more than 2 years. Mainly focused on the growing business and tends to be very broad goals. It ensures that the business is increasing profit and its market share

Interdependence with Operations

For inputs, machinery, land etc. that can create value and is able to assist in the business receiving a return on investments

Interdependence with Marketing

For advertising that will increase value and manage cash flow

Interdependence with Human Resources

Creates data on earnings & productivity, which leads to an insight on the staff development and numbers needed

Owner's Equity

Contributed by owners & partners

Retained Profit

Net profit being invested into the business instead of being distributed

Overdraft (Debt: Short Term)

Borrowing money from the bank on short notice through its cheques or current account

Commercial Bills (Debt: Short Term)

Loans (billl of exhange) from other institutions

Factoring (Debt: Short Term)

Selling company's accounts that are receivable (money owed to the business) at a discount to a finance company for immediate cash

Mortgage (Debt: Long Term)

Paid over a fixed period of time with interests

Debentures (Debt: Long Term)

Fixed interest rate within a fixed period of time

Unsecured Notes (Debt: Long Term)

Not secured by assets loan. As there is a higher risk, it leads to higher interest rates

Leasing (Debt: Long Term)

Renting equipment from another company

New Issues (Equity: Public)

a.k.a Primary shares/new offerings. Security issued and sold for the 1st time on the market

Rights Issues (Equity: Public)

Shareholder's right to buy new shares within the same company

Placements (Equity: Public)

Allotment of share, debentures... made from company to investors

Share Purchase Plans (Equity: Public)

Making offers to existing shareholders to buy more shares without the brokerage fees and possibly discounted rates

Private Equity

Securities are not publicly listed through the Australian Securities Exchange (ASX). It aims to raise capital to finance future expansions and investments

Banks

They accept deposits from the public and also provide funds for loans, which can then make investements

Investment Banks

Provide specialised advice and services for businesses. They underwrite share issues

Finance Companies

They make secured/unsecured loans to both consumers and businesses. They can raise capital through share issues and debenture issues

Superannuation Funds

They invest the contributions of members into short/long term investments with the aim to maximise a return

Life Insurance Companies

They invest in other businesses as a method of spreading their exposure to risk, as they offer coverage for possible risks for the employees

Unit Trusts/ Mutual Funds

They take funds from small investors and invest in very specific financial assets

Australian Securities Exchange

Brings together buyers and sellers to exchange shares

Influence of Government

They influence businesses through economic policies (fiscal & monetary) and current/changing legislations

Australian Securities and Investments Commision (ASIC)

Aims to reduce fraud and unfair practices in financial markets and products

Company Taxation

Paid before profits are distributed to shareholders as dividends

Global Market Influences

Financial risks are greater globally than domestically, but takign these risks are necessary for a business strategy to be implemented.

Economic Outlook

The projected changes of the economic growth throughout the world. It can increase the products/services and the interest rates on the funds borrowed internationally

Availability of Funds

Refers to the level of accessability to funds for borrowing. It depends on the risk, demand and supply and the domestic economic conditions

Interest Rates

The cost of borrowing money. The higher the risk, the higher the interest rate

Financial Management

The planning process involves setting goals and objectives, determining the appropriate strategies, identifying alternative actions and choosing the best alternative

Financial Needs

It is vital as it determines the future of the business. A new business will have to determine its start up costs and then interpret it into balance sheets, income statements and cash flow statemtns, which will then be analysed

Budgets

They provide quantitative terms abour the requirments needed to achieve their goal.

Operating Budgets

Relates to the main activities of a business and includes sales, production, raw materials, direct labour, expenses and COGS

Project Budgets

Relates to capital expenditure and research + development

Financial Budgets

Relates to financial data and includes the budgeted income statement, balance sheet and cash flow statement

Record Systems

Mechanisms to ensure that data is recorded and the information provided are accurate, reliable, efficient and accessible

Financial Risks

If a business cannot cover their financial obligations, such as debts, there will be ultimate risks

Financial Controls

The policies and procedures put in place to enusre that goals are achieved efficiently

Debt Financing (Advantages)

Readily Available

Interest payments can be tax deductable

Increased funds lead to increased earnings and profits

Loans provide a business with the opportunity to grow

Profits are not shared with the lender of the loan

Debt Financing (Disadvantages)

Costs to a business establishment costs and ongoing fees and charges

Security is required by the business

Regular payments have to be made

Increased risk if debt comes from the financial institutions

because of the interest that the bank charges

Interest rates can varty over the loan period. making it more expensive

If it is a secured loan, defaulting on the loan may lead to loss of an asset

Equity Financing (Advantages)

Remains in the business for an indefinite time

Does not need to be repaid on a set date

Safer than debt

Cheaper than other sources of finance as there is no interest

There is flexibility in timing of dividend payments

The debt to equity (gearing/leverage) ratio decreases, lowering the risk to the business

Equity Financing (Disadvantages)

Requires sufficient profits to be made so that the business can continue to operate

Lower profits and lower returns for the owner

Equity is hard to obtain and can take time to organise, therefore may limit growth

Not tax deductible

Central ownership is reduced, causing a loss of contorl in decision making

High demands for dividend payments to shareholders may reduce the level of retained profits

Mathching terms and sources of finance to business purpose

Businesses must consider:

The terms, flexibility and availability of finance

The cost of each source of funding (debt and equity)

The sturcutre of the business (small business and public company)

Monitoring and Controlling

It is important as it maintains the business viability and affects all aspects of the operations. This method is done through cash flow statements, income statements and balance sheets.

Cost of Goods Sold (COGS)

Opening Stock + Purchases - Closing stock

Gross Profit

Sales Revenue - COGS

Net Profit

Sales Revenue - Expenses

Owner's Equity

Assets - Liabilities

Total Equity

Owner's Equity + Net Profit

Cash Flow Statement

It summarises cash transactions over a certian period of time. Its purpose is to provide information on the cash inflows (receipts) and outflows (payments). It can be divided into operating activities, investing activities and financing activities

Income Statement

It outlines the level of revenues, COGD and operating expenses. It calculates whether a profit or loss has been made over a particular period of time

Balance Sheet

It's a statement showing the total value of a business on a particular day (snapshot). It's based on the equation:

Assests = Liabilities + Owner's Equity

Comparative Ratio Analysis

Over different time periods: it identifies trends and assis with interpretation of ratioo results

Against Common Standards: Data such as industry averages and benchamarks can assis in the managaer's interpretation anmd decision-making on the business' performance

With Similar Businesses: Comparing businesses in the same industry and of the same size will give insight on the performance of a business

Normalised Earnings

Earnings on the balance sheet are adjusted to remove unusual or "one-off" events and show the true earnings o of the company

Capitalising Expenses

Process of adding a capital expense to the balance sheet that is regearded as an asset (in that it will add to the value of the company) rather than as an expense

Valuating Assests

The process of estimating the market value of assets/liabilities. Some assets can change over time due to inflation and the market. It would be worth less in the past and would not reflect the true value

Timing Issues

The business' financial position may not be a true representation if the business has experienced fluctuations as the reports usually cover activites during a long period of time

Debt Repayments

Financial reports can be limited because they do not have the capacity to disclose specific information about debt repayments, e.g how long the business has had or has been recovering the debt

Notes to Financial Statements

Details and additional information left out from the main reporting documents

Ethical Issues

Business have a legal and ethical responsibility to provide accurate financial records

Businesses must:

- Not add non-exisiting revenue

- Show all liabilities and expenses

- Display a high level of professionalism and integrity

- Not use business credit cards for personal expenses

Audits

It is an independent check on the accuracy of the financial records and accounting procedures.

1. Internal: conducted internally by employees to check accounting procedures and accuracy

2. Management: Conducted to review the business' strategic plan and to determine if changes are needed

3. External: conducted by independent and specialised audit accountants

Record Keeping

All accounting processes depend on how accurate and honest the data is recorded in financial reports

GST Obligations

Businesses have an ethical and obligation to comply with GST reporting requirements

Reporting Practices

Accurate financial reports are necessary for taxation purposes as well as for other stakeholders

Cash Flow Statements

They indicate the movement of cash receipts and payments as a result of transactions over time

Distribution of Payments

By spreadign expenses over the whole year, there is more equal cash outflow each month rather than a huge outflow during one month

Distribution of Early Payments

By spreading expemnses over the whole year, there is more equal cash outflow each month rather than one huge outflow during one month

Factoring

The selling of accounts receivable for a discounted price to a finance or specialist fatoring company

Working Capital

The funds available for the short-term financial commitments

Working Capital Management

Determining the best mix of current assets and current liabilities needed to achieve the objectives of the business

Control of Current Assets

Cash:

The most liquid current asset. It allows the business to pay back its debts, loans and accounts in the short term. Businesses can increase their cash amount by sale and leaseback. Too much cash can also be unproductive

Accounts Receivable:

The total amount of money that cutsomers owe to the business. The collection of accounts receivable is vital to manage the working capital.

Inventories:

The total amount of goods or materials in a store or factory. Inventory control involves balancing too much and too little stock