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Len Nixon – Finance 1
Len Nixon – Finance 2
Finance
Role of financial management
strategic role of financial management
objectives of financial management
– profitability, growth, efficiency, liquidity, solvency
– short-term and long-term
interdependence with other key business functions
Influences on financial management
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
financial institutions – banks, investment banks, finance companies, superannuation funds, life
insurance companies, unit trusts and the Australian Securities Exchange
influence of government – Australian Securities and Investments Commission, company taxation
global market influences – economic outlook, availability of funds, interest rates
Processes of financial management
planning and implementing – 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
monitoring and controlling – cash flow statement, income statement, balance sheet
financial ratios
– liquidity – current ratio (current assets ÷ current liabilities)
– gearing – debt to equity ratio (total liabilities ÷ total equity)
– profitability – gross profit ratio (gross profit ÷ sales); net profit ratio (net profit ÷ sales);
return on equity ratio (net profit ÷ total equity)
– efficiency – expense ratio (total expenses ÷ sales), accounts receivable turnover ratio (sales ÷
accounts receivable)
– comparative ratio analysis – over different time periods, against standards, with similar
businesses
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
Financial management strategies
cash flow management
– cash flow statements
– distribution of payments, discounts for early payment, factoring
working capital management
– control of current assets – cash, receivables, inventories
– control of current liabilities – payables, loans, overdrafts
– strategies – leasing, sale and lease back
profitability management
– cost controls – fixed and variable, cost centres, expense minimisation
– revenue controls – marketing objectives
Len Nixon – Finance 3
LIquidity
Solvency
Profitability
Efficie ncy
Growth
Contributes to
achieving the
goals of the
bus iness
Marketing
HR
Operations
Savings
Shares
Debt
Short Term
Long Term
ASIC
Economic outlook
Availability of
funds
interest rates
Banks and
NBFI's
Cashflow
Statement
Cost Control
Revenue control
Current of Asse ts
Control of
Liabilities
Strate gie s
Profitability
Gearing
Liquidity
Efficie ncy
Financial
Statements
Budge ts
Financial Risks
Normalsied
earnings
Financial re ports
Finance
Role of
Finance
Influe nces
Financial
Strate gie s
Processess
Obje ctives
of financial
Manage ment
Straegic
Role Interdepende nce
Internal
External
Governme nt
Global
Influe nces
Finnancial
Institutions
Cash flow
Profitability
Working
Capital
Ratios
Monitoring
and
Controlling
Planning and
implementing Limitation
of financial
re ports
Ethical
issues
Len Nixon – Finance 4
The role of Financial Management – to ensure there is sufficient finance to meet the financial needs of the business
Vision
Mission Statement
Long term Goals
Objectives
Strategies
Monitoring and evaluation
Financing decision
Source of finance-Debt and or Equity
Financial objective: Solvency
Current assets and current liabilities
Ability to pay short debts
Financial objective: Liquidity
Profits and Losses Surplus or deficit
generated from business activities
Financial objective: Profitability
Minimisation of costs and an
indicator of how assets are
contributing to generating revenue
and profits
Financial objective: Efficiency
The perimeter of the cycle is the flow
of funds. These are funds to finance
strategies such as marketing, HR and
operations.
Len Nixon – Finance 5
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 business’s strategic or long-term financial goal.
Profitability________________________________________________
Growth ___________________________________________________
Efficiency__________________________________________________
Liquidity ___________________________________________________
Solvency____________________________________________________
The key business functions are:
Human Resources
Marketing
Finance
Operations
All these functions or activities must interact with each other if a
business is going to achieve the business’s strategic, tactical and
operational goals and objectives. In other words, they are
dependent on each other.
Outline how finance is related to human resource and marketing
____________________________________________________
____________________________________________________
Strategic or
long-term
goal.
e.g. to
increase
Profitability
Profitability
Increase
Net profit
Growth
Increase
Market share
Efficiency
Decrease
expenses
Solvency
Ability to pay
off long term
debt
Liquidity
Control
cashflow
Short term
Within a year
Long term
e.g. 5 years
Finance
Marketing
Operations
Human Resources
Len Nixon – Finance 6
Len Nixon – Finance 7
Finance – Internal and external sources of funds
Scenario – hypothetical –Squeezed Now Ltd.
Squeezed Now is a manufacturer of a range of juices for Australian and global
markets.
In 2013, the management of Squeezed decided upon adopting a new strategic goal of
increasing the business’s growth. The business wanted to increase its market share
currently 35% to 50%.
To achieve this goal however, has meant the business would have to revamp its
manufacturing plant. Built in the late 1900’s, the current plant and technology used
was aging where breakdowns were becoming a regular feature coupled with
increasing maintenance costs and lower productivity.
In light of this, management decided to purchase new state of the art machinery with
the triple aims of increasing its productive capacity, productivity and reducing the
overall costs of production.
In addition, management had recently completed a strategic review of human
resources and it marketing activities revealing a need for additional training of
existing staff and the recruitment of additional operational, marketing and sales staff.
However, such changes required funding. Given the business’s current state of its
balance sheet as shown in table 1, the business had previously funded its assets
through an equal amount debt and equity.
Squeezed Balance Sheet
As at the 30th
of June 2013
Current Assets (000) Current Liabilities (000)
Cash 10 Accounts Payable 25
Accounts Receivable 25 Commercial Bills 20
Stock 10
Non Current Liabilities
Mortgage 975
Non Current Assets Total Equity
Plant and Machinery 2000 Shares 1000
Furniture and Fittings 75 Profit 400
Delivery Vans and Cars 300
Total Assets 2420 Total Liabilities 2420
From a solvency point of view, that is Total Liabilities/ Total Equity (1020/1400)
the solvency ratio is .72%. This means for every $1 of equity the business is only
using .72cents of debt. Given the industry average is usually $1 to $1 the business
has used equity as the primary means of funding its business activities. From a
financial management perspective, the business has been very conservative
Len Nixon – Finance 8
relying significantly on equity finance as the primary means of financing its
activities.
Problems to be solved.
Financial questions to be asked by Squeezed Now Management? Will the funds come from within the business (internal) or from outside the
business (external)?
What sources will be used debt or equity or a combination of both?
What type of finance is appropriate to purchase the current and non current
assets and pay expenses required by the business? The matching principle
Will the finance be long term or short term in terms of time?
What is the cost of using the various types of finance?
How will the choice of finance affect existing solvency, efficiency, liquidity
and profitability?
What the risks associated with using the various types of finance?
Will leasing and factoring as a better option in regard with respect to
managing the business’s cashflow better?
Financial questions needing to answered
1. What type of finance to use?
Debt
Current Liabilities (external debt)
Short Term means -
_______________________________________________________________
1.
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Use ___________________________________________________________
2.
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Sources of finance
Internal - Eq External - D
Len Nixon – Finance 9
Use ___________________________________________________________
3.
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Use ___________________________________________________________
4.
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
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 _________________________________________________________
Len Nixon – Finance 10
4
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Purpose
________________________________________________________________
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
___________________________________________________________
Len Nixon – Finance 11
Propose a set of financial strategies Squeezed Now management could use totally
$25 million dollars to purchase new equipment and to fund a training and
development program together with recruiting new staff.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
____________________________________________________________________
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 12
Influences on financial management
S
Increasing
Case study
Juiced Up, is a manufacturer of
juices for the Australia and global
markets.
Management has just appointed a
new marketing, operations and
human resource manager.
As part of the company’s induction
program the chief accountant has
been asked to brief these managers
on a number of financial issues.
Discuss the role of the ASIC
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
Outline the effects of the company
tax on profits and international
competitiveness
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
Len Nixon – Finance 13
Influences on financial management –
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
For example, assume the global demand for
goods and services increases.
For Juiced Up, being an Australian
company selling it juices overseas, this
trend represents an opportunity to possible
sell more of its products overseas.
The financial implications for the business
are the following:
Increased prof______________
Increased growth
Increased market share
Need to finance operations through
debt and equity - Solvency
Businesses can access funds from overseas
Debt markets
Equity markets
Because of the removal of many barriers by
owing to the removal of regulations, many
Australian businesses have been able to
raise funds in European and USA debt and
equity markets.
There are a number of management issues
to be considered when undertaking such a
strategy. This include:
Interest rates
Interest rate __________________
Exchange rate __________________
The bigger pool of funds available
The length time of the loan
Sec______ required against the loan
This is the cost of borrowing funds.
Note that interest rates are an expense and
hence will affect financial efficiency of the
business together with net profitability.
At present, Australian interest rates are
lower than many of its trading partners
such as Japan and USA.
Len Nixon – Finance 14
Processes of financial management
Planning and control
The financial planning cycle – To ensure the business’s flow of funds is achieved and all the financial objectives have been managed
effectively and efficiently a planning process must used
Determining
financial needs
Developing
Budgets Maintaining
Financial risk
Indentifying
financial risk
Establishing
financial controls
Addressing present financial needs
Len Nixon – Finance 15
Direct Links Sales generated = Marketing Advertising = Marketing Cost of Goods Sold = Operations Franchise Fees = Operations Rent = Operations Wages = Human Resources
Len Nixon – Finance 16
Various Limitations of financial reports and ethical issues related to financial reports – CRS References to the financial information
Normalised earnings – Sales of $810,0000
Limitation _________________________________________________________________________________________________________
Valuing assets . Total assets of $655,0000
Limitation _________________________________________________________________________________________________________
Debt Repayments. Bank Overdraft $56000 and Mortgage $120000
Limitation ________________________________________________________________________________________________________
Timing issues ____________________________________________________________________________________________________
Ethical issues are closely related to Legal issues
Audit accounts
In
External
Management
Recording
Cash
Reporting practices
Accurate for ATO
Stakeholders
Len Nixon – Finance 17
Ratio Formula Working Interpretation
Liquidity Industry Average 0.75:1
Current Assets
Current Liabilities
Solvency Industry Average 1:1
Total Debt
Total Equity
Profitability Industry Average Gross Profit : 80% Net Profit: 40% Return on Owner’s Equity: 58%
Gross Profit
Total Sales
Net Profit
Total Sales
Net Profit
Total Equity
Efficiency Industry Average 40%
Total Expenses
Total Sales
Ratio Analysis of Part and Parts PTY Ltd Financials
Len Nixon – Finance 18
found in
Types
ProblemsSolutions
SolutionsProblems
Problems Solutions
Liquidityability to
pay short
term debts
Balance
Sheet
Current
AssetsCurrent
Liabilities
Types of
short term
debt
Sources
Banks
Finance
Companies
Large
Companies
Bank
Overdraft
Calculated
CA/CL
Accounts
Payable
Credit
Card
Bank Bill
Cash
Stock/
Inventory
Accounts
Receivable
Storage
Transport
Insurance
Costs
J.I.T
Stocktakes
Two Bin
method.
Cash
Budgets
Too much
or
Too little
Poor credit
policies
Clerical
problems
High
Acounts
Receivable
Turnover
Age
accounts
Factoring
Cash only
Discounts
Credit
restrictions
Working capital managementLiquidity
Problems and Solutions
The use of all these types of finance will be a cost or expense to
the business.Their use will decrease
profits
Problems with the current assets will have and effect on the business's cashflow
cycle
Use of
funds
Financial ManagementCurrent Assets = Current Liabilit ies
Financial Objective
Financial management
strategies
Terms, Definitions, Problems and
Len Nixon – Finance 19
Revenue inflow
Influenced by
Sales obj ectives
Pricing policy
Determined by
Market Segmentation
Good and poor
management centres
on the purchase of
stock
Problems
and Costs
Solutions
Outflow
Cost control
Outlays to generate
revenue and profit
arising from
Strategies and
Solutions
Cost control
Management
Profit
Financial manage ment issues related to
Profitability
Sales revenue
Marketing
Issues and
strategies
Marketing
research
Target
Market
4 P
strategiesPrice
Place Product
Promotion
Profit may increase or
decrease owing to sales.
This is the outcome of
good or poor marketing
decisions
Cost of
goods sold
Opening
Inventory +
Purchases
less ending
stock
Liquidity
issues
Too much
Not enough
Stock
Storage
Ordering
Transport
J. I. T
Stocktakes
Two Bin
Method
Expenses
Selling
Marketing
Administration
Human
Resources
Financial
Rates of
interest
(borrowed
funds)
Bad Debts
(A/C
Receivable More efficient
management
of marketing
Employment
relations and
operations
These transactions are to be found in a business's Profit and Loss Statement Known as a Statement of Financial Performance
Expenses directly affect
the EFFICIENCY of a
Business
Calculations
Gross Profit
Margin
Net Profit
Margin
Return on
Equity
Fixed
CostsVariable
Costs
Cost centres
Len Nixon – Finance 20
Cashflow Management
Cashflow the problem Management Strategies to overcome potential cashflow problems
The example below represents a summary of a
cash in and cash out for a clothing store and
the cyclical flow of funds
Jan Feb Mar April May
2000 4000 -1000 -5000
Cash In 2000
0
22000 16000 16000 17000
Cash
Out
1800
0
19000 21000 20000 17000
Surplus/
shortag
e
+
2000
+4000 -
1000
-5000 -5000
Strategies to manage cashflow
Factoring
--------------------------------------------------------------------------------------------------------------
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--------------------------------------------------------------------------------------------------------------
--
Discounts for early payment
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
-----------------------------
Distribution of payments
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Other Strategies
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
-----------------------------
Outflow of cash for
stock purchased
Credit sales
Accounts Receivable
Receipt of cash
from credit sales
Len Nixon – Finance 21
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