Business Studies HSC Lectures

Len Nixon – Finance © 1

Business Studies

HSC Lectures



What

How


The role of Financial Management – Plan and control to ensure there is sufficient finance to meet the financial needs of the business

Vision

Mission Statement

Long term Goals

Objectives

Strategies Marketing, HR

Operations

Financing decision- INFLOW of FUNDS Source of finance-Debt and or Equity

Financial objective: Solvency

OUTFLOW of funds 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 OUTFLOW of funds

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.


Role of financial management

Objectives of financial management Interdependence with other key business functions Financial Objectives. Profitability___________________________________________________ Liquidity _____________________________________________________ Solvency _____________________________________________________ Efficiency ____________________________________________________ Growth _____________________________________________________ 2016- HSC Sue is a sole trader whose business is growing rapidly as sales are increasing. As a result of the growth, she needs to purchase stock worth $10 000. Explain a potential conflict between a short-term and a long-term financial objective for Sue. _________________________________________________________ _________________________________________________________ _________________________________________________________

Profits Decreasing Expense Increasing

Accidents Increasing Disputation Increasing

Using the above information, Explain the interdependent relationship between finance and human resource management _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________


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

Know the syllabus- Learn about – Roles + Influences + Processes

• Make the link from influences and to the role. • But sources of funds will affect the financial statements such as Balance

Sheet, Income sand cashflow statements and have implications for solvency and efficiency ratios

Case study material – they require depth not just acknowledgement

Processes Fin Statements

Ratios


Answering the question

1. What type of finance is use?

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 ___________________________________________________________

Sources of finance

Internal - Equity External - Debt


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 _________________________________________________________

4 Type ___________________________________________________________ Cost ___________________________________________________________ Source _________________________________________________________ Purpose ________________________________________________________________


Financial Management consequences of using debt – effects upon RATIOS 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 site


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

Financial institutions – intermediaries operating in a range of finance markets Banks _______________________________________________________________ Investment Banks ____________________________________________________ Finance companies __________________________________________________ Australian Securities Exchange _________________________________________ Insurance companies’ __________________________________________________ Superannuation Funds_________________________________________________ Unit trusts__________________________________________________________




Government and Global market influences. . 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

Influence Effect on processes- ratios Effects on fin objectives

ASIC – fraud and unfair practices

Company Tax – is an expense

Reserve Bank Australia – interest rates

Global Outlook – Demand for G&S increases

Availability of Funds- availability

Global interest rates- comparative


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 Auditors have discovered that the value of legal fees paid has been included in the asset value of a new warehouse purchased by a business. What limitation of financial reports does this show? (A) Capitalised expenses (B) Debt repayments (C) Normalised earnings (D) Timing issues

Why are ethical considerations play a role in the valuing of current assets such as

• Accounts Receivable • Inventories

What is Capitalising expenses means? Issues with debt payment


Ratio Formula Calculation Interpretation

Processes of financial Management Financial Ratios

Direct Links Sales generated = Marketing Advertising = Marketing Cost of Goods Sold = Operations Franchise Fees = Operations Rent = Operations Wages = Human Resources


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)

Liquidity Industry Average 0.75:1

Current Assets Current Liabilities

Gearing 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


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

What is required?


found in

Types

Problems Solutions

SolutionsProblems

Problems Solutions

Liquidityability to pay short

term debts

Balance Sheet

Current Assets

Current Liabilities

Types of short term

debt

SourcesBanks

Finance Companies

Large Companies

Bank Overdraft

CalculatedCA/CL

Accounts Payable

Credit Card

Bank Bill

Cash

Stock/Inventory

Accounts Receivable

StorageTransportInsurance

Costs

J.I.TStocktakes

Two Bin method.

Cash Budgets

Too much or

Too little

Poor credit policiesClerical

problems High

Acounts Receivable Turnover

Age accounts

FactoringCash onlyDiscounts

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 ie

Financial Objective

Financial management strategies



Revenue inflowInfluenced by

Sales obj ectivesPricing policy

Determined by

Market Segmentation

Good and poor management centres on the purchase of

stock

Problems and Costs

Solutions

OutflowCost control

Outlays to generate revenue and profit

arising from

Strategies and Solutions

Cost controlManagement

Profit

Financial manage ment issues related to Profitability

Sales revenue

Marketing Issues and strategies

Marketing research

TargetMarket

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

StorageOrderingTransport

J. I. TStocktakes

Two Bin Method

Expenses

Selling Marketing

AdministrationHuman

Resources

Financial

Rates of interest

(borrowed funds)

Bad Debts(A/C

Receivable More efficient management of marketingEmployment 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

CalculationsGross Profit

MarginNet Profit

Margin Return on

Equity

Fixed Costs Variable

Costs

Cost centres




2016 HSC What is required? • Syllabus knowledge • Processes + strategies

• Verbs •


Possible report question

Objective 2016 2017 Liquidity 2.1 1.1 Efficiency 45% 65%

Net Profitability 55% 30% Solvency 100% 250%

What role do objectives play in the financial management of a business? Evaluate the financial positon of the business Recommend an appropriate set of profitability and liquidity strategies financial strategies




Documents

Business Studies HSC Lectures