Lesson 1 - business

FINANCE

FINANCE

LESSON 1

Strategic role of finance

Increasingly the role of finance is strategic

Compiling financial reportsBalance Sheets, Income Statement, Cash Flow

Statement

Collecting financial data

Sales data, expense data on things like wages, cost of

buying raw materials

Regulatory compliance

Requirement to obey the laws

Link between objectives and

resourcesAchieving future goals

requires resources

Corporate Governance

The rules, practices and processes by which a business is managed

Lesson 1

Lesson 1

FinanceIn this lesson you will learn:

✓ The role of finance in a business

✓ The increasingly strategic role

✓How to write a short response on the strategic role of finance in a business

Before you begin, recall the work you have done on the strategic role of operations and marketing.

Every business function works toward one key goal and that is providing superior value to the customer. You will recall that the operations function provides superior value for the customer by either manufacturing the product, or delivering the service, more cheaply than competitors (this is called cost leadership), or by differentiating the product so that the extra benefits provide the customer with superior value.

In marketing the marketing mix is used to deliver superior value to the customer.

Now test yourself on the role of operations and marketing!

STRATEGIC ROLE OF FINANCIAL MANAGEMENT

USE THE GLOSSARY!

1. superior value

Superior value means the product offers greater value to the customer compared to competing products. Coles milk, for example is cheaper than competing products, Apple’s iPhone offers better design.

2. differentiating

Differentiating is an operations strategy to provide superior customer value by adding benefits to the product that appeal to the customer. These benefits might be design or superior performance. The Apple iPhone is an example of a differentiated product.

Lesson 1

Are you ready?

Review 1.1 Test your knowledge on the operations role

Check Answer

Which of the following businesses is implementing a cost-leadership strategy?

A. Apple Inc

B. Coca Cola Amatil

C. David Jones

D. Kmart

Review 1.2 Test your knowledge on the role of operations

Check Answer

Which of the following best describes a situation where a business attempts to have the lowest expenses in an industry?

A. Cost leadership

B. Good/service differentiation

C. Service differentiation

D. Social responsibility

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Review 1.3 Test your knowledge of the role of marketing

Check Answer

Which of the following best describes the role of marketing?

A. Selling and advertising

B. Persuading customers to buy a product

C. Communicating effectively with customers

D. A process to provide customers with superior value

Review 1.4 Test your knowledge of the role of marketing

Check Answer

Which of the following best describes the role of marketing?

A. Finding customers

B. Distributing goods and services

C. Advertising the business’s products to customers

D. A process to provide the link between a business and its customers

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Strategic role of financial management

The strategic role of financial management is a little more complex than the role of operations management and marketing management. This is because it has changed in recent years.

A few years ago the role of financial management was focused on data collection and compiling the financial reports such as the Cash Flow Statement, Balance Sheet and Income Statement. You will remember these from the Preliminary course.

The Income Statement is a powerful tool to monitor progress toward the financial goals of a business. EBIT (Earnings before Interest and Tax) comes from this report and EBIT is a key goal for all businesses. The Balance Sheet is important because it gives an insight into how the assets a business uses to conduct its operations were financed - either by the owners contributing the money or by the money being borrowed. The Cash Flow Statement enables the management team to monitor the inflow and outflow of cash from the business.

Another important role of finance is to provide a link between what a business wants to achieve in the future and the resources needed to achieve those objectives. This is a strategic role because the finance function needs to provide these resources in an environment that is dynamic where things like consumer confidence and interest rates are constantly changing

Movie 1.1 Miss Castellino introduces the lesson

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The current role of financial management is much more strategic.The Chief Financial Officer (CFO is almost always a member of the senior management team and is a source of advice on things like risk assessment, growth strategies and how the strategies will be financed, asset management and most importantly in todays financial management corporate governance and regulatory compliance.

Another way the finance role is becoming more strategic is the trend to directly contribute to the superior value of the product. Renault and Toyota often offer low interest rates when certain car models are sold. Typically the interest rate is about 2% when the rate people generally pay is about 10%. When you consider most people borrow to buy a car the low interest rate contributes strongly to the customer’s perception of superior value.

Other businesses, such as Harvey Norman, partner with GE Finance to provide “no deposit, no interest” loans to customers and these too are perceived by many customers to add value to the products they buy. (Be careful if you take up these loans! If the loan is not repaid in the time period the interest rate on the outstanding balance may be as high as 29%.)


Corporate governance is about good decisions being made by the right person and is not just the domain of companies – small businesses need corporate governance too.

A good structure will allow you to ensure that the start-up of your business occurs smoothly, with minimal confusion about responsibilities. As this can have many flow-on benefits to your business, it’s worthwhile considering how to implement a corporate governance structure best suited to your business.

If you’re looking to grow your business, established systems and processes will ensure that your growth occurs smoothly and that important decisions are made in minimal time.

Here are a few things to consider when setting up your governance structure:


Corporate governance is about good decisions being made by the right person and is not just the domain of companies – small businesses need corporate governance too.

A good structure will allow you to ensure that the start-up of your business occurs smoothly, with minimal confusion about responsibilities. As this can have many flow-on benefits to your business, it’s worthwhile considering how to implement a corporate governance structure best suited to your business.

If you’re looking to grow your business, established systems and processes will ensure that your growth occurs smoothly and that important decisions are made in minimal time.

Here are a few things to consider when setting up your governance structure:

This is a scrolling sidebar. Read the information by moving the scroll bar down. Write in your notebooks THREE things it is recommended businesses do if they are to improve corporate governance.The information here comes from the Australian government on the website www.business.gov.au

http://www.business.gov.au

http://www.business.gov.au

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Strategic role of finance

Much more than collecting data

Providing the resources needed to

achieve future goals

Collecting financial data

Sales, cost of making the sales, expenses in running

the business

Regulatory complianceRequirement that

businesses obey the corporation laws

Compiling the financial reports

Cash Flow Statement, Balance Sheet and Income

Statement

Corporate governance

The way a business is managed - need for

honesty and transparency

Mind maps are a valuable tool to memorise main ideas.

Mind maps are really helpful!Use the mind map to help you construct the three paragraphs required for this short response

Interactive 1.1 Writing a short response

This is an HTML widget - click on edit HTML and then write the 15 lines. Use the email facility to

Interactive 1.2 Did this lesson work for you?

It is most important you give us feedback if we are to improve.

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Lesson summary

Strategic role of finance- more complex than operations

Traditional role- collects the raw data for the financial

reports

- compiles the financial reports, Cash Flow Statement, Income statement and Balance Sheet

Now strategic role

Corporate governance- advice to management team on how to

finance resources needed in the future

- stress importance of transparency

Regulatory compliance- increasingly importance

- requirement to obey the corporation laws

- corporation laws enforced by ASIC

Introductory paragraph

Sets out where the response will go: 2

aspects, traditional role and more strategic role

Strategic role- advising management

team

- - financing assets, corporate governance, regulatory compliance

Writing the short responsePlan your ideas. Set out

the key idea for each paragraph. How are they

linked?

Traditional role - collecting the raw data- compiling the financial

reports

Movie 1.2 Miss Castellino sums up - this will be full screen

Balance Sheet

The Balance Sheet shows a financial picture of the business at a particular point in time. It also shows the way the assets in the business have been financed - that is, where the money came from to buy them. The Balance Sheet is also a most important monitoring and controlling tool.

Related Glossary Terms

Index

Chapter 1 - Strategic role of Financial Management

Drag related terms here

Find Term

Cash Flow Statement

The Cash Flow Statement is a summary of cash coming into the business and cash going out of the business for a set time period. The time period is typically the accounting period, which in turn is typically a year.


Index



Find Term


Corporate governance refers to the system of rules, practices and processes by which a business (particularly a company) is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company. These include its shareholders, management, employees, customers, financiers, government and the broad community.


Index


Differentiating, Regulatory compliance

Find Term

Cost leadership

Cost leadership is an operations strategy designed to manufacture the business’s products, or deliver its services, at a lower cost than any business in the industry. Walmart is a typical example and Kmart is now following the Walmart example.


Index



Find Term

Differentiating

Differentiating is an operations strategy to provide superior customer value by adding benefits to the product that appeal to the customer. These benefits might be design or superior performance. The Apple iPhone is an example of a differentiated product. The superior design and initially technology such as the ‘touch screen” enable Apple to charge a higher price. Customers pay this price because they consider the differentiation provides superior value.


Index



Find Term

EBIT

EBIT stands for Earnings Before Interest and Tax. It gives a better insight into the profitability of the business because net profit can be distorted by interest payments and tax. EBIT is a great way of monitoring the progress of a business from year to year.


Index



Find Term

Income Statement

The income statement presents a summary of the operations of a business for a given period of time, usually a year. The summary includes the value of the sales made during the period, the cost of making those sales and the expenses incurred in running the business.


Index



Find Term

Marketing

Marketing is a process in which a business creates value for its customer (in the form of a product or service) and builds strong customer relationships which, in turn, provide a continuing profitable relationship with the owners of the business.


Index



Find Term

Marketing mix

Is the way the Ps, product, price, promotion, place, people, processes and physical evidence are combined to provide the superior value in the product and develop the long-term relationship with the customer.


Index



Find Term

Operations

Operations is the function of business that makes the product or delivers the service to the customer. The operations function at Coca Cola Amatil, for example, manufactures the cans and bottles you purchase. When you withdraw money from an ATM the operations function of your bank provides the service


Index



Find Term

Regulatory compliance

Regulatory compliance refers to a business’s requirement to obey the corporation laws, guidelines and specifications relevant to its business. Violations of regulatory compliance regulations often result in legal punishment, including large fines.


Index



Find Term

Superior value

Superior value means the product offers greater value to the customer compared to competing products. Coles milk, for example is cheaper than competing products, Apple’s iPhone offers better design.


Index



Find Term

Documents

Lesson 1 - business