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38 Cards in this Set

  • Front
  • Back
Financial Planning and Management
Role of Financial Planning
• The Role of Financial Management
• Financial planners must estimate the cost of business activities, cost and allocate resources
and make decisions on funding options.
Objectives of Financial Management
• Increase dividends to shareholders
• Maintain environmentally friendly organisation
• Prepare financial reports
• Main roles: liquidity, profitability, efficiency, growth and return on capital
• The Planning Cycle
• Addressing the present financial position
• Determining the financial elements of the business plan - balance sheet, ratios, etc.
• Developing budgets - statement of resources allocated to specific areas in the business
• Planning cash flows - forecast inflows and outflows to ensure debts can be paid
• Preparing financial reports
• Interpreting financial reports
• Maintaining record systems - mechanism used to ensure all data is accurate, reliable and
efficient.
• Planning financial controls
• Minimising risk and loss
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Financial Markets Relevant to Business Financial Needs
• Major Participants in Financial Markets
• Banks - largest provider of funds to businesses
• Finance companies - get funds by issuing debentures to the public, provide short to medium
terms funds to business.
• Insurance companies - provide payment if a future event occurs
• Merchant banks - get funds from short term borrowing, lends mainly to large corps.
• Superannuation - get funds from people preparing for retirement
• Companies - have surplus funds from operations and invest funds into money market
• Government - ensures gaps in supply of funds are filled
• Role of the Australian Stock Exchange
• Allows new businesses to raise necessary capital
• Designed for individuals and institutions to invest their savings
• Allows businesses to exchange ownership of other businesses
• Governed by uniform rules and regulations
• Overseas and Domestic Market Influences
• Technological developments
• Globalisation of financial markets
• Taxation, GST, capital gains tax
• Commodity prices
• Risk management securities
• Share ownership & accounting standards
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Management of Funds
• Sources of Funds
• Internal
• Owners equity - funds contributed by the owners of the business
• Retained profit - all profit kept within the business
• External
• Bank overdraft - bank allows the business to exceed their current balance up to a certain
agreed level
• Bank bills - bill of exchange given for large amounts in short term
• Mortgages - loan secured by the property of the borrowers
• Debentures - issued by a company for a fixed amount and a fixed rate of interest
• Leasing - involves payment of money for use of equipment owned by another party
• Factoring - Selling of accounts receivable for a discounted price to a finance company
• Venture capital - funds supplied by private investment org for innovative / new ideas
• Grants - funds given by the government to promote business and ideas
• Financial Considerations
• Set-up costs
• Interest costs
• Availability of funds
• Flexibility of funds
• Level of external control
• Match the terms and source of finance to the business purpose and structure
• Debt and Equity Financing
• Short term debt expenditure by short term finance
• Long term finance funded by long term finance
• Debt financing
• Provides tax deductible interest payments
• Loan has to be repaid
• Provider of finance don’t own part of the business
• Equity financing
• No interest payable
• Non-Tax-Deductible payments must be made
• Providers of finance own part of business
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Using Financial Information
• The Accounting Framework
The Accounting Framework
• Provides most of the information for the decision making process
• Financial statements
• Revenue statement - summarises the activities of an organisation over a period of
time, showing operating results and revenue.
• Balance sheet - represents an organisation’s assets and liabilities at a point in time
• Accounting equation - shows the relationship between assets, liabilities and owners equity.

Assets = Liabilities + Owners Equity
Types of Financial Ratios
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Liquidity
the ability of an organisation to pay its debts as they fall due

Current Ratio = Current Assets / Current Liabilities
Solvency
the extent to which the business can meet it’s long term financial commitments

Debt to Equity = Total Liabilities / Owners Equity
Profitability
the economic performance of a business and indicates the capacity to use
it’s resources to maximise profit.

Gross Profit Ratio = Gross Profit / Revenue

Net Profit Ratio = Net Profit / Revenue

Return on Equity = Net Profit (After Tax) / Owners Equity
Efficiency
The ability of a firm to use it’s resources effectively in ensuring the financial
stability and profitability of the business.

Expense Ratio = Expenses / Revenue

AR Turnover Ratio = 365 / ( Revenue / AR )
Comparative Ratio Analysis
Used to indicate trends, strengths, weaknesses and relationships between financial items
• Time comparison - compares current period to prior financial periods
• Industry average - business results are compared to industry averages
Limitations of Financial Reports
Historical costs - process of valuing the business assets by their cost at the time the
transaction took place
• Value of intangibles - rights, rather than objects, not generally recorded on the balance
sheets unless the business has been or will be purchased.
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Effective Working Capital (Liquidity) Management
Working Capital Ratio
Capital Ratio
WC Ratio = Current Assets / Current Liabilities
Control of Current Assets
Cash controlled using budgets, which detail expected inflows and outflows
• Accounts receivable controlled using credit checks on borrowers, and offer incentives for
early payment while using factoring as a last resort.
• Inventory controlled by detailing acceptable inventory policies or JIT if suited.
Control of Current Liabilities
• Accounts payable are controlled by paying as late as possible and choosing suppliers carefully
• Incorrect use of overdrafts can cost money in high interest payments
• Short term loans should be controlled by planning borrowing carefully and finding alternate
sources of finance.
• Strategies for Managing Working Capital
Factoring - Improves working capital by selling accounts receivable to a third party
• Sale and lease back - selling an asset to a lessor and leasing it back through fixed payments.
• Leasing - hiring of an asset owned by another company or person who has purchased the
asset and retains ownership.
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Effective Financial Planning
• Effective Cash Flow Management
...
Cash flow statements
financial statements indicating the flow of cash resulting from
transactions
Management Strategies
• Distributing of payments - involves spreading payments over a period of time to coincide
with surpluses of cash
• Discounts for early payments - business provides a percentage reduction from the
purchase price if the buyer pays within a certain period of time.
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• Effective Profitability Management
• Cost Control
• Cost centres - departments in a business to which costs can be directly attributed
• Expense minimisation - improves competitive position of the business while maintaining
production levels, e.g.. downsizing.
• Revenue Controls
• Sales objectives - set objectives in revenue budgets by forecasting sales
• Sales mix - the range of products offered for sale, financial managers need to analyse
the breakdown and contribution margins for each product.
• Pricing policy - The aim is to protect or increase market share while meeting profitability
objectives, managers have to ensure products are correctly priced.
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Ethical and Legal Aspects
• Audited Accounts
• Independent check of the accuracy of financial reports / records and accounting procedures
• Inappropriate Cut Off Periods
• A business incorrectly matches the period in which revenues occur with when major outflows
occur
• Misuse of Funds
• Business funds are used for purposes other than originally delegated
• Australian Securities and Exchange Commission
• Enforces and administers corporations law and protects consumers in the areas of investments,
superannuation, life insurance, etc.
• Corporate Raiders
• The process of buying an undervalued company and increasing profit or selling off the
businesses assets.
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