Finance- Business Studies Hsc

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Strategic Role of Financial Management

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Financial management provides the link between what a business wants to achieve in the future and the resources that willbe needed to achieve these goals.

• The financial function relates to the allocation of resources in order to achieve the objectives most effectively. It requiresefficient planning.

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The four Objectives of Financial Management

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Profitability | Growth | E"ciency | Liquidity | Solvency

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Profitability

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Profit is the return to the business that results from its activities. Financial managers aim to ensure the revenue isgreater than expenditure (Profit). It is important because it allows businesses to attract new capital and loans (long-terviability)

Profitability involves either increasing revenues and or reducing costs.

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Growth

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Financial management aims at increasing the business size [sales revenue and market share] over the long term (growth).They do this by:

Managing asses to increase sales, profit and marketshare. Mergers, and diversification.

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Efficiency

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Ability of business to use resources effectively, ensuring financial stability and profit.

More output from same level of input, or same output at lower level of input.

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Liquidity

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Meet its short term financial commitments, converting assets into cash.

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Solvency

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Ability to reach longterm financial commitments (liabilities) or the percentage of debt in relation to equity.

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Influences on Financial Management

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Internal, External.

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Internal Sources of Finance

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Retained ProfitThey are the main internal source of financing. It is the profit from business activities that is left after taxes, interest anddividend payments. These profits are reinvested into the

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External Sources of Finance - Short

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Overdraft, Commercial Bills, Factoring,

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Overdraft

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Service provided by bank where the account holder can withdraw past the credit level of the overdraft accountinto a deficit for an agreed amount.These are often used to overcome a temporary cash shortfall.

Advantage: flexible business accounts can go into positive and negative figures at any time, allowing thebusiness to pay off short term [often seasonal] debts. i.e. Qantas has overdraft for several tens of millions ofdollars.

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Commercial Bills

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A commercial bill is a short-term loan from a bank or non-bank institution. It is typically for large loans of $100000or more for a period of 7 to 180 days. The borrower receives the money immediately and promises to pay thesum of money and interest at a future time.

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Factoring

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This is the sale of creditors (accounts receivable) balances to a factoring/finance company for a proportion of theirtotal value. The factoring company pays a lower price than value of accounts so that they can earn profit. To releasecash to finance operations, minimise credit control, pay off urgent expenses and recoup some of the baddebtlosses.

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Long term External Finance -

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Mortgage, Debentures, unsecurtd notes, leasing, equity, ordinary shares, private equity.

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Mortgage

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This is a loan secured by the property of the borrower (business). The property that is mortgaged cannot be soldor used as security for further borrowing until the mortgage is repaid. The interest rate can be variable or fixed.

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Debentures

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This is a long-term loan from investors. These are issued by a company for a fixed rate of interest and a fixedperiod of time. They can be secured or unsecured. Investors receive regular, fixed interest payments. When onecompany needs to raise large sums through debt finance it issues debentures by first issuing a prospectus andthen pooling money from investors.

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Unsecured Notes

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These are a form of long-term loans from individuals or institutions. Unlike most loans, they do not require collateral.This means that there is a greater risk for the lender, and therefore the business pays a higher interest rate.

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Leasing

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This is a source of borrowing that involves payment for the use of equipment or vehicles etc that is owned byanother party.The benefit of leasing a company car is that after a few years it can be changed for a newer modeland not have to be fully repaid.

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Equity

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This refers to the finance (cash) raised by a company by issuing shares to the public for purchase through theAustralian Securities Exchange (ASX). This involves giving individuals or institutions a share of the ownership ofthe business in return for funds.

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Ordinary Shares

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Investors pay funds to comppany in return for ownership, voting rights. Dividendes.

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Influence of Governement on Finance

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ASIC• ASIC is an independent government body that regulates and monitors the activities of companies to ensure relevantcorporate laws are followed.

• It aims to reduce fraud and unfair practices in financial markets.

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Global Market Influences - 3

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Economic Outlook, Availability of Funds, Interest Rates

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Interest Rates

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This is the cost of borrowing money.• In the modern era of globalisation, global market forces can affect domestic interest rates, which impacts on the abilityof firms to borrow.• If the Australian economy is perceived as a risky investment by the world market, Australian interest rates are likely torise.

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Processes of Financial Management

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Financial management is concerned with how businesses raise, use and monitor the use of funds employed. This meansplanning, monitoring and controlling the business’s financial position and

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Planning and Implementing

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Planning enables the business to operate more efficiently. It also gives the business more direction and assists in coordinatingactivities to achieve stated objectives.

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Budgets

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• Budgets plan expected costs and revenues of business activities over a set period of time.Budgets are necessary to obtain external finance.

They help identify threats and problems, such as potential cash shortages, allowing managers to develop strategies toovercome these challenges.

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Record Systems

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Record systems are the mechanisms employed by a business to ensure that data is recorded and the informationprovided by record systems is accurate, reliable, efficient and accessible.• Management bases its decisions on the accuracy and reliability of the record systems.

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Financial Risks

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Rise in interest rates- Increase in inflation- Increase in inflation

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Debt & Equity Financing

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Advantages of Debt : Increased funds leads to increased earnings and profits.

Flexible and readiliy available, tax deduction for interests payments.

Disadvantage: Expensive, high risk

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Equity Finance - pros n cons

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pros : Cheaper than equity due to no interest, less risk, lower gearing.

Cons : Limited