Finance 1

Finance 1

Strategic Role:
1. Finance is about the Analysis, Interpretation and evaluation of financial records
2. Strategic role of finance is Making sure that your financial stability in the long-run is maintained in your business
  1. Otherwise the business will suffer from low cash flow, not enough money in bank, cant invest, can't pay staff, Can't pay suppliers e.c.t
3. Objectives of Financial Management (PLEGS)
  1. Profitability: Money left over once all expenses are paid.
  2. Liquidity: Ability to pay short-term debts
  3. Efficiency: How much total revenue is spent on expenses
  4. Growth: the size of business compared to competitiors
  5. Solvency: Ability to pay long-term debt
Influences:
1. Internal Finance sources
  1. Owners capital (own money, inheritances e.c.t)
  2. Retained Profits: Net profit reinvested)
  3. Selling unwanted capital: company car e.c.t
2. External sources of finance
  1. Debt;: (Loans/Borrowed money from financial institution and you pay interest)
    1. Short
      1. Overdraft: your bank balance goes below 0 and the bank borrows you money. Very expensive
        Make sure that in an exam when talking about strategies make sure the company is not abusing its overdraft because if it is then they are not being financially responsible
      2. Commercial Bill: a written loan of money brorrowed from another person/account that has extra funds. Have to repay on a certain date at a certain rate. Cheaper then overdraft
      3. Factoring: sell accounts recievable to a factoring company at a discounted rate. they pay you instantly but is a less amount
    2. Long term
      1. Mortgage: Bank borrowing and then paying back both the full amount and interest. Usually need a assest so if you dont pay back they come take housse or whatever
      2. Debentures: Business leads another business money for a fixed time, rate and amount. can be issued publicaly on the stock exchange or privately
      3. Unsecured Note: Notes issued by a finance company but is unsecured so if you go bankrupt they can't their get money back and thus is a high rate of interest
      4. Leases: rent item on a agreement at a fixed amount and tax deductable. but doesn't count as asset cause you don't own it
  2. Equity: (Shares/Ownership)
    1. Private: shares sold to private investors. Don't have to pay back evidence until later profit is made
    2. Public: sold through shares
      1. New issue: first time being issued on the stock exchange
      2. rights issue: existing shareholder in the business is offered more shares
      3. Placement: place certain shares into a certain shareholder that you choose. fast-can happen in less then 24h and can raise a lot of money
      4. Share purchase plan: offering existing shareholders up to $5,000 in new shares
3. Financial Institutions: Bank, Investment bank, life insurance firms, super funds, unit trust, ASX
4. Government: Fiscal/monetary police, ASIC, Company tex
5. Global Marketplace: Exchange rates, interest rates
Processes
1. Planning and Implementing
  1. 1st - Determining what your financial needs are
    1. 2nd - create budgets to plan financial figures, Threats and opportunities. Allow to compare actual vs planned results later on
      1. 3rd - set up record systems to record revenue, payment, taxes
        4th - assess financial risks and make sure your financial strategy matches your goal
        5th - Put in financial controls to ensure that objectives are achieved
2. Financial processes in debt and equity
  1. using a MATCHING PRINCIPLE. whether you are using debt financing or equity financing you use the matching principle to ensure the right type of debt is matched with the right length of loan
3. Monitoring and controlling
  1. Cash flow statement
    1. CALCULATION: opening balance + cash in - cash out = closing balance
      1. Closing balance for a month will normally be opening balance for next month
        Negative Balance: the company does not have enough money to pay for its financial stability meaning they are not liquid (Can not pay the debt in short-run)
  2. Income Statement
    1. CALCULATION: revenue - COGS = gross profit. then Gross profit - expenses = Net profit
  3. Balance Sheet
    1. Current and Non-current assets are = to current and non-current liabilities and owners equity
4. Ratios/Formula
  1. Liquidity
    1. Name: Current ratio
      1. Formula Current assets over current liabilities
        source: Balance sheet
        what it shows: financial stability in the short run, can a business pay its bills on time
        1:1 too risk. Means for every $ in an asset we have a $ in liability. what happens if a unexpected bill comes in? we cant pay for it
        4:1 is inefficient. having lots of money sitting in bank and not investing in more profitable experiances
        2::1 stable position
  2. Solvency
    1. Name: debt to equity ratio
      1. Formula: Total Liabilities over owners equity and then that number x 100
        source: Balance sheet
        what it shows: The financial stability in the long term and shows a risk to investors
        If we are relying heavily on loans, debt loans other people financing the company it shows ther is a high risk that the company can go backrupt
        High = more unstable
  3. Profitability
    1. Name: Gross profit
      1. Formula: Gross profit over revenue and that number then x 100
        Source: income statement
        what it shows: for every $ of sales how much GP does the business make
    2. Name: net profit
      1. Formula: Net profit over revenue and that number x 100
        source: Income statement
        what it shows: for every $ of sales how much NP does the business make
    3. Name: Return on Owners equity
      1. Formula: Net profit over owners equity and that number x 100
        source: Income statement and balance sheet
        what is shows: How much $ owners receive for investment
  4. Operating Efficiency
    1. Name: expenses ratio
      1. Formula: total expenses over revenue and that number times 100
        source: Income statement
        What it shows: Higher expenses = inefficient
    2. name: accounts receivable turnover ratio
      1. Formula: sales over accounts recievable and that number x 100. Then 365 over that number
        source: Income and balance sheet
        Higher number of days = inefficient and leads to other problemes
Strategies
1. Cash flow managment
  1. Use a budget to ensure that businesses have enough money throughout the year
    1. way to do this and avoid nagative balances is to:
      1. Distribute payments: Spread large, predictable expenses over the whole year to create even outflow over time e.g insurance one month and electricity
      2. Discounts for early repayments: offer discounts to companies that pay you early on accounts receivables
      3. Factoring: Get a company to buy accounts receivables at cheaper rate but get funds immediately
  2. Overdrafts
    1. Enable a business to overcome temporary cash shortages
    2. relative cheap sources of finance (interest charged is usually less than a loan)
    3. However bank charges need to be monitored and businesses need to have policies for using bank overdrafts
2. working capital managment
  1. Making sure current assets is greater than current liabilities
    1. HOW
      1. Control current assets. Do this by making sure you have:
        Cash: sales and leaseback of NCA (Cards/machines)
        Receivables: Bad debts/write off requires factoring, credit limits, discounts, send reminders, reduce time to pay back and refuse those who don't pay
        Inventories: too much investment - long term to sell back, thus at cheaper rate - requires security, accurate records and better predictions
      2. Control current liabilities. do this by making sure you
        Payables: Stretch accounts - pay on last day to use money in other investments
        Loans: Compare costs/terms of loans, matching needs with costs
        Overdraft: Ensure cash is received before spending,
      3. sales and lease back
        sell non-current assets to provide cash injection, but then lease them back on monthly repayments
3. Profitability management
  1. Maximise difference between revenue and costs
    1. HOW
      1. Cost controls
        Fixed and variable: Reduce labour and input costs, outsourcing non-core functions, reduce waste, negotiate discounts, JIT
        Cost centres: has own budget to monitor and minimise waste and maximise resources - helps identify improvement areas and sets budgets to fix it
        Expense Minimisation: find area which contributes highest costs, and minimise them first via budgets, reducing cash ourflow
      2. Revenue controls
        Marketing objectives: ensure plans to achieve sales revenue via forecasts, sales mix, pricing policy
        Adjust prices: accourding to demand, overstocking, quantity sold to maximise revenue in any situation
4. Global financial managment
  1. Exchange rates: value of country's currency calculated against another
    1. influence profits, prices and stability of business (is always uncertain/changes)
    2. Impacts of appreciation/depreciation when exporting/importing
  2. Interest rates: costs of borrowing money
    1. Rate volatility, risk, banking technologies, different laws
    2. Impacts of higher/lower interest rates domestically and overseas
  3. How to resolve
    1. Methods of international payment
      1. Payment in advance: payment received before goods sent - least risk for exporter
      2. Letter of credit:
      3. Bills of exchange: seller provides written order requesting amount at time when offical shipping document are recieved
      4. Clean payment: goods sent before payment received - most exporter risk
    2. Hendging: enter contracts using one single currency - Aus/China = USA - even out
    3. Derivative: Forward exchange (future rate/date), currenct option (buy/sell spot rate), swap contract (use the same, agreed upon rates to swap currency)

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