13080827
Description
Flashcards by Ethan Reid, updated more than 1 year ago
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Created by Ethan Reid
about 6 years ago
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| Question | Answer |
| Role of Financial Management | - Strategic Role of Financial Management - Objectives of Financial Management - Interdependence with Other Key Business Functions |
| Strategic Role of Financial Management | The strategic role of financial management is to ensure the business achieves its long term goals and objectives, through the planning and monitoring of its' financial resources. |
| Objectives of Financial Management | - Liquidity - Profitability - Efficiency - Solvency - Growth - Short-Term - Long-Term |
| Liquidity Objective | The capacity of a business to meet its financial commitments in the short-term. (Less than 12 Months) |
| Profitability Objective | The ability of a business to maximise its profits. |
| Efficiency Objective | The ability of a business to use its resources effectively, in ensuring financial stability and profitability. |
| Solvency Objective | The capacity of a business to meet its financial commitments in the long term. - Gearing is the proportion of debt finance to equity finance used to fund the businesses' activities. |
| Growth Objective | The ability of a business to expand in the long-term. |
| Short-Term Objectives | The tactical (1-2 years) and operational (day-to-day) plans of a business. Reviewed regularly to see if targets are being met. |
| Long-Term Objective | The strategic (long-term) plans of the business. Tend to be broad goals. Set for a fixed time period (usually 5 years). Reviewed annually |
| Interdependence with Other Key Business Functions | Interdependence refers the mutual dependence, key business functions have on each other. They rely on each other to ensure the business achieves its overall goals and objectives. |
| Influences on Financial Management | - Internal Sources of Finance - External Sources of Finance - Financial Institutions - Influence of Government - Global Market Influences |
| Internal Sources of Finance | - Retained Profits - Owners' Equity/Capital |
| Retained Profits | Are profits which are not distributed as dividends, but instead kept in the business and used as a source of finance. |
| Owners' Equity / Capital | Owners' equity of capital are the funds contributed to the business by the owners and/or parters to establish and/or build the business. |
| External Sources of Finance | - Debt Finance (Short & Long Term) - Equity Finance |
| Short-Term Debt Finance | - Overdraft - Commercial Bills - Factoring |
| Overdraft | An overdraft is a short-term loan given by banks to an individual or business to overdraw on their account up-to an agreed limit and for a set period of time. It is used to overcome temporary cash short-falls and usually incurs a high interest rate. |
| Commercial Bill | A commercial bill is a short-term loan issued by finance institutions for larger amounts (usually over $100,000) for a period generally between 30 to 180 days. |
| Factoring | Factoring is the selling of a businesses' accounts receivables to a finance or specialist factoring company at a discount price in exchange for immediate cash. Boosts working capital, but may affect profitability. |
| Long-Term Debt Finance | - Mortgage - Debentures - Unsecured Notes - Leasing |
| Mortgage | A mortgage is a long-term loan issued by banks, that is secured against the business's assets (collateral). Usually used to purchase property, equipment, etc. (Non-Current Assets) |
| Debentures | Debentures are long-term contracts issued by companies, in order to borrow money from investors for a fixed rate of interest and for a fixed period of time. |
| Unsecured Notes | An unsecured note is a loan from investors for a set period of time. They are not secured against the business's assets. Incurs and extremely high rate of interest. |
| Leasing | Leasing is the long-term borrowing of an asset that is owned by another person or business in exchange for payment to use the asset. |
| Equity Finance | Ordinary Shares: - New Issues - Rights Issues - Placements - Share Purchase Plans - Private Equity |
| New Issues | New issues are securities that have been issued and sold for the first time on a public market. |
| Rights Issues | The right given to current shareholders to purchase more shares in the same company in proportion to how many shares they hold. |
| Placements | Issue of shares offered to specific investors at a discount. |
| Share Purchase Plans | Offer to existing shareholders to purchase more shares with a discount and without brokerage fees. |
| Private Equity | Money invested in a private company, not listed publicly. |
| Financial Institutions | - Banks - Investment Banks - Finance Companies - Life Insurance Companies - Unit Trusts - Superannuation Funds - Australian Securities Exchange |
| Banks | Banks are financial institutions that provide both short-term and long-term loans to businesses. Short-Term: Overdraft Long-Term: Mortgage Supervised by the Reserve Bank of Aus. |
| Investment Banks | Investment banks are a financial institution that provides services in borrowing and lending to the business sector. |
| Finance Companies | Financial companies are non-bank financial institutions that offer a range of secured and unsecured loans. Mainly deal with small commercial finance. Regulated by the Australian Prudential Regulation Authority (APRA). |
| Life Insurance Companies | Life insurance companies are also non-bank financial intermediaries that provide equity and loans to the corporate sector. |
| Unit Trust | Unit trusts are funds taken from a large group of small investors and put into a trust fund. The trustee then invests this money into financial assets. |
| Superannuation Funds | Superannuation funds are able to invest the contributions of members into a range of financial assets. Becoming popular due to tax incentives. Superannuation contributions are compulsory |
| Australian Securities Exchange | Is the primary stock exchange group in Aus. Acts as a primary market as it enables companies to issues shares publicly. Acts as a secondary market as it allows investors to trade pre-owned shares. |
| Influence of Government | - Australian Securities and Investments Commission - Federal Company Taxation |
| Australian Securities and Investments Commission | ASIC is an independent government body which enforces and administers financial legislation such as the Corporations Act 2001 (Cwlth). Ensures companies do not participate in illegal activity. |
| Federal Company Taxation | Federal company taxation is a tax which all Australian incorporated business have to pay on their profits. It is levied at a flat rate of 30% of their net profit and must be paid before dividends are distributed. The % of this tax is slowly being reduced to make Aus businesses more competitive. |
| Global Market Infliences | - Global Economic Outlook - Availability of Funds - Interest Rates |
| Global Economic Outlook | Global economic outlook refers to the projected changes to the level of economic growth of individual economies globally. Positive outlook = Increase in exports Negative outlook = decrease in exports |
| Availability of Funds | Availability of funds refers to the ease in which a business is able to access funds (for borrowing) on the international financial market. |
| interest Rates | Interest rates is the cost of borrowing money internationally. Each country will have their own interest rates. The higher the risk, the higher the rate. |
| Processes of Financial Management | - Planning and Implementing - Monitoring and Controlling - Financial Ratios - Limitations of Financial Reports - Ethical Issues Relating to Financial Reports |
| Planning and Implementing | - Financial Needs - Developing Budgets - Record Systems - Financial Risks - Financial Controls |
| Financial Needs | Determining financial needs is the first step of the financial planning process. Needs will be determined by the business's current position. |
| Developing Budgets | A budget is a financial plan for a set period of time. Developing budgets allow businesses to budget for production, employment, etc. it enables constant monitoring of progress and shows problem areas. |
| Record Systems | Record systems are the mechanisms used to record inform the expenses/revenue of a business in a way that is legal, accurate and reliable. The 'double entry' system is an important control aspect as it minimises mistakes and improves accuracy of reports. |
| Financial Risks | Financial risks is the possibility of a business not being able to cover its financial obligations, such as debt. To minimise risk, a business must consider whether profit as a result of borrowing is enough to cover repayments. |
| Financial Controls | Financial controls are tools such as policies and procedures that ensure that the plans of a business will be achieve in the most efficient way. |
| Advantages of Debt Finance | - Interest is tax deductible - Profits are not shared with lender - Funds are usually readily available |
| Disadvantages of Debt Finance | - Funds must be paid back - Interest also must be paid - Regular repayments must be repaid - Loan is usually secured against the businesses assets |
| Advantages of Equity Finance | - No interest or repayment - No impact on risk - Dividend payments are flexible - Greater potential for growth |
| Disadvantages of Debt Finance | - Dividends not tax deductible - Diluted ownership - Lose proportion of profits |
| Matching Terms and Sources to Business Purpose | Considerations for finance are current business positions. Matching principle: term and source of finance should match business purpose. Inefficient to buy a short-term asset with a long-term loan. |
| Controlling and Monitoring | The main financial controls are: - Cash Flow Statement - Income Statement - Balance Sheet |
| Cash Flow Statement | Financial statements that indicates cash receipts and cash payments over a period of time. Usually split into 3 categories: operating, investing and financing activities. |
| Income Statement | Financial statement shows sales, COGS and expenses, which indicates both gross and net profit over a period of time. Gross Profit = Sales - COGS Net Profit = Gross Profit - Expenses |
| Balance Sheet | The balance sheet shows the assets, liabilities and equity of a business at a particular point in time. Assets = Liabilities + Owners Equity |
| Financial Ratios | - Liquidity Ratio - Solvency Ratio - Profitability Ratios (3) - Efficiency Ratios (2) |
| Liquidity Ratio | Current Assets/Current Liabilities 2:1 is a sound position, as a business has $2 of current assets to cover every $1 of current liabilities. Shows capacity of a business to meet its financial commitments in the short term. |
| Solvency Ratio | Total Liabilities/Total Equity x 100 Proportion of debt and proportion of equity used to fund business activities at a certain period in time. Shows extent a firm relies on debt finance. Higher the %, the higher the gearing. |
| Profitability Ratios (3) | Ability to make a financial return. Gross Profit/Sales x 100 (Higher the better) Net Profit/Sales x 100 (Higher the better) Net Profit/Total Equity x 100 (Shows how effective funds contributed by owners) |
| Efficiency Ratios (2) | Expense Ratio Total Expenses/Sales x 100 - Lower the better Accounts Receivable Turnover Ratio Sales/Accounts Receivables, then 365/(result) - How long it takes to collect debts. |
| Comparative Ratio Analysis | Compare Ratios: - Over time periods - Against industry standards - With similar businesses |
| Limitations of Financial Reports | - Normalised Earnings - Capitalising Expenses - Valuing Assets - Timing Issues - Debt Repayments - Notes to the Financial Statement |
| Normalised Earnings | Normalised earnings involves removing one-time or unusual income to show a more accurate depiction of the 'true' earnings of a company. |
| Capitalising Expenses | Capitalising expenses involves recording an expense from the income statement and listing them on the balance sheet as an asset. Not accurate, as it understates expenses and overstates profits |
| Valuing Assets | Valuing assets involves estimating the market value of assets when recording them on the balance sheet. Does not truly represent worth of business as certain assets can appreciate or depreciate in value. |
| Timing Issues | Timing issues are a limitation as businesses may record revenues and expenses in different accounting periods to when the activities occurred. Matching principle involves recording expenses on the income statement for the same accounting period of activities. |
| Debt Repayments | Debt repayments are a limitation of financial reports as reports don't have the capacity to disclose specific information about debt repayments. |
| Notes to the Financial Statement | Notes to the financial statement report the details and additional information left out of the main reporting documents. |
| Ethical Issues Relating to Financial Reports | - Audited Accounts - Record Keeping - GST Obligations - Reporting Practices |
| Audited Accounts | An audit is an independent check of the businesses financial reports and accounting procedures. Internal Audit: conducted by employees. External Audit: Legal requirement by Corporations Act 2001, conducted by external independent accounting firm. |
| Record Keeping | Records must be kept for all transaction, else the business may be committing fraud. Monitored by Australian Taxation Office. Proper records must be kept for a minimum of 5 years. |
| GST Obligations | Goods and service tax is a financial obligation that all businesses pay GST. Failure to declare GST is illegal. |
| Reporting Practices | Businesses must provide the government (ATO) and shareholders with accurate financial reports. Stakeholders also are entitled to access business reports. |
| Financial Management Strategies | - Cash Flow Management - Working Capital Management - Profitability Management - Global Financial Management |
| Cash Flow Management | Cash flow is the movement of cash in and out a business over a period of time. Cash Flow Management Strategies: - Distribution of Payments - Discount for Early Payments - Factoring |
| Working Capital Management | - Control of Current Assets - Controls of Current Liabilities - Strategies |
| Control of Current Assets | - Cash - Accounts Receivables - Inventories |
| Control of Cash | Cash is required for both predictable and unexpected purposes. Managers must plan timing and budgeting to avoid cash shortfalls or excesses. |
| Control of Accounts Receivables | Collection of receivables is vital to ensure cash. Managing accounts receivable can be done by establishing credit policies, factoring or discount for early payment. |
| Control of Inventories | Inventory needs to have a correct balance to avoid excessive stock (cash shortages) and insufficient stock (loss of sales). Strategies such as an Inventory Control Policy or J.I.T can be implemented to control inventories. |
| Control of Current Liabilities | - Accounts Payables - Loans - Overdrafts |
| Control of Accounts Payables | Accounts payable need to be carefully controlled so that all accounts are paid on time to protect credit rating. Control of accounts payable involves periodic reviews of suppliers and their policies. |
| Control of Loans | Interest and loan payments ened to be paid on time to avoid excess fees. Control of loans involve comparing the cost of a loan with other sources of finance. This needs to be constantly monitored. |
| Control of Overdrafts | Must only be used to fund short-term finance to avoid cash shortfalls. Control of overdraft involves ensure overdraft size is appropriate and is paid back to avoid excess high interest. |
| Strategies of Working Capital Management | - Leasing - Sale and Lease Back |
| Leasing | The hiring of an asset from an individual or business who retains ownership of the asset. Helps conserve working capital, tax deductible interest payments. - Use of up-to-date asset. |
| Sale and Lease Back | Selling (liquidating) assets and then leasing them back from the purchaser through fixed payments for a specific period of time. Cash obtained from sale is then used as working capital. |
| Global Financial Management | - Exchange Rates - Interest Rates - Methods of Payments - Hedging - Derivatives |
| Exchange Rates | Exchange rates are set by the foreign exchange market (forex). Currency fluctuations affect the price of goods and services. The lower the $AUD, the cheaper exports become and therefore more internationally competitive. |
| Interest Rates | Interest rates are the cost of borrowing money on international financial markets. Australian business often borrow funds from overseas as interest rates are lower however there is the risk of harmful currency fluctuations. |
| Methods of Payment | - Payment in Advance - Letter of Credit - Clean Payment - Bill of Exchange: - DAP - DAA |
| Payment in Advance | Exporter receives payment and then arranges for goods to be sold. Most common method of payment. |
| Letter of Credit | Contract by importer's bank to pay exporter once bank receives documentation proving the shipping of goods. |
| Clean Payment | Payment is sent to, but not received by exporters until goods are transported. |
| Bill of Exchange | Document instructing importer to pay at a time in the future, DAP: Importer can collect goods after paying. DAA: Importer may collect goods before paying. |
| Hedging | Hedging is the process of minimising the risk of currency fluctuations. Natural Hedging: Using strategies to minimise the risk of foreign exchange exposure. Financial Instrument Hedging: Derivatives (contract) used to minimise the risk of exchange rate fluctuations. |
| Derivatives | Simple financial instrument used to support hedging. Is a contract dealing in the future price of an asset. Forward Exchange Contract: Options Contract: Swap Contract: |
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