Processes of financial managment

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Mind Map on Processes of financial managment, created by novin.ehteshami0060 on 29/07/2013.
novin.ehteshami0060
Mind Map by novin.ehteshami0060, updated more than 1 year ago
novin.ehteshami0060
Created by novin.ehteshami0060 over 10 years ago
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Resource summary

Processes of financial managment
  1. LT/ST goals--2--10yrs. Planning-setting of goals/objectives, determining strategies to acheive g/o,identifying and evaluating alternatives couse of action/choosing best alternative for bs.
    1. Comparative ratio analysis
      1. Over different time periods
        1. Against standards or benchmarks
          1. With similar bs
      2. Limitations of financial reports
        1. Normalised earning
          1. Capitalising expenses
            1. Valuing assets-discounted cash flow method/guideline company method
              1. Timing issues
                1. Debt repayment
                  1. Notes on financial statement
        2. Ethical issues related to financial reports
          1. MUST:act in good faith, exercise power for proper purpose, exercise discretion reasonably and properly, avoid conflicts of interest.
            1. AUDITED ACCOUNTS-independence check of accuracy of financial records/acc procedures. Used to examine financial affairs-internal/management-->External audits. Assist in improving efficiencies and help guard misuse of funds, fraud and theft.
              1. RECORD KEEPING-accounting processes depend on how accur/honestly data recorded in financial reports. ATO regular monitors so no tax reduction.
                1. GOODS AND SERVICES TAX OBLIGATIONS-ethical/legal obligation to comply with GST reporting requirements. Firms obligated bs to complete bs activity statement quarterly, pay any GST collected, claim input tax credits.
                  1. REPORTING PRACTICES-accurate fin reports necessary for both taxation purposes, also stakeholders entitled to receive fin reports annually.
        3. Planning and implementing
          1. Determining financial need
            1. Bs heading, how it got there, needs. F information collected for future use->balance shet, revenue statement, F ratio analysis, interpretation. Determined by:size of bs, current phase of bs cycle, future plans for growth/development, capacity to soruce finance, managment skills for assessing F needs/planning.
              1. Establishing finanical controls
                1. Prevent bs from ach goals, caused by both management and employees. Common causes problems-theft, fraud, damage/loss of assets, errors in record systems. Fin controls-polciies/procedures ensure plans of bs will ach in efficent ways. important to deal with assets-accounts rec, inventory, cash. Common policies/procedures whhich promote control-clear authorisation/respon,seperation/rotation of duties,cnotrol of cash, protection of assets, control of credit procedures.
            2. Developing budgets
              1. Budgets-info in quan terms to achieve goal. Reflect strategic planning decisions regarding resource use, provide finanical info for bs goals. Drawn to show:cash required for planned outlays, cost of capital expenditure, estiamted use/cost of raw materials/inventory, no and cost of labour hrs required for production.
                1. B provide-facts and figures for planning/decision making, mointoring of progress. Planned performance measured from actual performance. Factors-review past figures/trends, portential market or market share, trends, seasonal fluctuations in market, proposed expansion or discontinuation of projects, alter price/quality of product, current order and plant capacity, external enviro.
                  1. Prepared to predict range of act-ST/LT plans and activities-OPERATING B-main activities of bs including sales, production, expenses, raw mat, labour. Indo use in prep of budgeted fin statments. PROJECT-cap expenditure and R&D. Info about purpose of assets, life span, potenital revenue generated from use. Info included in budgeted financial statements. FINANCIAL-fin data of bs, using info from operating/project budgets to create budgeted income statements, bal sheets, cash flows. Income/balance reflect results of operating act while cash flow statements shows liquidity of bs.
              2. Maintaining record system
                1. Mechanisms employed by bs to ensure that data recorded and info provided accurate, reliable, efficient, accessible. Maintaining record systems requires minimisation of errors in recording process, and production of accruate, reliable financial statements.
                  1. Identifying finanical risk
                    1. Risk to bs being unable to cover finanical obligations->debts incurred through borrowing. If bs is unable to reach F obligations, becomes insolvent. If bs is financed from borrowings there is greater risk, greater expectation of profit and dividends. Minimise risk-bs must consider amount of profit that generated, must be sufficient to cover cost of debt while also increasing profits. Bs must consider liquidity of assets, which may be needed to cover repayments of ST debts.
              3. Debt and equity finance
                1. Debt finance-can be attractice to bs funds readily avaible, interest payments are tax deductible, reducing cost of debt. Must consider risk and return. ADVS-readily abail, increased funds increased earning/profits. DIS-increased risk if devt comes rom fin institution, security is required, regualr repayments, lenders first claim if bankrupt.
                  1. Equity-important remains in bs for indefinite time. Requires suff profits to be made in order for bs to continue operating. Provide confidence to creditors and lenders, more willing to lend. ADV-not repaid, cheaper, low gearing, less risk. DIS-lower profits/lower returns, expectation owner will have return of investment,
                    1. Comparison of debt/equity-bs must take into account purpose of finance. DEBT-liquidation, repaid periodic repayments, interest payments deductible, lenders lower rate of return, payments fixed, debt provider no voting rights. EQUITY-shareholders residual claim, no maturity date, dividends not tax deduc, shareholders require higher return, voting rights.
                2. Matching the terms and sources of finance to bs purpose
                  1. Bs identifies/plans to meet fin objectives. Must find appro-terms of finance:suitable structure of bs/purpose for which funds required(st), cost of each source of funding:required rate of return bal against costs of each source, structure of bs:small bs fewer opportunities for equity fin compared larger bs that may raise equity by issuing shares, costs:setup costs/intrerest rates must be considered, Flex-bs require flex sources of fin to vary condition change(overdraft more flexble than deb/fact.Availability of funds:dependence small no of investors risky may pull out, availability by bs credit rating. Level of control-lender requires security over asset.
                  2. Monitoring and Controlling
                    1. Cash flow statements-indicates movement of cash rec/payment resulting from transactions over period of time. Gives info regarding firm's ability to pay debts on time, identify trends or predict change. Cash flow-better predictor of bs status, shows whether firm:generate fav cash flow, pay fin commitments, suff funds for future expansion, obtain finance from ex sources, pay drawings to owners, dividends to shareholders. OPERATING act-cash inflows/outflows relate m,ain act of bs, INVESTING-in/out purchase and sale of non-current assets/investments, used to generate income, FINANCING-in/out relating to borrowing act of bs.
                      1. Income statement-operating eff or results for period. Shows revenue earned/expenses or results for period. Shows rev earned/expenses incurred over accounting period, resultant in profit/loss. Operating incomes, cost of goods sold, operating expenses-->selling/distribution expenses, general/admin expenses(rent, wages), financial expenses(interest, debts, discounts allowed).
                        1. Balance sheet-represents bs assets/liabilities at particular point in time, rep net worth(equity) of bs. Shows level of current/non-current assets, current and current-liabilities(+OE)
                          1. Assets-CA turned cash 12 months. NCA-not expected to be turned into cash within 12 months. Liabilities-claims by ppl other than owners against assets, rep owed by bs. CL-repaid 12 months, NCL-after 12 months. OE-rep owner's fin interest in bs. Includes cap/retained profits. Accounting eq-A=OE+L. Revenue statement shows-resulting profit from rev,less expenses, figure transferred to bal sheet as cap in OE.
                        2. Financial ratio
                          1. Analysis-involves comparing similar terms in revenue statements and balance sheet, calculations of figures, percentages, ratios. VERTICAL-compares fig within 1 yr, HORIZONTAL-diff F yrs, TREND-figures periods 3-5 yrs.
                            1. Liquidity-extent which bs meets ST objectives. Assessing liq-determine whether cash, assets, inventory converted cash quickly enough to pay debt. CA and CL determine liq of bs. MUST ensure enough CA to generate cash but not too many resources not used. 2:1 acceptable->but depends on type of firm, industry and external factors.
                              1. Gearing-firm fin in operations, measuring relo debt/equity. Determines solvency(LT). More high geared, more risk and potential for profit. Bs level of gearing important dec:risk/return on investments, degree of control, size and stability, liq of bs assets, purpose of ST debts. Higher ratio less solvent firm->higher risk.
                                1. Profitability-earning performance of bs and indicates cap to se resources to maximise profits. Amount of profit determined by no of factors-vol of sales, mark up on purchases, level of expenses. Income statement used to measure profit. Gross P-total amount of sales, represents % of sales revenue. NP-profit or return to the owners, how much of each follar earned by firm is translated into profits. ROE-how effective funds contributed by owners gen profits.profit with amount shareholders invested.
                                  1. Efficiency-ability of firm to use resources effectively in production/ provisions of G/S ensuring fin stability and profitability. Expense R-compares total expenses, indicating day-2-day eff.. A/Rec-firms credit policy, eff collects debts, average length of time takes to convert balance into cash. High R-bs eff in debt collection, signal for firms to loosen up thir credit policies may be limited.
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