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Business Studies
HSC
Lectures
Len Nixon – Finance ©
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Len Nixon – Finance ©
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What
How
Len Nixon – Finance ©
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The role of Financial Management – Plan and control to ensure there is sufficient finance to meet the financial needs of the business
Profits and Losses Surplus or deficit
generated from business activities
Financial objective: Profitability
Financing decision- INFLOW of FUNDS
Vision
Source of finance-Debt and or Equity
Financial objective: Solvency
Mission Statement
Long term Goals
The perimeter of the cycle is the flow
of funds. These are funds to finance
strategies such as marketing, HR and
operations.
Objectives
Minimisation of costs and an
indicator of how assets are
contributing to generating revenue
and profits
OUTFLOW of funds
Financial objective: Efficiency
Len Nixon – Finance ©
Strategies
Marketing, HR
Operations
OUTFLOW of funds
Current assets and current liabilities
Ability to pay short debts
Financial objective: Liquidity
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Role of financial management
Objectives of financial management
Interdependence with other key business functions
Financial Objectives.
Profitability___________________________________________________
Liquidity _____________________________________________________
Solvency _____________________________________________________
Profits
Expense
Accidents
Disputation
Decreasing
Increasing
Increasing
Increasing
Efficiency ____________________________________________________
Growth _____________________________________________________
2016- HSC
Sue is a sole trader whose business is growing rapidly as sales are
increasing. As a result of the growth, she needs to purchase stock
worth $10 000.
Explain a potential conflict between a short-term and a long-term
financial objective for Sue.
Using the above information, Explain the interdependent
relationship between finance and human resource management
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Len Nixon – Finance ©
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Finance – Internal and external sources of funds and financial objectives
HSC 2012
Section 4
Extended response
How can different sources of funds help a business achieve its financial objectives?
Answers could include:
• Objectives of financial management
• profitability, growth, efficiency, liquidity, solvency
• short-term and long-term
•
• Sources of funds
• internal sources of finance – retained profits
• external sources of finance
• debt – short-term borrowing (overdraft, commercial bills, factoring), long-term
borrowing (mortgage, debentures, unsecured notes, leasing)
• equity – ordinary shares (new issues, rights issues, placements, share purchase
plans), private equity
Issues in answering the question
Directive term use- what does it mean?
How means
How to, how might, how would, how can and why are and why is? – explain – show
cause and effect
Processes
Fin Statements
Ratios
Know the syllabus- Learn about – Roles + Influences + Processes
• Make the link from influences and to the role.
• But sources of funds will affect the financial statements such as Balance
Sheet, Income sand cashflow statements and have implications for
solvency and efficiency ratios
Case study material – they require depth not just acknowledgement
Len Nixon – Finance ©
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Answering the question
1. What type of finance is use?
Sources of finance
Internal - Equity
External - Debt
Debt
Current Liabilities (external debt)
Short Term means _______________________________________________________________
1.
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Use ___________________________________________________________
2.
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Use ___________________________________________________________
3.
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Use ___________________________________________________________
4.
Type ___________________________________________________________
Cost ___________________________________________________________
Len Nixon – Finance ©
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Source _________________________________________________________
Use ___________________________________________________________
Long Term – (External) Non-Current Liabilities
Long term means__________________________________________________
1.
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Purpose
________________________________________________________________
2.
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Purpose___________________________________________________________
3.
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Purpose _________________________________________________________
4
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Purpose
________________________________________________________________
Len Nixon – Finance ©
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Financial Management consequences of using debt – effects upon RATIOS
The use of short and long-term debt will affect:
•
Profitability - ______________________________________________
•
Solvency ___________________________________________________
•
Efficiency __________________________________________________
Important financial management principle
The matching the terms and sources of finance to the purpose
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Equity – internal and external equity
Internal Equity – relates to an unincorporated business structures such as
_______________________________________________________________
Sources of funds
__________________________________________________________
External Equity sources – relates to incorporated business entity such as
Type ___________________________________________________________
Cost ___________________________________________________________
Source _________________________________________________________
Purpose
___________________________________________________________
2014 HSC
Emu Manufacturer Uniform
You have been hired as a consultant to write a report to the management. In your
report: • recommend a source of finance for the factory expansion
Sales are increasing
They need to expand. To do this they will have to outsource overseas OR expand
their current factory site
Len Nixon – Finance ©
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Recommend a source of finance for the factory expansion
Suggestions?
Advantages and disadvantages of using debt finance
Advantages
Disadvantages
Advantages and disadvantages of using Equity finance
Advantages
Disadvantages
Financial institutions – intermediaries operating in a range of finance markets
Banks _______________________________________________________________
Investment Banks ____________________________________________________
Finance companies __________________________________________________
Australian Securities Exchange _________________________________________
Insurance companies’ __________________________________________________
Superannuation Funds_________________________________________________
Unit trusts__________________________________________________________
Len Nixon – Finance ©
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Len Nixon – Finance ©
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Len Nixon – Finance ©
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Government and Global market influences. . These external influences are out of the direct control of management but can affect a
business in the following areas:
• Growth
• Liquidity
• Solvency
• Profitability
• Efficiency
Influence
Effect on processes- ratios
Effects on fin objectives
ASIC – fraud and unfair practices
Company Tax – is an expense
Reserve Bank Australia – interest rates
Global Outlook – Demand for G&S
increases
Availability of Funds- availability
Global interest rates- comparative
Len Nixon – Finance ©
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Processes of financial management
Limitation of financial reports
•
•
limitations of financial reports – normalised earnings, capitalising expenses, valuing assets, timing issues, debt repayments, notes to the financial
statements
ethical issues related to financial reports
HSC 2013
Auditors have discovered that the value of legal fees paid has been
included in the asset value of a new warehouse purchased by a
business. What limitation of financial reports does this show?
Why are ethical considerations play a role in the valuing of current
assets such as
• Accounts Receivable
• Inventories
(A) Capitalised expenses
(B) Debt repayments
(C) Normalised earnings
(D) Timing issues
What is Capitalising expenses means?
Issues with debt payment
Len Nixon – Finance ©
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Processes of financial Management Financial Ratios
Ratio
Formula
Calculation
Interpretation
Direct Links
Sales generated = Marketing
Advertising = Marketing
Cost of Goods Sold = Operations
Franchise Fees = Operations
Rent = Operations
Wages = Human Resources
Len Nixon – Finance ©
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Liquidity
Current Assets
Industry Average
0.75:1
Current Liabilities
Gearing
Total Debt
Industry Average
1:1
Total Equity
Profitability
Gross Profit
Industry Average
Total Sales
Gross Profit : 80%
Net Profit
Net Profit: 40%
Total Sales
Return on Owner’s Equity:
58%
Net Profit
Total Equity
Efficiency
Total Expenses
Industry Average
40%
Total Sales
Importance of comparative ratio analysis- must be used in answering a question such as
Evaluate the importance of financial management strategies in improving business performance. (HSC 2014)
Len Nixon – Finance ©
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Financial strategies
Report 2013
Kingland Office Supplies operates in a large NSW city in a highly
competitive market. A paid manager is responsible for the day to day
running of the business. The owners are concerned about the low
profitability of the business. Investigations by the owners indicate the
following problems:
What is required?
• customers find the product mix unappealing
• poor management of cash flow
• poor accounts receivable turnover compared to similar businesses.
The manager has also identified low prices offered by larger competitors
as a cause of the low profitability.
Write a report recommending financial strategies to improve the
performance of the business.
providing reasons for financial strategies such as cash flow
management, working capital and profitability management
to address the issues identified in the hypothetical situation
Len Nixon – Finance ©
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Financial
Objective
Ca lcula te d
CA/CL
Wor king capital manage ment
Liquidity
Problems and Solutions
Liquidity
ability to
pa y short
term de bts
Types of
short te rm
de bt
found in
Us e of
funds
Current
As sets
Ba lance
Sheet
Current
Liabilities
Types
Too much
or
Too little
Storage
Transport
Insurance
Costs
Poor credit
policies
Cleric al
problems
High
Ac ounts
Re ceiv able
Turnov er
Age
ac counts
Problems
Ca sh
Solutions
Financial management strategies
Ca sh
Budgets
Ba nk
Ov e rdraft
Problems
Stock /
Inv entory
Ac counts
Re ceiv able
Problems
Solutions
Solutions
Problems with the current
asse ts will have and effect
on the business's cashflow
cycle
Len Nixon – Finance ©
J.I.T
Stock ta kes
Tw o Bin
method.
Fa ctoring
Ca sh only
Discounts
Credit
restrictions
Sourc es
Ba nks
Fina nce
Companies
La rge
Companies
Ac counts
Pa yable
The use of all t hese
type s of finance will be
a cost or expense t o
the business.
Their use will decreas e
profit s
Credit
Ca rd
Ba nk Bill
Financial Management
Curr ent Ass ets = Current Liabilit ie
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Len Nixon – Finance ©
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Financial manage men t iss ues related to
Profitability
Re v enue inflow
Influenc ed by
Sa les obj ectiv es
Pric ing policy
Sale s
reve nue
Outflow
Cost control
Profit
Expenses
De termined by
Profit may increa se or
de cre ase ow ing to s ales.
This is the outc ome of
good or poor mark eting
de cisions
Ca lcula tions
Gross Profit
Margin
Ne t Profit
Margin
Re turn on
Equity
Marketing
Issues and
strate gies
Good and poor
manage ment c entres
on the purc has e of
stoc k
Marketing
resea rc h
Ope ning
Inv entory +
Purchase s
less e nding
stoc k
Market Segmentation
Stra te gies and
Solutions
Fina ncial
Ra tes of
intere st
(borrow ed
funds)
arising from
Ba d Debts
(A/C
Re ceiv able
More efficient
manage ment
of mark eting
Employment
relations and
opera tions
and Costs
4P
strate gies
Place
Administration
Huma n
Re source s
Outlays to ge nerate
rev enue and profit
Problems
Ta rget
Market
Pric e
Se lling
Marketing
Cost of
goods s old
Promotion
Product
Liquidity
issues
Too much
Not enough
Stock
Solutions
Storage
Ordering
Transport
Ex pens es directly affe ct
the EFFICIENCY of a
Business
Cost control
Manage ment
J. I. T
Stock ta kes
Tw o Bin
Method
Fixe d
Costs
Va riable
Costs
Cost ce ntre s
These transactions a re to be found in a business's Profit and Loss Statement
Known as a Statement of Financial Per formance
Len Nixon – Finance ©
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Len Nixon – Finance ©
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Len Nixon – Finance ©
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2016 HSC
What is required?
• Syllabus knowledge
• Processes + strategies
• Verbs
•
Len Nixon – Finance ©
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Possible report question
Objective
Liquidity
Efficiency
Net Profitability
Solvency
2016
2.1
45%
55%
100%
2017
1.1
65%
30%
250%
What role do objectives play in the financial management of a business?
Evaluate the financial positon of the business
Recommend an appropriate set of profitability and liquidity strategies financial strategies
Len Nixon – Finance ©
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Len Nixon – Finance ©
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Len Nixon – Finance ©
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Len Nixon – Finance ©
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