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Flashcards by Ahmad Joumaa, updated more than 1 year ago
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Created by Ahmad Joumaa
over 9 years ago
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| Question | Answer |
| Role of Financial Management | First Heading |
| Strategic Role of Financial Management | –crucial –business may fail more many reasons, often financial – Its strategic role is to give the business specific strategies needed to reach its long-term, big-picture goals |
| Objectives of Financial Management | –maximise the returns on the funds that the owners have invested into the business –objectives are used to generate SMART goals |
| Profitability | earnings after expenses are paid |
| Growth | size of the business compared to competitors in the same market |
| Efficiency | the amount of revenue spent on resources |
| Liquidity | Ability to pay short term liabilities with current assets |
| Solvency | Ability to pay short term and long term liabilities as they fall due |
| Short term | with the year eg. Bills, credit cards |
| long term | longer than a year eg. Mortgage |
| Interdependence with other key business functions | finance department needs marketing to be successful to gain profit which can be passed on to HRM to employ new staff required to produce the product -> all departmenets work together to achieve financil/bus goals |
| Influences on financial management | title |
| Internal sources of finance | comes from within the business’s owners (equity or capital) or from outcomes of the business activities (retained profits) |
| Retained profits | –cheap and accessible –in Aust. 50% profits are retained + re-invested (on average) |
| External sources of finance | outside the business |
| Debt- Short term borrowing | –used for temporary shortages of cash flow –repaid within 1-2yrs |
| Overdraft | ability to overdraw an account up to a certain amount –most common |
| Commercial Bills | –bill exchange (loan) from financial institution other than a bank –represents business’s acknowledgement of a debt to another business, |
| Factoring | –selling of accounts receivable for a discounted price *credit cards -> expenses, pay stock from banks, immediate, cost = interest *leasing* can be used for long and short term –loan repayments are tax deductible, cash isn’t tied up in assets |
| Long term borrowing | –funds borrowed for longer than 2yrs |
| Mortgage | loan secured by the property of the borrower |
| Debentures | - issued by a company for a fixed rate of interest for a fixed time, |
| Unsecured notes | -loan for a set period –not backed by a collateral/asset –highest risk for investors = high interest, mostly public companies, |
| Leasing | -long-term source of borrowing –payment for equipment owned by another business) |
| Equity | finance raised by a company issuing shares via ASX - A security is an exchangeable, negotiable instrument representing financial value. –cost = dividend payed out |
| Ordinary Shares | -most commonly traded-individuals become part owners (new issues-a security issued & sold for the first time AKA –primary shares/new offerings, |
| New issues | a security issued & sold for the first time AKA –primary shares/new offerings, |
| Rights issues | privilege granted to shareholders to buy new shares in the same company, |
| Placements | allotment of shares directly from company to investors, |
| Share purchase plans | –offer for current shareholders to purchase more shares without brokerage or at a discount |
| Private equity | – money invested into a private company not listed on the ASX |
| Financial institutions - banks | –most important –receive savings as deposits and makes investments and loans to borrowers, |
| Investment Banks | –provide services in borrowing and lending primarily in the business sector |
| Finance & Life insurance companies | –specialise in smaller commercial finance –finance to business + individuals through cosumer hire-purchase loans personal loans and securred loans |
| Superannuation funds | provide funds to the corporate sector via inverstment of funds received from superannuation contributors |
| Unit trust | take funds from a large number of small investors and inverst them into specific types of financial assets e.g. gold |
| THE Australian Securities Exchange | primary stock exchange group in Australia |
| • influence of government | -through implementation of economic policies and current and chnaging legislation |
| Australian Securities and Investments Commission | aims to reduce fraud and unfair practices, |
| Company taxation | companies/corroporations in Australia pay company tax on profits |
| Global market influences | globalisation has created more interdependence between business sectors + their economies relying on trade for expansion + increased profits |
| Economic Outlook | relate specifically to changes in economic growth rates of individual economies throughout the world, |
| Availability of funds | wider availability of funds when trading in a global market, |
| interest rates | when sourcing funds overseas this needs to be considered along with risks |
| Role of Financial Management | financial planning is the continual process that all business must go through to manage their finances efficiently and achieve their financial goals. |
| Planning and Implementing - fiancnail needs | -essential to determine where a bus. is headed and how it will get there -Drawing up a business plan ensures that the organisation knows what it aims to achieve, |
| Budgets | reflect strategic planning decisions on resources/their use –provide financial information for bus. goals - used for strategic, tactical and operational planning, |
| Record Systems | ensure recorded info. Is accurate, reliable, efficient and accessible –e.g. budgets/cash flow, |
| Financial risks | should be planned –aware of what may cause them to be unable to cover obligations |
| Financial Controls | ensure plans will lead to achievement of bus. goals - Financial controls are the policies and procedures which will lead to the achievement of the organisation’s goals in the most efficient way. |
| Debt and Equity Finance | advantages and disadvantages of each |
| matching the terms and source of finance to business purpose | matching principle = current liabilities fund current assets & non-current liabilities fund non-current assets |
| Financial consideration Factors - 1 | - Costs, including set-up costs and interest rates – must also consider fluctuations in cost due to market and economic conditions. |
| Financial Consideration Factors - 2 | - Size and stability of business earning capacity. |
| Financial Considerations Factors - 3 | - Flexibility, so that businesses can pay off at certain time or increase/renew their borrowing |
| Financial Consideration Factors - 4 | - Availability of finance and ease of access to finance |
| Financial Consideration Factors - 5 | - Level of control – if the lender requires security over an asset and other conditions of lending are imposed, a business’s ability to consider future financing possibilities is reduced. |
| Monitoring and Controlling - Cash flow statements | inflows/ outflows |
| Income Statement | revenue, expenses, net income, |
| Balance Sheet | assets = liabilities + owner’s equity (accounting equation) ensures the balance sheet balances |
| Financial ratios | calculations that help managers examine bus. performance –allow comparison over time w/ industry averages + competitors and prediction of trends/assist in planning |
| Liquidity - current ratio (current assets / current liabilities) | short term stability –should have more current assets than liabilities IA= 2:1 -> working capital |
| Gearing - debt to equity ratio (total liabilits/ total equity | solvency –long term stability –IA=50% small 100% big |
| Profitability - gross profit ratio (gross profit / sales) | - higher the percentage the better |
| Net Profit ratio (net profit / sales) | takes expenses into account -13-20% good for a retail bus |
| ; return on equity ratio (net profit ÷ total equity)- | how much the owner’s investment/risk in the bus. is earning –a figure below 10% would be a concern |
| Efficient - expense ratio (total expenses ÷ sales) | -- relationship between sales and expenses - as low as possible |
| Accounts receivable turnover ratio (sales ÷ accounts receivable) | OR AR ÷ (sales ÷ days) –how long it takes to collect owed $ IA=14-60days |
| Comparative ratio nalysis | over different time periods, against standards, with similar businesses *covered be exercises in class,* the ability to understand meaning of ratios. E.g. high GP is good but doesn’t mean much if the bus. has high expenses or the better bus may have a lower ROOE but greater stability (solvency) |
| limitations of financial reports – normalised earnings | Reviving of one time or unusual influences (to add to accuracy) e.g. land sale, |
| Captialising Expenses | –adding a capital expense to the balance sheet that is regarded as an asset e.g. R&D, |
| Value assets | the process of estimating the value –may be inaccurate |
| Timing Issue | reporting is over a year but –may not be accurate due to seasonal flutuations e.g rain for ice cream business |
| Debt Repayments | infomation On how long the bus. has been recovering debt e.g. debt unlikely to be paid creating an inaccuracy |
| ethical issues related to financial reports | failing to report or providing incorrect information in reporting statements is unethical |
| Financial Management Strategies | Title |
| Cash flow statments | inflows/outflows to give net profit or loss from the period |
| Distribution of payments | organizing expenses to match monthly/yearly inflows/outflows –can be aided by cash projection |
| Discount for early payments | offering creditors a discount for early payments –most effective when targeting creditors owing large amounts –improves cash flow, |
| Factoring | selling accounts receivable for a discounted price to a finance/specialist factoring company |
| – control of current assets – cash | problem = too much/too little -> could be better invested or can’t pay debts solution = can be managed with: budgets, cash reserves/overdrafts and investment options, |
| Receivables | -*problem = poor credit policies, clerical problems, high acc/rec turnover ratio, aged accounts -> not sending out bills, *solution = needs to encourage debtors to pay account quickly: monthly statements, discounts, factoring, charges on late payment |
| Inventories | problem = storage, transport, insurance *solution = J.I.T, stock takes -monitored –too much stock=cash shortage and not enough=customer loss/lost sales |
| – control of current liabilities – payables | control of AP/ periodic reviews, consider: discounted periods avoid late payment fees, extended terms for payment |
| Loans | management is important –interest rates/ongoing charges -positive relationships w/ financial institutions to insure the most appropriate loans, |
| Overdrafts | fees/interest payments need to be monitored –overdraft policy should be in place –better cash flow management –budgets |
| Strategies - Leasing | hiring of an asset –‘frees up cash’ within the business |
| Sale and Lease back | selling of an owned asset to a lessor/leasing the asset back –increase liquidity |
| Profitability Management - Cost controls | –monitoring of fixed and variable costs, using cost centres |
| Fixed | not directly impacted by sales |
| Cost Centres | areas/departments of a bus. costs can be directly attributed –good for inventory management, |
| Expense Minimization | –reducing costs and expenses to maximize profits and be competitive e.g. outsourcing, sale & lease back, replacing labor w/ technology, improving budgeting and accountability |
| Revenue Controls | - Sales objectives, pricing policy to balance sales with profits |
| Marketing objectives | –meeting marketing/sales targets to grow sales = increase in profit |
| Global Financial Management | -- |
| Exchange Rates | –ratio of one currency to another –to find what a currency is worth divide by 1 –impact of fluctuations in rates |
| Interest Rates | may be cheaper to borrow overseas due to low interest rates –major risk is fluctuation exchange rates |
| Methods of international payment | payment in advance-most secure/low risk exporter |
| Letter of Credit | importer is confirmed from a letter by the bank, |
| Clean Payment | Paid at point of sales |
| Bill of Exchange | written order from the seller requesting the importer pay a certain amount at a specified time |
| Hedging | Process of minimizing risk natural hedging –insisting both import/export contracts are paid in AUS $ -marketing strategies that reduce price sensitivity of exported goods –establishing off shore subsidiaries |
| Derivatives | special contracts between global business’s/suppliers that help manage the risk of currency fluctuations *forward exchange contract –contract to exchange one currency for another currency an agreed exchanged rate on a future date, usually after 30//90/180 days |
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