Business Studies Financial Planning and Management Study Notes.doc 0

8/12/2019 Business Studies Financial Planning and Management Study Notes.doc 0

1/10

Business Studies - Financial Planning and Management Study Notes

Financial Planning and Management Study Notes:

The Role of Financial Planning:

The strategic role of financial management:

Organisational objectives provide a greater detail about the organisationsmission Organisation objectives brea! do"n the business operations intoachievable outcomes that can be measured and evaluated

Strategic Plans:

#ncompass a long term vie" of "here the organisation is going$ ho" it "ill getthere and a monitoring process to !eep trac! of progress along the "ay

Objectives of Financial Management:

%i&uidity: 'efers to the ease "ith "hich an asset can be converted cash Moreimportantly it is the ease of a business to meet its short term liabilities

Profitability: (s the ability of a business to ma!e a financial return frombusiness activities

#fficiency: is generating ma)imum returns for the minimum costs

*ro"th: is the increase in the si+e and value of a business over time'eturn on capital: ,apital is the amount of funds that is invested in a business

to create "ealth These funds are referred to as o"ners e&uity

The Planning Cycle:

The planning cycle is an integral part of the business plan This cycle isongoing and includes:

-ddressing the present financial position

.etermining financial elements of the business plan

.eveloping budgets

,ash flo"s Financial reports

/ 012314 -ll 'ights 'eserved 3 of 32 For more info$ go to """ hscintheholidays com au
http://www.hscintheholidays.com.au/http://www.hscintheholidays.com.au/http://www.hscintheholidays.com.au/http://www.hscintheholidays.com.au/http://www.hscintheholidays.com.au/http://www.hscintheholidays.com.au/http://www.hscintheholidays.com.au/http://www.hscintheholidays.com.au/


2/10

(nterpretation of financial reports

Maintaining record systems

Planning financial controls

Minimising financial ris!s and losses

-ddressing the preset financial position:

- situational analysis of the current financial position is the basis for effectivefinancial planning .ata driven identification of current financial issues andtrends "ill assist the development of appropriate budgets$ analyses$strategies and controls in the planning cycle

.etermining financial elements:

The business plan sets out goals and future direction 0vision4 of the business$including "here the business e)pects to be at the end of a particular timeperiod The financial elements of the plan "ill identify the amount of financeneeded$ the sources of finance available and the methods of

reporting financial data to support the strategies developed to achieve thevision$ goals and objectives of the business plan

.eveloping 5udgets:

- budget is a plan predicting revenue 0from sales and investments4 ande)penses of a business for a future time period 5udgets identify anticipatedsources of revenue and e)penses and are derived from the overall strategic

business plan There are various types of budgets$ including:

The operating budget$ "hich relates to the day to day operation of thebusiness and includes sales$ labour costs and administrative e)penses

Financial budgets$ "hich include the balance sheet$ cash flo" andrevenue 0profit and loss statements4 statements

,ash Flo"s:

,ash flo" is the difference bet"een cash inflo"s and cash outflo"s For abusiness to survive it is necessary to have more cash going in than is going

out - cash flo" budget helps a business to predict the cash inflo" and cashoutflo"s over specified periods of time ,lose monitoring of the cash flo"position is important so that the business can meet its short term financialcommitments

Financial 'eports:

(nclude statements of financial performance 0'evenue statement4$ statementif financial position 05alance sheet4 These standard reports communicatefinancial information about the business to sta!eholders$ including o"ners$shareholders$ employees and government regulatory authorities



3/10

(nterpretation of financial reports:

Financial reports re&uire interpretation for the position and performance of abusiness to be fully understood Financial managers and accountants use theratio analysis to assist their interpretation of this financial data

Maintaining record systems:

-re the processes and practices that a business uses to store data such assales$ e)penses$ assets$ liabilities and customer$ supplier and productinformation

Planning Financial ,ontrols:

(s a tool that provides feedbac! on the financial performance of the businessFinancial controls include budgets$ cash flo" statements$ profit and lossstatements and balance sheets

Minimising financial ris!s and losses:

(s the chance that a financial decision "ill result in a financial loss The maintype of financial ris! is that the business "ill not have enough cash flo" tomeet its financial commitments .ebt financing also raises the financial ris! ofa business

Financial Markets relevant to business financial needs:

The financial mar!et provides businesses access to a "ide range of financial

products This allo"s a business to use the participants e)pertise and tocustomise the type and use to match the business purpose and structure

The t"o main types of financial mar!ets are the:

,apital mar!et

Short term money mar!et

The capital mar!et deals "ith financial securities that help raise long termfunds for business This mar!et includes the debt mar!et and the e&uitymar!et The debt mar!et involves the borro"ing and repayments of fundssuch as mortgages and bonds The e&uity mar!et involves buying and sellingof company shares

The money mar!et involves the borro"ing and lending of money in the shortterm This is a highly li&uid form of finance Participants in the money mar!etin debt products that have a maturity date of t"elve months or less

Major participants in financial mar!ets:

(nclude financial intermediaries$ "hich accept deposits from lenders and ma!e

loans to borro"ers Such intermediaries are vital in the provision of e)ternalfunding for the establishment$ gro"th and operations of businesses Theparticipants in the financial mar!ets include:



4/10

5an!s

Financial and insurance companies

Merchant ban!s

Superannuation7 mutual funds

,ompanies

*overnment 0'5-4

The role of the -S8 as a primary mar!et:

The -S8 has many roles including:

-ssisting companies to raise initial capital finance through the issue ofshares$ "hereby those buying the shares become part o"ners in thebusiness

Providing a mar!et for e)isting company shares to be traded bet"eenbuyers and sellers

Overseas mar!et influences and Trends:

- number of overseas influences have affected the -ustralian financialmar!ets including:

9S credit crisis in the subprime mar!et (n 122$ 9S commercial andinvestment ban!s "ere affected by the inability of borro"ers to repay theirdebts

The main domestic mar!et influences are:

Financial deregulation: The regulation of restriction in the -ustralian financialmar!et began in 3; of 32 For more info$ go to """ hscintheholidays com au


5/10

Management of Funds:

5usinesses need to use a mi) of both debt and e&uity finance to achieve theirfinancial objectives

Sources of funds:

(nternal sources:

O"ners #&uity? is the funds contributed by o"ners to establish and build thebusiness'etained profits: The most common source of internal finance is retainedearnings or profits in "hich all profits are not distributed$ but are !ept in thebusiness as a cheap accessible source of finance for future activities

#)ternal sources:

#)ternal finance is the funds provided by sources outside the businessincluding ban!s$ other financial intermediaries$ government$ suppliers orfinancial institutions

Short term borro"ing: includes overdraft and ban! bills Overdraft is "hen theban! allo"s a business to dra" che&ues a certain previously settled amount5an!s bills are short term loans of about ;2? 3


6/10

The costs of establishing leases may be lo"er than other methods offinancing

(t permits 322 percent financing of assets

%ease payments are a ta) deduction

Factoring:

(s "here the factor purchases an account receivable from the business fornearly a full percentage of the price (t allo"s the business to gain the moneyo"ed to them &uic!ly

Trade ,redit: (s "here a creditor allo"s the business e)tra time on therepayment of the funds

Comparing Debt and equity Finance:

Debt Equity

%enders =ave prior claim in theevent of li&uidation

Shareholders have a residualclaim on assets

.ebt must be repaid by periodicrepayments

#&uity has no maturity date

(nterest payments are ta)deductable

.ividents are not ta)deductible

%enders usually re&uire alo"er rate of return

Shareholders re&uire a higherrate of return due to ris!

(nterest payments are fi)ed .ividend payments are notfi)ed and may be reducedthrough lac! of funds

.ebt providers have no votingrights

#&uity holders have votingrights

*earing7 %everage:

(s the proportion of debt 0e)ternal finance4 and the proportion of e&uity that is

used to finance the businesses activities *earing7 leverage is an importantconsideration for businesses as the more highly geared the business 0usingdebt rather than e&uity4$ the greater the ris! for the business

Using Financial Information:

Types of financial Ratios:

-nalysis: is an important part of the accounting process (t involves "or!ingthe financial information into significant and acceptable forms that ma!e itmore meaningful and highlighting relationships bet"een aspects of anorgani+ation The main types of analysis are vertical$ hori+ontal and trend

analysis

/ 012314 -ll 'ights 'eserved A of 32 For more info$ go to """ hscintheholidays com au


7/10

Bertical analysis compares figures "ithin one financial yearC for e)amplee)pressing gross profit as a percentage of sales and comparing debt toe&uity

=ori+ontal analysis compares figures from different financial yearsC fore)ample$ comparing 122 and 122


8/10

Ratio typeFinancial ratio Formula Reasons for the use of

this ratio

Suggested ratio level

%i&uidity ,urrent ratio The ratio gives an indicationof ho" "ell a business canmeet its current assets

The generally preferredratio level is 1:3 Thismeans that for every D1of current assets there is

D3 of current liabilityThis means that thebusiness is able to meetits short?term debtscomfortably

Solvency *earing ratio *earing is therelationship bet"een thelevel of debt of thebusiness and the level ofo"nersE e&uity (f abusiness is highly geared

it faces the possibility ofnot being able to repay itsdebt and becominginsolvent

The preferred ratiodepends on thespecific circumstancesbut for small businessA2 is an acceptablelevel: for every A2

cents of liabilitiesthere is D3 of o"nersEe&uity The higher the the greater thefinancial ris! %argecompanies mayoperate at over 322

Profitability *ross profitratio

Net profit ratio

'eturn ono"nersE e&uity

This ratio measures "hatpercentage of each dollarof sales is gross profit (tindicates the mar! up onthe goods that are sold bythe business

The ratio measures "hatpercentage of each dollarof sales is net profit (tta!es into account theoperating e)penses

This is one of the most

important indicators as itsho"s ho" much theo"nerEs investment andris! in the business isearning

The suggested ratiolevel depends on thetype of industry

- gross profit figure of62 indicates thatevery dollar of salescontributes 62 c ofgross profit to thebusiness Fallingfigures or a lo" figurecompared to similarbusinesses "ould be

a concern

- high or at leastincreasing ispreferred but itdepends on theindustryThe higher the returnthe better 9suallyover 12 is a goodreturn

/ 012314 -ll 'ights 'eserved < of 32 For more info$ go to """ hscintheholidays com au


9/10

#fficiency #)pense ratio

-ccountsreceivable

turnover ratio

T"o steps tocalculation:

This sho"s therelationship bet"eensales and the e)pensesthat the business hasmade in ma!ing thosesales

This ratio sho"s ho" longit ta!es for the businessto receive cash for itscredit sales from thedebtors

This depends on thespecific circumstancesand strtegies that thebusiness may beunderta!ing =o"ever$increasing e)penses

over time "ill needcloser revie"

The standard time torepay credit isbet"een fourteen andthirsty days (f theaccounts receivablerate is more than tendays above thestandard payment

time$ then thebusiness should beconcerned

/ 012314 -ll 'ights 'eserved ; of 32 For more info$ go to """ hscintheholidays com au


10/10

,omparative ratio analysis:

There are three main benchmar!s of "hich a business can compare itsfinancial results to:

34 Past results G historical analysis

14 (ndustry -verage? are you above or belo" industry average for returnon O#$ NP$ e)pense ratio$ current ratio and gearing

64 5enchmar! to a standard such as ban! interest rates #g$ return on O#should be above "hich is "hat could be earned if the money "erein the ban!

%imitations of financial reports:

,aution needs to be e)ercised in reading the information Misleadinginformation impacts on business decision ma!ing and outs the business atris! The first consideration that must be made is the effects of an e)ternal

shoc!$ if there is a recession then a profit ratio compared to the profit of a time"hen there "as no recession is unreasonable So it must be understood that"hen e)ternal shoc!s are ta!en into account the figures "ould loo! lessserious

=istorical costs:

-s time goes on prices change$ for e)ample if a business is on a propertyvalued 12 years ago then there "ould be a large difference "hen the propertyis re valued

Balue of intangibles:

This can include licences$ patents$ trademar!s$ brand names$ intellectualproperty and good "ill These do not have a value on the balance sheet butcan be "orth millions for e)ample the ,oca ,ola name "ould be "orthmillions

Strategies to Manage:

Working Capital:The first consideration is cash$ "hich should be

minimised so an overdraft could be use to manage The second isreceivables or accounts rec Factoring is used to speed up therelievable time The final is inventory and a H(T inventory controlsystem "ill minimise holdings of inventory

Profitability:,ont control and #)pense minimisation


Business Studies Financial Planning and Management Study Notes.doc 0

Documents

Transcript of Business Studies Financial Planning and Management Study Notes.doc 0