TOPIC 3 - FINANCE
Role of financial management
- strategic role of financial management
- objectives of financial management
– short-term and long-term
- interdependence with other key business functions
Influences on financial management
- internal sources of finance – retained profits
- external sources of finance
– equity – ordinary shares (new issues, rights issues, placements, share purchase plans), private equity
- financial institutions – banks, investment banks, finance companies, superannuation funds, life insurance companies, unit trusts and the Australian Securities Exchange
- influence of government – Australian Securities and Investments Commission, company taxation
- global market influences – economic outlook, availability of funds, interest rates
Processes of financial management
- planning and implementing – financial needs, budgets, record systems, financial risks, financial controls
– matching the terms and source of finance to business purpose
- monitoring and controlling – cash flow statement, income statement, balance sheet
- financial ratios
– gearing – debt to equity ratio (total liabilities ÷ total equity)
– profitability – gross profit ratio (gross profit ÷ sales); net profit ratio (net profit ÷ sales); return on equity ratio (net profit ÷ total equity)
– efficiency – expense ratio (total expenses ÷ sales), accounts receivable turnover ratio (sales ÷ accounts receivable)
– comparative ratio analysis – over different time periods, against standards, with similar businesses
- 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
Financial management strategies
- cash flow management
– distribution of payments, discounts for early payment, factoring
- working capital management
– control of current liabilities – payables, loans, overdrafts
– strategies – leasing, sale and lease back
- profitability management
– revenue controls – marketing objectives
- global financial management
– interest rates
– methods of international payment – payment in advance, letter of credit, clean payment, bill of exchange
– hedging
– derivatives