Boop Flashcards
Liquidity(Current Ratio)
Current Assets/Current Liabilities
Ideal range is 2:1
Comment: For every $— In liquid assets the business owns it owes $1 is current liabilities
Strategies to improve
1. Reduce current liabilities such as overdrafts through equity
2. Non-Current assets sold
3. Factoring
Solvency(Debt to equity ratio) determines level of gearing
Ideal range Below 100%
This means that for every $—– in debt the owners are providing $1 of owners equity to fund business activities
Strategies to improve are: Lowering debt by increasing equity input(New share issue)
Profitability(Gross profit or Net Profit ratio)
Higher the better
This means that for every $1 in sales the business retained $—– in Gross or net profit
Strategies to improve include
1. Reduce COGS **
2. Increase price of sales
3. Increase number of sales **
4. Reduce expenses(Net profit only)
Profitability(Return to owner equity ratio)
Above 10%
This means that for every $1 of equity invested by the owners they receive $—– in return
1. Reduce COGS **
2. Reduce Expenses
3. Increase number of sales **
4. Adjusting pricing to increase sales
Efficiency(Expense ratio)
The lower the better
This means that for every $1 in sales revenue $—- is used to pay for expenses
Strategies to improve include
1. Reduce expenses
Efficiency(Accounts receivable turnover ratio)
Sales/Accounts receivable= Answer/365=Answer in days
Below 30 days is best
This means that the business takes on average —– days to receive their accounts receivable
Strategies to improve include:
1. Implement a credit policy*****
Fees,Discounts, Time
2. Timing of receipts
3. Factoring(Last option)
What are the objectives of financial management
G-Growth-Ability of the business to grow in size(market size)
E-Efficiency-Ability of the business to use resources effectively and minimise costs
L-Liquidity-Extent to which a business can meet short term financial objectives(Less then 1 year)
P-Profitability-Ability of a business to maximise profits which satisfies owners and leads to long term success
S-Solvency-Ability of the business to meet long term financial objectives and can be measures with gearing. Indicates level of risk to investors
What are strategic roles of financial management
-Setting financial objectives
-Preparing budgets and forecasting finance
-Efficiently sourcing finance
-Implement effective financial strategies
-Effectively distribute funds to other parts of the business
How does finance interdepend with other key business functions
Operations-Sets production targets and funds production
Marketing- Cost suggestions, sets budgets, sets marketing targets
HR-Sets costs for wages, training, incentives
Types of objectives
Short term-Tactical(1-2 years) and operational(day to day)
Long term-Strategic(generally more then 5 years )
Advantages/Disadvantages of OE-Retained profits
Advantages-Not indebted to lender, No interest, Unlimited access
Dis- Dissolve funds
Long term borrwing
Shares
New issue(Primary shares)-Issued for the first time
Private shares- Money invested in a private company not listed
Financial Institutions
Investment banks- Provide services mainly to corporate sector
Finance companies-Non-bank financial institutions that specialise in smaller commercial finance.
Life insurance-Provide equity and loans to corporate sector
Super- Invest money for super into shares, property and managed funds
Unit trusts-Take funds from large number of small investors and invest in specific types of financial assets
ASIC
Independent commission who enforces and administers Corporations Act 2001 which protects investments, super and banking
