Finance

Question 1

Topic 1

Answer 1

Role of financial management

Question 2

Topic 2

Answer 2

Influences on financial management

Question 3

Topic 3

Answer 3

Processes of financial management

Question 4

Topic 4

Answer 4

Financial management strategies

Question 5

Role of financial management

Answer 5

Strategic role of financial management
Objectives of financial management
- profitability, growth, efficiency, liquidity, solvency
- short-term and long-term
Interdependence with other key business functions

Question 6

Influences on financial management

Answer 6

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
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

Question 7

Processes of financial management

Answer 7

Planning and implementing- financial needs, budgets, record systems, financial risks, financial controls
- debt and equity financing- advantages and disadvantages of each
- matching the terms and source of finance to business purpose
Monitoring and controlling- cash flow statement, income statement, balance sheet
Financial ratios
- liquidity- current ratio (current assets ÷ current liabilities)
- 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

Question 8

Financial management strategies

Answer 8

Cash flow management
- cash flow statements
- distribution of payments, discounts for early payment, factoring
Working capital management
- control of current assets- cash, receivables, inventories
- control of current liabilities- payables, loans, overdrafts
- strategies- leasing, sale and lease back
Profitability management
- cost controls- fixed and variable, cost centres, expense minimisation
- revenue controls- marketing objectives
Global financial management
- exchange rates
- interest rates
- methods of international payment- payment in advance, letter of credit, clean payment, bill of exchange
- hedging
- derivatives