Finance Flashcards
D Goal
A measurable and observable long-term aim.
It identifies the business’s direction and focus for the future.
(Goals may involve several objectives.)
d Objective
A series of short- term steps or targets needed to achieve the final goal.
d Dividend
The income earned from owning shares in a company.
d Drawings
Money taken out of a business by a sole trader or partner for their personal use.
5 Financial objectives…
- Liquidity
- Growth
- Efficiency
- Profit
- Solvency
d Profitability…2
The earnings of the business after expenses have been paid. (Ability to make financial return)
d Efficiency…
How much of total revenue is spent on expenses.
d Growth…
Increase in value and size of business over time.
d Liquidity
The ability of business to pay short term liabilities using its current assets.
d Solvency
The ability of the business to pay both short/long term liabilities as they fall due. Indicates long term stability.
d Debtors..
People who owe money to the business. Accounts receivable/
d Current assets…
Assets expected to be used, sold or converted to cash within 12 months.
d Creditors…
Businesses/Institutions that a business OWES money too. Accounts payable.
Problem of too little liquidity…
Can’t pay water/phone/electricity bills - cut off.
Interdependence eg F and HR
Finance must fund renumeration and HR strategies. Qantas spends $275m annually on staff training.
Interdependence eg F and M
Finance depends on marketing to generate funds. + Also, Marketing strategies (like new Qantas lounges) need to be funded by finance.
Interdependence eg F and O
Set budget for O. Fund new equiptment eg planes at Qantas.
Internal sources of finance 3
- Selling unproductive assets
- Owners equity/capital
- Retained Profits
Short term debt options 3
- Overdraft
- Commercial bills
- Factoring
Long term debt options
- Mortgages
- Debentures
- Leasing
- Unsecured notes
Types of equity finance
private/public
Types of public share issues 4
- New share issue (IPO)
- Rights issues
- Placements
- Share purchase plans
Rights issue meaning
Company offers existing shareholders option to purchase more shares. option can be rejected, sold, transfered.
Placements issue meaning
Firms offers specific investors large amount of shares. Used for quick cash for takeovers.
Share purchase plans meaning
Offer shares to existing shareholders at discounted price.
Qantas shareholder example
raised $500m in 2009
2 other random sources of finance
Govt grants. Venture capital.
7 Financial institutions
- banks
- investement banks
- finance companies
- life insurance
- super funds
- Unit trusts
- ASX
Global market influences 3
- Economic outook
- Avaliability of funds.
- Interest rates.
Influence of Govt dot point 2
ASIC and company taxation.
How Govt can influence finance 3
Fiscal
Monetary
Legislation
How ASIC influences
Regulates corporations, markets, provision of financial services. Ensures fair and honest dealings.
Law ASIC governs under…
Corporations Act 2001 (Cth)
5 points under Planning and Implementing
- Determine Financial Needs.
- Set budgets
- instigate record systems
- determine financial risks
- develop financial controls
Determining financial needs means…
Analysing current position > set goals > determine f n > source finance > implement
Budget meaning
A budget is a place for achieving set outcomes and is based on forecasted figures and expectations of future activities.” A budget sets goals
Record systems meaning
MYOB etc
Used to create financial statements. Records must be kept by law.
Financial risks dot point examples
IR hikes, theft, nonpayment
Financial controls meaning
Controls will establish whether the business is achieving its objectives. Also ensure no employee theft or improper use of funds eg credit cards. `
Source of finance influenced by 5
- Legal Structure
- Profitability
- Share price
- IR
- Credit rating
Liquidity or working capital ratio or current ratio. AND GOAL
= CA / CL
Goal is slightly over 1.
Gearing or Leverage
AND GOAL
= TL / TE
4:6 or 40%
GPR
shows what?
= GP / Sales
Shows markup/profit margin of stock. Shows money made from core business activity.
NPR
= NP / S
ROE + good if high..
NP / TE
easier to gain funds.
Efficency ratio names ?
Expense ratio and Ac rec turn ratio
Expense ratio
= Total Expenses / Sales
Acc rec turn o
= Sales / Accounts recievable
Comparative ratio analysis comparables…3
- Different times to track progress
- Against standards KPIs
- Other in industry
Goal ROE
greater than current IR
Limitations to financial reports..6
- Normalised earnings
- Capitalising expenses
- Valuing assets
- timing issues
- debt repayments
- notes
Normalised earnings info
The earnings adjusted to take into account cyclical upswings or downswings in the economy to remove one-time influences. (eg Sale of land)
Gives more accurate sense of real earnings.
Capitalising expenses info
The costs incurred when financing a non-current asset added to the cost of the asset.
Makes assets look more valuable
Valuing assets limitiations
Value changes over time.
Hard to value intangibles. Like goodwill and patents
Timing Issues info
Revenue flows can be delayed or sped up. This makes the business seem more/less profitable. Financial periods vary country to country
Debt repayements info
Reports dont show true future debt. Eg warranties, staff oncosts.
Notes to financial reports info
Provide details. Might include methods of recording transations.
Ethical issues to financial repots.
Accountants cannot be creative. (CPA and CA teach this)
Bad practices can lose thousands of jobs.
Audits must be undertaken
Eg of financial misconduct 3
Calling R and D investment not expense.
Innapproriate asset valuations.
Using business credit cards for personal use.
Financial misconduct prohibited under…
Corporations Act 2001
Financial Management strategies 4
Cash flow mng
Working capital mng
Profitability mng
Global Financial Mng
2 Dot points under cash flow ng
- cash flow statements
- distribution of payments, discounts for early payment, factoring
Working capital mng 3 dot points
- control of CA - cash, recievables, inventories
- control of CL - payables, loans, overdrafts
- strategies - leasing, sale and lease back.
Net working capital
= CA - CL
Ways to improve accounts turnover ratio 3
- Factoring
- introduce late payment fee
- reduce credit time
etc
Problem with investories
$ on security, perishing, ties up cash
Strategies with payables…2
- Pay on last day possible
- Ask for discount for early payment
dot points under profitability management 2
- Cost controls - fixed and variable costs, cost centres, expense minimisation
- revenue controls - marketing objectives
Easier types of costs to reduce,
variable
Ways to reduce variable costs…3
- Negotiate discounts from suppliers
- replace permanent with part time (no oncosts)(qantas)
- outsource non core BF
Cost centres
centres that account for expenses/costs incurred by each KBF in providing a product to customers. Cost centres are used to identify which expenses contribute most to the product. This shows which area expense minimisation would have the greatest effect
expense minimisation ideas…3
- multoskill workforce to increase efficiency
- substitue capital/labour
- use JIT
Revenue controls
marketing strategies aim to maximise revenue
