Processes Flashcards
PLANNING AND IMPLEMENTING
Financial needs, record systems, budgets, controls, Risk
Financial Needs
Determined by: Size, phase of BUS cycle, future plans for growth and development, capacity to source finance, management skills for assessing financial needs
Budgets
What: Budgets provide info in quantitative terms about requirements to achieve a particular purpose and reflect the strategic planning decisions and how resources should be used. Resource allocation!
Why: Provide framework for a BUS, outline plans, allocate financial resources effectively, assists forecasting
Drawn to show: Resource allocation, number and cost of labour hours required, estimate use of raw materials, cash required for a period
Types: Operating, projects, financial
Record Systems
Mechanisms employed by the BUS to ensure data recorded and the info provided by financial systems is accurate, reliable, efficient and accessible.
Global BUS have complexities such as currency, language, legal regulations which may differ between nations
Financial Risk
The risk of being unable to fulfill financial obligations. Q's: Should BUS borrow Will shareholders assist in expansion Will interest rates go up Implications: Gearing ratio When borrowings are due to be paid Interest rates
Financial Controls
Policies and procedures that ensure the plans of a BUS will be achieved in an efficient way
WHY: theft, fraud, damage of assets, errors in records systems
HOW: - separation of duties
Internal audited (reviews which suggest ways of improving policies and procedures)
Clear authorisation
Control of cash
cheque signatures
protection of assets (register)
Control of credit procedures, follow up on outstanding accounts
Debt finnance Adv
- Interest payments are tax deductible reducing the costs 2. Lender does not gain ownership in the BUS, 3. Allows access to a large pool of funds to conduct necessary activities.
Debt Finnance DIS
- Regardless of income the BUS has to meet the repayment requirements, 2. Can be difficult to obtain particularly for new BUS 3. Property and other assets can be repossessed by the lender if payments are not made
Equity Adv
- No repayments since funds are from internal sources 2. Dividend payments are from the businesses profits so if no profit is made they do not have to pay dividends.
Equity Dis
- Dividends are paid to shareholders from the businesses profits 2. Dilution of ownership when a BUS raises funds from equity/shareholders therefore loose control of the business.
Matching Principle
Short term debt finance smaller short term commitments and long term debt finance as a source of finance in order to finance long term commitments.
If not achieved, financial risk due to short term debt
Cash Flow
Link between an income statement and a balance sheet
The movement of cash within a BUS and can determine whether a BUS can meet financial obligations
Determines if the business has sufficient funds
Balance Sheet
Represents a businesses assets and liabilities
Assets = Liabilities + Owners Equity
Assets (CA/NCA)
Liabilities (CL/NCL)
Owners equity (Retained profits/Net profit, - drawings, capital)
Income statement
Shows the income and expenses over a period of time
Financial year in AUS is July 1 - June 30
Good for comparing figures over time (previous years indicate the efficiency of the BUS)
Liquidity ratio (working capital/current ratio)
Current assests/current liabilities
Benchmark is 2:1 - below that can be concerning
Gearing Ratio (debt to equity ratio)
Liabilities (debt)/Total equity (Owners Equity)
Related to insolvency
0.5-1:1 is the benchmark if no industry average is provided
Lower the better - if too high there is a possibility of insolvency
PROFITABILITY
Show as a %
GPR = gross profit/ sales
NPR = NP/ Sales (15% for most industries)
Return on earners equity ratio (ROE) = NP/Total equity (10-15% good)
Think about reducing expenses, cogs (cheaper suppliers), and increase revenue
EFFICIENCY
Expense ratio = expenses/total (minimise expenses and maximise the sales - lower the ratio the better)
No real benchmark it depends on how long the BUS be running for, type of BUS, eco conditions
Acc rec turnover = Sales/Accounts receivable = times per year
365 divided by answer = number of days
More than 60 days is generally a problem for collecting money and impacts cash flow and liquidity.
This can allow a BUS to take corrective action and recover outstanding debts.
Comparative ratio analysis (LIT)
Analysis involves budget figures so that projected figures can be compared against actual figures
IDENTIFY TRENDS THEN TAKE CORRECTIVE ACTION
Benchmark against similar firms ie
Ensures the BUS is operating effectively in comparison to its competitors
Identify if they are above or below peers
If not they will have to change something such as increase marketing or make it better
Industry average
Comparison against the industry average (i.e Tech industry)
Used as a guide - enables the BUS to examine risk and analyse the reasons for the differences and then they are able to take corrective action
Increases in globalisation has led to comparing against global industry standards
Limitations of financial ratios
- Normalised earnings 2. Capitalising expenses
- Debt Repayments. 4. Valuing assets
- Timing issues. 6. Notes with financial statements
- Normalised earnings
It’s the solution
Removes a one off or unusual influence such as seasonal or cyclical patterns in the economy which will affect profitability
An attempt to show a more accurate representation of the business and its activities
Allows for year to year comparisons
- Capitalising expenses
Adding the expense to the balance sheet in assets rather than an expense (R and D)
It may understate the BUS expenses and overstate the assets and profitability
Could be correct if it is adding significant value to growth of the Business
May be a misrepresentation and misleading for investors
- Debt Repayments.
Debt liabilities may not be disclosed
Reports do not have the ability to specify info about repayments such as:
How long BUS has had the debt
The capacity of the BUS or debtor to pay the amount owed
When the debt is due
The adequacy and the methods the BUS has for recovering the debt
- Valuing assets
Estimating the market value of assets or liabilities
May be listed under the original cost of the asset not the current market value
ADV is that that historical cost can be verified
DIS may distort the BUS balance sheet meaning that it may not accurately represent the true worth of the BUS assets because it’s the original cost of the business
Intangibles are difficult to value
Appreciation or depreciation of the asset must be considered
- Timing issues
Represents the 12 month period from July 1 - June 1 which may not show the true position of the BUS
Inappropriate cut off periods or the use of different cut off methods may give a misleading representation of the BUS financial performance
Overstate profits to attract investors or understate to avoid tax payments
True representation includes the matching principle should apply i.e. revenue and costs should match the period in which they occur.
- Notes with financial statements
Notes contain important info that are left out of the main reporting documents such as:
Info that may be useful to stakeholders to help make sense of the statements
Accounting methodologies for recording and reporting transactions that can affect the bottom line expected from an investment in a company
Containing further details about how the figures in the financial statements were calculated and the procedures that were used to develop them
ETHICAL ISSUES WITH FINANCIAL REPORTS
To do with the moral values with BUS methods ie what they believe is right and wrong
Transparency and trust are the main concerns with financial management have to be honest
Relation to financial Management:
Act in good faith
Exercise power for the purpose in the name of the corporation
Exercise discretion reasonably and properly
Avoid conflicts of interest
How to ensure that you meet ethical needs
Follow accounting conventions
Disclosure of all relevant info the stakeholders
Social responsibility regarding the the financial returns (society and environment factored into the framework of the BUS)
Payment to directors - Bonuses / Misuse of funds
How to demonstrate the ethical approach
Provide the triple bottom line
Internal audits beyond the mandatory external audits for public firms
Provide greater transparency
Audited Accounts
An independent check of financial accounting procedures
Internal Audits - Systematic review of the operations . Aimed at identifying how well risks are managed , whether right processes are in place. Can identify areas where efficiencies or innovations may be made.
Management Audits - Establish the current level of efficiency, suggest improvements, lay down standards for future performances, critically evaluate the senior executives as a management
External Audits - Has to be done by law by an external source. Determines whether accounting reports are complete and accurate, statements present the firm’s position fairly.
