Role of Financial Management Objectives Liquidity Profitability Efficiency Growth Return on Investment Strategic role To provide and manage the financial resources to run the business and achieve business goals Financial planning cycle 1.Assess present position 2.Determine financial elements of the business plan 3.Develop budgets 4.Planning cash flows 5.Prepare financial reports 6.Interpret financial reports 7.Maintain record systems 8.Planning financial controls 9.Minimising financial risks and losses

Financial markets Types Capital (long term) vs. money (short term) Primary (new) vs. secondary (old) Importance of financial markets Access funds Investment opportunities Financial expertise Participants in financial markets (invest in financial securities and lend money) Banks Merchant banks Finance companies Insurance companies Super Funds Govt Other businesses Role of ASX Primary Market (allow to access large amounts of money quickly from a wide investor base) Secondary (provides liquidity for investments and encourages activity in primary market) Overseas and domestic market influences Interest rates Innovations in financial assets Deregulation Globalisation Growth in small investors

Management of Funds Debt Finance (money borrowed from outside of the business that will need to be repaid) Equity Finance Finance from inside the business Short term Trade credit Overdraft Bank bills Long term Mortgage Debenture Other Grants Venture capital leasing Comparison of debt and equity Debt must be repaid irrespective of financial position Equity is more expensive Gearing is the mix of debt and equity used Retained profits Capital Take on a new owner Owners put more money in Factors to consider when selecting finance Term and source match the purpose and financial structure on the business Other factors (repayments, costs, availability and flexibility)

Using Financial information Elements Assets (things owned) Liabilities (money owed to outside parties) Equity (owners claim in the assets of the business Expenses (costs incurred in operating the business Revenue (money earned by the business) Limitations of financial statements Historic cost (may not reflect current value and hence true financial position) Value of intangibles (subjective and difficult to value) Financial Statements Balance Sheet (show financial position of the business i.e. what they own and how they paid for them) Revenue Statement (shows operating result by matching expenses and revenues) Cash flow statement (shows the movement of cash in and out of the business Liquidity ability to pay debts when they fall due Current ratio (current assets / current liabilities) Solvency Measure of long term financial stability Gearing (debt / equity x 100) Debt to Equity (debt / equity) Profitability Amount of money earned by the business Gross profit margin (gross profit / sales x 100) Net profit margin (net profit / sales x 100) Return on OE (Net profit / OE x 100) Efficiency How well the business is using its resources Accounts receivable turnover (accounts receivable / sales x 365) Expense ratio (expense / sales x 100)

Effective Working Capital Management Formulas Ratio - Current Assets / Current liabilities Dollar value – current assets minus current liabilities Control of Current Assets (preserve the value of CA) Cash – budgets, discounts Accounts receivable – invoicing, credit terms, factoring Inventory – stock take, method e.g. JIT Control of Current Liabilities Minimise costs and ensure on time payment Strategies (increase cash balance and allow CL to be met on time) Factoring Leasing Sale and lease back

Effective Financial Planning Cash Flow Profitability Reduce Costs Identify nature of the costs (fixed or variable) Develop cost centres and assign responsibility Expense minimisation Increase revenue Set sales objectives Review sales mix (eliminate non performing products and redistribute resources) Review pricing policy Prepare and analyse cash flow statement Strategies Distribute payments (match outflows with inflows) Take advantage of discounts

Ethical considerations in financial planning and management Financial Statements Statements must be audited to ensure that they accurately reflect the business’ true financial position Areas of concern: Misuse of funds (the business’s money used in a way that does not benefit the business) Inappropriate cut offs (used to inflate or deflate profits based on the accounts included) Australian Securities and Investments Commission (ASIC) Corporate Raiding and Asset Stripping Corporate Raiding (create a rumour of takeover to raise the share price then sell shares at the higher price and take the profit) Asset stripping (leaving the business with no assets or buying a business to sell off its assets)