Financial Management: Role and Objectives

Role of Financial Management

• Financial management involves planning, organizing, and monitoring financial resources.
• Its strategic role is to ensure business operation, growth, and profitability for owners.
• Financial managers need accounting skills to analyze financial data effectively.

Objectives of Financial Management

• Profitability involves making a financial return from business activities.
• Maximizing profit requires monitoring revenue, pricing, costs, inventory, and assets.
• Net profit from the income statement is a way to measure it.
• Investors rely on long-term profit for business survival and capital returns.
• Growth refers to increasing a business's size and value over time.
• Could involve increasing assets, market share, acquisitions, or geographical expansion.
• It's crucial to effectively monitor growth levels and cash flow for sustainability.
• Efficiency involves generating maximum returns for minimum costs.
• Can involve increasing output with the same inputs or achieving the same profit with fewer assets.
• Efficiency may be measured using an expense ratio and the ability to collect accounts receivable.
• Liquidity is the ease with which an asset turns to cash, which refers to a business's capacity to to meet its debt (current liabilities).
• Need to maintain sufficient current assets, such as cash and accounts receivable, relative to current liabilities (less than 12 months), for example, short-term loans or bank overdrafts.
• Firms must have adequate cash flow to pay financial commitments or quickly convert assets into cash, such selling stock.
• Solvency is the capacity of a business to pay both its debt as they become due.
• It shows overall financial stability.
• Gearing measures the amount firm funded by debt finance in relation to from equity finance (businesses use mix of both).
• Must avoid holding too much or too little cash to liabilities.
• Long-term objectives are strategic, generally covering 5+ years, achieved through tactical plans (1-2 years) that are regularly reviewed.
• The ultimate objective is to grow owner's wealth which relies on near-term profitability from boosting operational efficiency.

Interdependence with Other Key Business Functions

• Operations requires finance for inputs, machinery, land etc. while operations manages stock & outsourcing and finance monitors the costs
• Marketing generates sales which assists with the short-term financial goal of managing cash flow while finance establishes budgets and forecasts marketing must follow
• Human Resources requires funds for wages/salaries & HR strategies, thus training/development

Internal Sources of Finance

• Internal funds originate from within the business.
• Owners' equity involves funds coming from the investors or partners to form and grow business either from new partner or issuing private shares or selling unproductive assets
• Retained profits are earnings kept within the business instead of being dispensed to shareholders as dividends, serves as a cheap accessible finance.
• On average in Australia 50% of business profits are retained and reinvested.

External Sources of Finance

• Short-term borrowing involves debt repayable in less than 12 months, like bank overdrafts, business bills, and factoring.
• Bank overdrafts allow businesses to exceed their account balance, within agreed limits and a specified time, to address short-term cash deficits.
• Provides flexibility with short notice money access through cheque use and helps short term liquidity issues.
• Interest (variable) is paid on a daily basis across the the outstanding account.
• Commercial bills are written agreements to repay a specific amount on a set future date.
• Funds borrowed are from non-bank entities, while the bank warrants that its customer will repay this loan, providing the customer meets the requirement from the bank
• The business gains money at once while they have to pay the principal plus interest back at future date, mainly used exceeding $100 000 for 3-6 months.
• Factoring involves a business selling existing debt to factoring company
• Factoring company provides immediate cash in return for ownership of debtors books.
• Generates cash sale of accounts receivable at a discount to a factoring company
• Factoring company will pay the business the present value of the accounts receivable minus a commission or fee.
• Business receives as 90% of amount of receivables within 48hrs of submitting invoices to the factoring company which will take management & collection of the unpaid accounts under terms agreed with the business.
• Improves liquidity by paying cash out some the businesses working capital earlier

Long-Term Borrowing

• Involves the use of loans to expand past 12 months.
• Can be secured or unsecured.
• Funds projects, plant, and other equipment.
• Mortgage funds property such as office sites or buildings which is secure for the repayment of the loan (bank can sell) with regular repayments plus interest across set of time.
• Debentures are secured loans made by a company/business for the purpose of fixed interest as period of time, lender becomes debenture holder and has the security of the business's assets
• Used by large established companies to buy buildings, equipment.
• Unsecured notes (bonds), issued by finance companies for gained funds which is unsecured asset securing this and has higher interest than that of a debenture.
• Leasing is where businesses rent assets, equipment, office space, or other items.
• By leasing business is reducing cost of asset as firm will only have to pay the other business rent
• Term loans are repaid past 12 months.

Equity

• Equity refers to raises finance in shares to the public to source external with private equity & ordinary shares
• Advantage is that shares will pay when profits are made rather than interest payment needing quicker finance raising
• Public company ownership with dividends paid to shareholders, with shareholder rights to vote across the board
• New issues are primary shares listed publicly with prospectus by stockbroker made shares exchanged securely.
• Rights issues are privileged new shares existing shareholder buy safely in the same listed company.
• Placements are large shares provided to institution investment sale plans.
• Share purchase allow limited company to make shares issued to shareholder safely as is low costing and inexpensive w/ASIC registration .
• Private Equity, where investors invest in private company which can postpone dividends due to the original having less control being more widespread.

Financial Institutions

• Banks are the main providers of finance to businesses and consumers. They take deposits and invest by lending to borrowers E.G. Commonwealth, Westpac, NAB
• Investment Banks specialize in assistance to corporations, as arranging for foreign/takeover for advice in mergers and managed with portfolio investment. E.G. Macquarie bank
• Both offer secured as unsecured business loans.
• Finance and Insurance companies, where they provide funding to large investments from insurance premium payments, e.g G. I. O
• Capital race through debentures from loan providers mostly, usually with high prices but not so strict criteria from banks, E.g. ESANDA
• Superannuation funds can grow funds sector investing long term security for government by properties. and other entities
• Unit Funds deed for investment by pooling money by trustee in assets E.g mortgages, interest with financial trustees

Australian Securities Exchange (ASX)

• Stock exchange in Australia's is where businesses can capitalize with markets acting secondarily for buying from market.

Influence of Government

• ASIC enforces/administers the Corporations Act, protection of consumers, investors and fair corporations and financial information providers
• Australian businesses pay 30% net profit as tax, with reduced by government for foreign investment to cause economic prosperity

Global Market Influences

• Economic prospect involves economy, investment, levels and borrowing/production which can be discouraging as it increases in countries, while funds of opportunity can also be raised with higher rates as it can decrease availability funds by increasing high interest rates
• Australian interest tends to borrows from overseas and japan since the risk can affect fluctuations of currency

Processes of Financial Management

• Financial Needs with accounting/analysing to get financial controls by financial risks plus resources for budgets .
• Financial needs must be met with production sources to develop budget for resources.
• Record systems must be accurate in order with appropriate resources in relation to financial accounts, that can be risk non payment or theft.
• They must be managed well though accounts for balances sheets for future cash flow

Advantages & Disadvantages of Debt

• Usually available with tax deduction for interest payment;
• More funds, earnings, and less shared profit.

Disadvantages

• Consistent regular repayment with the the possibility of rising debt
• Increases financial risk if default leads to loss of asset
• Less interest charges (equity), no gearing implications so higher growth due to being more flexible as investment can increase
• Proportion of profits being distributed;
• Dividends not tax deductible, more expensive due to shareholder high returns
• Less control and dilution (external equity)

Matching the Terms and Source of Finance to Business Purpose

• Short (long) -term should match asset purchase with short (long)-term finance for appropriate structure depending on equity vs ASX

Mointoring

Cash Flow Statements

• How much money is coming into the business (receipts)

Income Statement

• How much the business sold and its total profit

Balance Sheet

• Represents a business's assets and liabilities which indicates current liquid assets

Financial Ratios

• From liquidity/sheet, current ratio(asset) measures its current liabilities meet.
• Gearing - determines the company trading term & shows company with external reliance less than 1:1
• Profit Measures the average % of each dollar of sales that is gross profit 50% or more
• Efficiency of how expenses show businesses with low cost structures, by selling people owe

Limitations Of Financial Reports

• Normalized Earnings: removing abnormal data from previous activity
• Capitalzing Expensive: the financial condition by expenses understated
• Valuing Assets: under states expenses by putting market on balance sheets.

There can be ethical issues such as

Audits

• Must be independent, truthful, and correct.
• Accounting standards must be accurate with documentated by Australian Taxation Office
• Legally bound standards by ATO with understatements

Cash Flow Statement

• Manages cash in business for problem by monitoring flow for liquidity and shortages

Management Strategies

• Bill payment maximizing, to maximize savings credit bills or prepare expenses for payments.
• Discount offerings to get dollars faster targeting at large owing

Financial Commitment

• Refers to short term funds which can improve debt through W=CA-CL

Control

• Cash is predicted can prepare budget to anticipate, account for receivables

Accounts and Inventories

• Establish factoring from payments as policy to collect cost so low as little as minimum or larger goods
• Control of Current Liabilities
• Careful need of stretch to improve payments from minimum JIT paid

Management Strategies

• Pay debt from business, business conserve assets with tax

Profitability Management

Control

• Fixed is constant, can reduce through supplies by cost minimization for revenue.
• Through objective sales maximize improve cash flow, while currency fluctuation imports decrease competitiveness.
• Like payment in advance (by buyer) can reduce risks though for credits like cash

Payment in Advance

• Most risk for exporter payment with bank transfer guaranteeing payment shipped overseas

Hedging

• Is minimizing risk over rates by subsidiaries business
• Rates on contracts for assets traded.

Derivatives

• Bank locking rate not taken advantage of with the right rates to sell with contracts allowing the reverse to trade

Control of Current Liabilities

• Careful need of stretch to improve payments from minimum JIT paid

Management Strategies

• Pay debt from business, business conserve assets with tax

Profitability Management

Control

• Fixed is constant, can reduce through supplies by cost minimization for revenue
• Through objective sales maximise improve cash flow, while currency fluctuation imports decrease competitiveness
• Like rate and by payment in advance (by buyer) can reduce risks though for credits like cash

Payment in Advance

Most risk for exporter payment with bank transfer guaranteeing payment shipped overseas

Hedging

Is minimizing risk over rates by subsidiaries business

• Rates on contracts for assets traded

Derivatives

• Bank locking rate not taken advantage of with the right rates to sell with contracts allowing the reverse to trade