Strategic Financial Management

Strategic Role of Financial Management

• Financial management is how businesses raise, use and monitor funds.
• Finance is one of the functional areas of management.
• It deals with profit or losses from operations, ensuring appropriate cash flow, raising funds, controlling internal funds, investment of funds, cost control, pricing and forecasting.

Key Concerns of Financial Management

• Providing a link between a businesses goals and the resources needed to achieve those goals.
• Evaluating a project's size, profitability, and risk.
• Finding suitable types of finance.
• Measuring financial performance and assessing actual performance vs. planned performance.

Key definitions

• Budgeting: Preparing revenues and costs for future business functions.
• Auditing: Checking that financial plans are implemented
• Asset Valuing: Determining how much business assets are worth.
• Cash Control: Maintaining sufficient working capital.

Strategic Role

• Long-term planning and monitoring of a business' financial resources enable the achievement of profit maximisation.
• Involves setting objectives throughout the business and deciding what resources will be needed to achieve these objectives.
• Encompasses long-term organization view while accounting for changing environments

Importance

• Every aspect of a business relies on finance
• It enables the business to achieve its goals
• Senior management are the people that often perform this planning.

Financial Management Allows

• Achieve financial management objectives (PLEGS) and growth
• Funds are essential for survival and often cause failure.
• Its essential for business growth.
• Funds are essential for survival and often cause failure, especially among SMEs.
• It is Required for inventory / asset management
• Enables research and development
• Forecasting (financial)
• Funding employees and operations

Profitability

• the level of revenue less total costs
• Increasing profitability means increasing revenue and/or reducing costs.
• It is the ability of a business to maximise its profits.
• Satisfies owners or shareholders in the short term.
• It ensures the sustainability of the firm in the long term.

Growth

• Growth refers to increasing size or scale of the business.
• Multiple ways include: direct expansion by acquiring more resources (organic growth), merging with other businesses, and acquiring other businesses.

Efficiency / Effectiveness

• The level refers to outputs obtained from inputs.
• Financial management aims to reduce input costs by maximising efficiency / effectiveness per input.

Liquidity

• Extent to which a business can meet its financial commitments in the short term
• A business must have sufficient cash flow or be able to convert current assets into cash quickly to ensure the business has supplies of cash when needed.
• Cash shortfalls and idle cash should be avoided or the business may face a loss of profitability.

Solvency

• Solvency refers to the business' ability to pay its long term liabilities.
• Especially important to the owners, shareholders and creditors as it is an indication of the risks to their investments.
• Gearing is the proportion of debt (external finance) and the proportion of equity (internal finance) used to finance a business activities and determines the firms solvency.

Short-term Financial Objectives

• Tactical (1-2yrs) and operational (day-to-day) plans reviewed regularly to meet targets and use resources effectively.

Long-term Financial Objectives

• Strategic plans for a set period, generally involving broad goals such as increasing profit or market share spanning over 5 years with short-term goals to assist in its achievement.
• Business objectives compliment each other; however potential conflicts must be assessed and reconciled.
  • Long term goals satisfy managers, employees, suppliers, and the local community but is associated with increased costs, gearing and lower profits in the short term causing conflict with the business owners/ shareholders and investors.
  • Expansion increases the overall value of the business in the long term.
  • Investing in research and development is expensive and can take years to achieve results but in the long run can make the company lots of money.
  • Long term profitability requires investment in human and physical resources and may take a long time to pay off, minimising the businesses ability to meet their short-term obligations.

KBF Interdependence

• Operations needs funds to purchase inputs and carry out transformation processes.
• Marketing needs funds to undertake various forms of promotion.
• Human resources needs funds to pay staff.

Finance Needs Others

• Finance relies on operations to produce the products to generate revenue.
• Finance relies on marketing to promote the businesses products to generate revenue
• Finance relies on human resources to manage staff which helps the business generate sales and provide income.

Retained Profits

• Generated from within the business itself
• Cheaper and does not have associated interest costs.
• There is an opportunity cost - what else could the business have used the money for that could have generated more money, rather than saving it up.
• Refers to using the business profits from previous years to reinvest into the business.

Internal Finance

• Funds provided by the owners of the business (finance - equity or capital) or from the outcomes of business activities (retained profits).
  • Owners equity is the funds contributed by owners or partners to establish and build the business
  • Equity capital can also be raised by adding a partner, seeking funds from an investor who becomes an owner/ shareholder, selling unproductive assets or issuing private shares.
  • Retained profits is the most common source of internal finance which are earnings not distributed but kept in the business for future activities and reinvestment.

External Finance

• External sources of finance are obtained from parties outside of the business (banks or shareholders) so it means costs either as interest or giving par ownership of the business with debt (borrowing of money with a contract and a set agreement on how the money will be repaid).

Short-term Borrowing (within 12 months)

• Overdraft:
  • Withdrawing a larger sum of money than what is in the bank account up to an agreed limit and time for repayment.
• Commercial bills:
  • Short term loans over $100,000 with a lending period is 30 - 180 days to be repaid with interest.
  • Secured against the business' assets.
• Factoring
  • (think debt collector) - Raising cash flow by selling accounts receivable to a factoring company at a discount.
  • Allows businesses to receive up to 90% of the amount in 48 hours from the 'factoring' company.
  • Benefit: Beneficial for a fast injection of cash into the business
  • Negative: Can harm customer relations or business relationships

Long-term Borrowing (Longer than 12 months)

• Mortgage
  • A secured loan from the bank, Secured means the asset can be taken if payments are not made (e.g: House can be repossessed by the bank if required payments are not made).
• Debentures
  • A long term loan from investors with a fixed interest rate.
  • These are 'sold' by the business to investors (Westpac Bank raised $25bn in funds through debentures in 2009).
• Unsecured notes
  • Long term loans which do not need collateral.
  • Means a greater risk to the lender and a higher interest rate.

Leasing

• Similar to renting, pay off an asset over time without owning it
• Allows the business to access the asset without large up-front costs.
• Makes it much easier to update or change assets for example leasing an office for a year then moving to a better one.

Equity

• Equity involves giving up partial ownership in return for funds associated with a loss of freedom to make some decisions.
• Ordinary Shares - investors purchase a share of ownership in a business which can give uncertain rewards in the form of dividends as a share of the profit.
• New issues is when a business makes a main public offering to investors and can raise funds but they now have lost ownership of that part of the business.
• Rights issues is when a business sells additional shares to shareholders to raise funds in a cheaper way by offering current shareholders one additional share for every five they already own.
• Placements involve selling shares privately, rather than through a public offering. Via a financial institution, the business can sell to private investors at a lower cost than a public offering.
• Share purchase plans means providing shares to shareholders instead of dividend payments which means the business saves extra cash that would otherwise be given as dividends.

Private Equity

• a specialized form that is often a private sale of part ownership of a company to a firm or large investor meaning giving a large financier part ownership of the business in return for a large amount of funds.
• Venture Capitalism means the capitalist takes a big risk by investing in a company; but often expects good returns.

Financial Institutions

• Banks are the major operators in financial markets and are the most important source of funds for businesses.
• Banks roles include offering a wide range of financial products and services/credit cards, cheques, overdrafts, insurance, investment and savings accounts/lending money through personal and business loans and mortgages and for businesses provide business banking, trading in financial markets, stockbroking, insurance and funds management.
• Banks accept money as savings (deposits) at a lower interest rate and lends that money at a higher interest rate to make a profit.
• Investment banks provide services in both borrowing and lending, primarily to the business sector. Trade in money, securities and financial futures + Arrange long-term finance for company expansion or give advice on mergers and takeovers + Provide portfolio investment management services + Arrange overseas finance + Operate unit trusts including cash management trusts, property trusts and equity trusts.
• Finance Companies operate non-bank financial intermediaries that specialize in smaller commercial finance. Provide mainly short-term and medium-term loans through consumer hire-purchase loans, personal loans and secured loans and are also the major providers of lease finance specializing in factoring or cash flow financing..
• Life insurance companies are also nonbank financial intermediaries who provide cover and a lump sum payment in the event of death. .Life insurance companies provide equity and loans to the corporate sector through receipts of insurance premiums, which provide funds for investment

Superannuation Funds

• A scheme set up by the federal government, that requires all employers to make a financial contribution to a fund that will provide benefits to an employee when they retire and invest the money received in company shares, property and managed funds.

Unit Trusts

• Also known as mutual funds, it takes funds from a large number of small investors and invest them in specific types of financial assets which can be in any mixture of cash, Australian or international shares, fixed interest securities (such as government bonds) or property.

The Australian Securities Exchange (ASX)

• The ASX operates as a market where shares are bought and sold and enables a company to raise new capital through the issue of shares and through the receipt of proceeds from the sale of securities (primary market)/secondary market is where pre-owned or second-hand securities, such as shares, are traded between investors.
• The ASX functions as a market operator, clearing house and payments system facilitator and compliance with its operating rules and promotes standards of corporate governance among Australia's listed companies.

Australian Securities and Investments Commission (ASIC)

• Independent statutory commission which enforces the Corporations Act (2001)
• ASIC enforces laws to protect Australian businesses, finance professionals and consumers to reduce fraud and unfair practices in financial markets and products.

Company Taxation

• leveled federal tax rate of 30% on their taxable income, except for SMEs, which are subject to a reduced tax rate of 25%
• In order to be eligible for the lower company tax rate, the company has to have a turnover of less than $50 million.
• Government has gradually decreased company tax rates to be more competitive in the international market.
• Company tax is paid before profits are distributed to shareholders as dividends.

Economic Outlook

• Global economic outlook refers specifically to the projected changes to the level of economic growth throughout the world.
• Positive outlook: business will need to prepare for increasing demand for products and services, focusing on funds to purchase equipment, employ or trainstaff, or expand the size of the business the are a decrease in the interest rates on funds borrowed internationally from the financial money market.
• Negative outlook: business will need to prepare for decreases in consumer spending by downsizing or slowing production discretionary spending dropped 25 per cent/interest rates will likely decrease in an attempt to revitalise the economy, OR if contractions are necessary to re-stabilise the economy interest rates will increase to discourage spending.

Interest rates

• Interest rates alter the associated costs of loans, incentivising or incentivising spending and economic activity.
• Low interest rate incentivises spending as money saved will not generate more money with low interest, and incentivising taking loans, as interest on repayments will be lower.
• High interest rate incentivises saving, as saved money in banks will grow with the larger interest, while discouraging taking out loans, as higher interest on repayments - paying way more

Financial Needs

• The size of the business
• The current phase of a business cycle
• future plans for growth and development
• Capacity to source finance - debt and/or equity
• Management skills for assessing financial needs and planning

Budgets

• The review of past figures and trends, and estimates gathered from relevant departments in the business + Potential market or market share, and trends and seasonal fluctuations in the market + Proposed expansion or discontinuation of projects + Proposals to alter price or quality of products + Current orders and plant capacity + Considerations from the external environment
• There are three types of budgets (operational + project + financial).

Record Systems

• Data is recorded and the information provided is accurate, reliable, efficient and accessible and is essential for decision-making, financial control, compliance, and performance evaluation.
• Financial Records - Includes income statements, balance sheets, cash flow statements, tax records + Operational Records - Inventory management, customer databases (CRM), HR records + Legal & Compliance Records - Business registration documents, contracts, workplace safety reports.

Financial Risks

• Credit, market, liquidity and operational risk.
• Credit Risk involves borrowing money- businesses needs to ensure sufficient funds to meet these repayments.
• Market Risk involves changing conditions in the market for example increasing number shopping online. Liquidity Risk- the business have sufficient funds to meet their financial obligations, need convert their assets into cash. Operational risk, the various dangers faced during the day-to-day management and a business may have Legal problems, fraud risk, human resource issues, and business model risk.

Financial Controls

• Financial controls are the procedures, policies and means by which a business monitors and controls allocation and usage of its resources and ensure a clear authorisation and responsibility for tasks in the business and separation of duties- one person order and the other for reciept.
• Placing certain qualification and employ only certified + control + protection of asset.

Advantages and Disadvantages for debt financing and equity financing

• Debt financing can include short and long term with some advantages- they are really ready available to get and can lead to increased earnings and profit and tax deductable but can be increased risks as interest with equity it doesn't need to be repaid
• Advantages to Equity-contributed finance is used Low expensive process Ownership
• Disadvantages include lower profits and returns.

Liquidity

• Ability to meet short term financial and to turn assets into cash also basically does it have enough available and means possible to earn additional income.

Gearing

• solvency or the level of long-term debt compared to the total equity in a business is measured by The debt equity ratio, which equals the total liability by the total equity and compares how much the business actually owns to the total value it's in debt.

Efficiency

Efficiency measures how well a business can work for tasks cheap.

Financial reports

• financial reports are great tools to tell u about the financial business with cautions since do not always shwo the whole story. .

The Financial Ratios

• The Current Ratio - a sound financial position (i.e. the firm should have double the amount of assets to cover its liabilities).
• The debt to Equity ratio - The solvent of the debt can be a risk.
• Net profit ratio and Gross profit Ratio - A firm aiming for a good one

Normalised earnings

• Normalised earnings normalings that refer earnings to have the adjusted to take account that refers to earnings.

Capitalising

• Refers to the listing and listing the capital expenditure is asset.

Valuing assets

• How to the Accurately and what it is.

Timing

• Issues with the timing can give time.

Cash flow Statements

• used to help Indicate the movement of the payments over time

Strategies

• can include distrubuting cash payments and invoices that is being the selling a business.

Working Capital

• capital can helps it can be in liquidity with with of the management and be needed with the current abilities.

Inventory

• the stock of excess inventory the management and to ensure that management.

Cost -

• fixed , variable expenses.

Revenue control

• a higher sales.

Exchange rates

• It helps with the countries can commerece that helps.

Intereset rates

• Borrow lenders helps in the countries and other things to take.

Methodas

• and payment and and what it's what you.

Hedging

• risks with the curreny helps fluctuations risk.

Cost of good sold

• Is the value that sold that to a product expenses amount.

Nert of amount

• help what you get after an expenses

Gross

• Helps how much you left it off.