Year 12 Business Studies


10 Νοε 2013 (πριν από 3 χρόνια και 10 μήνες)

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Year 12 Business Studies

Role of Financial Management

Strategic role of financial management is to ensure
that a business operates with a ROI and continues to
grow and meet its objectives

Financial objectives identify what the owners of a
business want to achieve:






Role of Financial Management

What is profit?

What is left over after all expenses have been paid

Retained profit is reinvested back into the business as

Profitability is represented by the gross profit and net
profit earned in a financial year

What is efficiency?

Achieved when a business can generate a greater output with the
same level of inputs (or same output using less inputs)

What does liquidity show?

It shows how well working capital is being managed and whether the
business can meet its short
term obligations

Role of Financial Management

A business needs to hold liquid assets

The most liquid asset is cash

Current assets are more liquid than non

What is solvency?

The ability of the business to pay its debts as they fall due

The higher the gearing or debt compared to equity
finance, the greater the financial burden and the
greater the risk.

Influences on Financial Management

How can a business finance money?



Internal sources of funds are called equity
(reinvested profits and capital contributed by

External sources of finance include debt finance
(borrowed money) and equity in public and private

Types of debt financing are short and long term.

Influences on Financial Management

Short term types include bank overdrafts, commercial
bills and factoring

Long term types include mortgage loans, debentures,
unsecured notes and leasing

Leasing allows a business to finance an asset by
effectively hiring it for a given time frame

Factoring enables a business to increase its cash to
finance the payment of short term liabilities and

Private equity refers to selling shares by inviting people
to become owners of the business in a private company.

Influences on Financial Management

What does the Australian Securities Exchange do?

A market that allows companies to issue shares on the primary
market to raise equity finance

Facilitates the buying and selling of shares on the secondary

Deregulation of the Australian financial sector
means Australian businesses can now choose from a
greater number of financial products and services at
more competitive prices

Businesses can acquire finance from overseas stock
exchanges and overseas financial institutions.

Processes of Financial Management

Financial management is responsible for the
financial planning of the business

A business may acquire funds from both equity and
debt sources:

Equity is lent to the business in exchange for ownership

Debt is made up of borrowed funds that must be repaid with

What are the three main financial statements?

flow statement

Income statement

Balance sheet

Processes of Financial Management

What is the income statement?

A summary of the income and expenses of a business over a
set period of time.

What can you calculate from the income statement?

Total revenue


Gross profit

Net profit

A summary of the profitability and efficiency of the
business over a period of time

Processes of Financial Management

What is the balance sheet?

A summary of the assets, liabilities and equity of the business
as at a particular date

It provides a look at the financial stability or net
worth of the business.

Information can also be used to determine the
business’s liquidity and gearing.

Processes of Financial Management

Financial ratios are management tools used to
analyse the financial statements of a business

Liquidity: current ratio

Gearing: debt to equity ratio

Profitability: gross profit ratio, net profit ratio and return on
equity ratio

Efficiency: expense ratio and account receivable turnover ratio

Ratios can be compared with those of previous years
(same period) or with industry averages
(benchmarking) and competitors.

Financial Ratios


current ratio (working capital ratio)

Current assets/current liabilities


Debt to equity ratio

Total liabilities/equity


Gross profit ratio, net profit ratio and
return on equity

Gross profit/sales x 100, net profit/sales x 100, net profit/total equity
x 100


Expense ratio, Accounts receivable turnover

Total expenses/sales x 100

Number of days in a year, 365 divided by sales/accounts receivable.

Financial Management Strategies

A business must be able to pay for its expenses and
term liabilities when they are due

flow statements can be used to predict a
business’s cash inflows and outflows over a length of
time to identify a period when the business may have
liquidity problems

Working capital is the current assets used in the day
day running of a business

Net working capital = current assets


Financial Management Strategies

What does inventory include?

Raw materials


Finished goods

Businesses must control their current liabilities
(accounts payable, short
term loans and overdrafts)

By stretching accounts payable, a business can hold
onto its money for longer and pay more urgent
expenses on time

Fixed expenses do not change when a business
produces more goods (
. Rent)

Financial Management Strategies

Global businesses:

May borrow from financial markets in other countries

Need to take account of the exchange rates in their financial

Hedging is used to reduce the financial risk in global
transactions due to changes in the exchange rate

Derivatives, a from of hedging, includes forwards
exchange contracts, currency option contracts and
swap contracts.