HSC topic 2: Financial Planning and Management

Business Studies Stage 6 2010 Course

Syllabusthe role of financial planning

strategic role of financial management

objectives of financial management — liquidity, profitability, efficiency, growth, return on capital

the planning cycle — addressing present financial position, determining financial elements of the business plan, developing budgets, cash flows, financial reports, interpretation, maintaining record systems, planning financial controls, minimising financial risks and losses

Lingo Listliquidity,

profitability,

efficiency,

growth,

return on capital,

financial position,

business plan,

budgets,

cash flows,

financial reports,

interpretation,

record systems,

financial controls

financial risks

losses

financial management

Whats It All About?Financial management is:

planning,

organising,

monitoring and

controlling

the financial resources of a business.

Who is affected?

Managers

What do they look for?

Information

What do they do with the information?

They use it to make the best financial decisions

Why is it important?

Because these decisions affect the competitiveness of the business.

How is the business impacted?

If they do well it will improve its competitiveness and grow in value. If it is done poorly the business starts to lose market share and its competitors grow in value.

strategic role of financial managementIs the process of ensuring that the resources needed to achieve business goals are available when they are needed

objectives of financial management — liquidity, profitability, efficiency, growth, return on capital

liquidity

Liquidity objectives ensure:

that a business can pay its short term debts

to pay these bills some short-term assets, such as customer debts and inventory, will need to be turned into cash

profitability

The owners of a business expect to get a competitive return on their investment because of the risks they take.

Managers need to provide sufficient return to attract investors.

EfficiencyAll businesses aim to achieve lower costs by getting greater output from inputs such as labour or machinery.

The employees of Virgin had a greater productivity than the employees of Ansett because they were more multi-skilled (cabin staff, for example, also cleaned the plane).

Cost cutting is a key strategy in most large businesses. Lower costs that result from increased output from the same amount of input is called efficiency.

Growth

To increase the value of a business its managers need to grow the business.

The managers of Google, for example, have dramatically increased the value of the business. In the space of 18 months the price of a Google share went from $83 to over $300.

Google increased the value of the business through the effective marketing of its product and developing new products.

Growth (cont.)

Horizontal acquisition is where a business acquires a business performing the same function, such as Westpac Bank acquiring St George Bank.

Vertical AcquisitionOccurs when a business acquires a business that is part of its supply chain, either providing the business with raw materials or components, or a business that sells its products.

Starbucks: often thought to be a franchise. Instead, the company is immensely vertically integrated for one purpose to maintain perfect quality throughout the value-chain.

Founder, Howard Schultz, claims to have a good strategy when he has :

a globally orientated company

suppliers all around the world

coffee-shops and

selling a premium product

what do you think?

return on capital

The return that the business gets from its resources such as land, labour, machinery, management skills, factories and vehicles and so on is called the return on capital.

People who provide capital are called investors and they put their money where they get the greatest return.

Businesses that get a poor return from their resources will find it difficult to attract capital.

(a) Activity Capital Management (HSC Online)

1. Why is it often a mistake to judge a firm's financial progress simply on the basis of profitability?

2. How can working capital (liquidity) management ever be considered more important than profitability? Can you give an example from a business you have studied of a situation where profitability was not as important as effective working capital (liquidity) management?

3. What do you understand as the difference between liquidity and working capital?

4. What ratio is commonly used to express a firms' working capital ratio?

5. Why do you think banks often insist on securing overdraft arrangements with real property? Are there any disadvantages to a business that chooses to offer security on their real property in exchange for the privilege of having an overdraft facility?

http://hsc.csu.edu.au/business_studies/financial_planning/effective_working/effective_working.html

the planning cycle

The Planning Cycle in BriefA series of continuous financial activities with the purpose :

Short term = pay bills

Long term = ROI for investors

These lead to expectations about business growth through either or both:

acquisition of other business (horizontal integration)

specific projects

present financial positionActivity designed to assess the businesses financial resources.

Cash flow - the cash that comes to the business through sales revenue and investments vs that used to pay expenses

cash flow = (Sales Revenue + Investment Income) - Expensescash flow = (Sales Revenue + Investment Income) - Expenses

Raising of capital

Share Issues

Borrowing money

financial elements of the business planLooks at providing the resources to implement the business plan.

Approved / provided by the Chief Financial Officer (CFO)

BudgetsSpecific details for the financial aspect of the business plan

Where will the money come from?

Where will it go to?

Examples include:

capital expenditure

ongoing operations

cash flow

cash flows

inflow v outflow

Active strategies are required to keep this healthy

Example: strategies required to manage debt collection of the business

financial reports

standardised reports for

regulators (ASIC)

investors

Styles include:

Revenue Statement

Balance Sheet

Statement of Cash Flows

InterpretationAs standardised reports are general in nature - on order for specific interest groups to read and understand they need to be analysed

The analysing is done through ratio analysis

Example:

Investors use a ‘Return on Equity’ Report to help decide whether to invest in one company or another

Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.  

maintaining record systemsDetail, detail, detail Detail, detail, detail

If you don't know it, you’ll almost certainly blow it!!!If you don't know it, you’ll almost certainly blow it!!!

MIS - Management Information Systems

aka Reports

aka Data

All of the above are used to track the:

implementation of projects and day to day running of the business

projects vs day to day to review possible impact on either

planning financial controlsWhat was planned?

What actually happened?

How do you know?

Budgets

Financial statements

Ratio analysis

minimising financial risks and losses

The risk = not being able to pay a debt when its due.

Some risk can be transferred to other businesses specialising in risk.

Hedging is one way of insuring against possible loss

HedgingFor example,

The risk for an apple grower is that the price of apples may fall in six months’ time when the crop is harvested.

An apple pie manufacturer, on the other hand, is concerned about the risk of the price rising.

Both the grower and manufacturer could get certainty by signing a contract now to provide the product in six months’ time at the current price.

The contract is a derivative. The value of the contract is derived from the apples.

Derivatives enable businesses to better manage their business risks, in fact to hedge their risk

(a) Activity

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