Finance

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Finance by Mind Map: Finance

1. Role of financial management

1.1. the key business function of finance supporting the business to achieve its main business goal of maximising profit.

2. PLEGS (6 objectives of financial management) - A business creates and examines various financial statements in order to assess their financial performance/ success - cash flow budgets, income statements and balance sheets.

2.1. P - PROFITABILITY (profit - total revencue less total costs)

2.2. L - liquidity (ability to pay short term debts, using current assets, managing cash flow of a business)

2.3. E - Efficiency ( monitoring all aspects of a business to maximise productivity and lower costs)

2.4. G - Growth (increasing the size / sales revenue / operations of the business)

2.5. S - solvency/gearing ( ability of a business to manage level of debt and sources of funds)

3. Key business functions all 4 rely on each other to ensure the product/ service is successful.

3.1. HUMAN RESOURCES - the functional area responsible for managing employees, e.g. induction, recruiting, training etc,

3.2. MARKETING - the functional area responsible for selling the good / service, e.g. advertising, packing, promoting, placement and pricing.

3.3. OPERATIONS - the functional area responsible for producing the good / providing the service. e.g. designing physical layout to ensure efficient movement of product and people.

3.4. FIANANCE - responsible for managing money and budgets. e.g. determining the price for a good or service that marketing must promote to the public.

4. SHORT -TERM DEBT

4.1. Bank overdraft - a short term loan where a business can withddraw funds from its bank beyond their account into debit.

4.2. Commercial bills - short term loans issued by financial institutions for larger amounts.

4.3. Factoring - a business selling its accounts receivable to a factor business, usually a fiancé company at a discount (5-10%).

5. LONG _ TERM DEBT (external sources of finance)

5.1. Mortgage - a secured loan on real estate usually 10 -30 years

5.2. Debenture - long term loan from the public, usually6 organised by finance companies.

6. EQUITY FINANCE - (external sources of finance)

6.1. Equity finance refers to finance raised by a company by issuing shares to the public through the Australian securities exchange.

6.2. Ordinary shares - commonly traded throught the ASX.

6.3. private Equity - raising finance for expansion through the selling of shares/ ownership. private companies are not listed on the ASX.

7. PROCESSES OF FINANCIAL MANAGEMENT - (planning and implementing)

7.1. planning and implementing - involves etting up the goals and objectives and then determining the strategies to be implemented to achieve.

7.2. 1. Determining financial needs

7.3. 2. Developing budgets

7.4. 3. Maintaining record systems

7.5. 4. Determining financial risks

7.6. 5. Establishing financial controls.

8. PROCESSES OF FINANCIAL MANAGEMENT - (Monitoring and controlling)

8.1. - Cash flow statment

8.2. - income statment

8.3. - balance sheet

9. influences on financial management

9.1. INTERNAL SOURCES OF FINANCIAL MANAGEMENT- retained profits (net profit that is invested in the business to help the business grow.)

9.2. EXTERNAL SOURCESOF FINANCE - debt, short term borrowing,(overdraft, commercial bills, factoring) long-term borrowing(mortgage, debentures, unsecured notes, leasing).

9.3. FINANCIAL INSTITUTIONS - banks, investment banks, finance companies, superannuation fu8nds, life insurance companies, unit trusts and the ASX.

9.4. INFLUENCE OF GOVERNMENT - Australian securities and investments commission, company taxation.

9.5. GLOBAL MARKET INFLUENCES - economic outlook, availability of funds, interest rates.

10. PROCESSES OF FINANCIAL MANAGEMENT - FINANCIAL RATIOS

10.1. Liquidity - current ratio (current assets divided by current liabilities)

10.2. Gearing - debt to equity ratio ( total liabilities divided by total equity)

10.3. Profitability - gross profit ratio (gross profit divided by sales); net profit ratio (net profit divided by sales); return on equity ratio (net profit divided by total equity).

10.4. Efficiency - expense ratio (total expenses divided by sales); accounts receivable turnover ratio (sales divided by accounts receivable.)

10.4.1. Comparative ratio analysis - over time periods -Against standards, with similar businesses.

11. PROCESSES OF FINANCIAL MANAGEMENT -LIMITATIONS OF FINANCIAL REPORTS

11.1. - Normalised earnings, capitalising expenses, valuing assets, timing issues, debt repayments, notes to financial statements.

12. FINANCIAL MANAGEMENT STRATEGIES

12.1. Cash flow management - Cash flow statements Distribution of payment, discounts for early payment, factoring

12.2. Working capital management - Control of current assets – cash, receivables, inventories control of current liabilities – payables, loans, overdrafts Strategies – leasing, sale and lease back

12.3. Profitability management - Cost controls – fixed and variables, cost centres, expense minimisation Revenue controls – marketing objectives

12.4. Global financial management - Exchange rates Interest rates Methods of international payment Hedging Derivatives