Business Studies Notes Topic 1 – Business Management and Change The Nature of Management The importance of Effective Management * Management = process of coordinating and integrating work activities in order to achieve goals and objectives of the business. * Planning: 1. Strategic plans – long term (3-5 yrs), responsibility of senior management Eg. Expand overseas, new product development, diversify. 2. Tactical plans – medium terms (6 months – 3 yrs), responsibility of middle management Eg. Increasing market share, implementing strategic plans 3.
Operational plan – short term (1 week – 6 months), responsibility of department heads Eg. Rosters, ordering supplies * Organising = establishing the structure of business (flat, pyramid, functional, geographic, product, team based), assigning tasks, allocating resources, rules and reporting relationships. * Structures: – flat (short chain of command, wide span of control) – pyramid (long chain of command, narrow span of control) – functional (separating business functions) – geographic (structure based on location) – product (sparating business by products) Leading = motivate workers by influencing and encouraging, leading by example, providing a stimulating work environment, including staff in decision making, commanding respect. * Controlling = process of measuring the business performance against the plan and taking corrective action. – Controls = input/preventative, concurrent and output/feedback. * Effective managers = achieve the objectives and goals of the business * Efficient managers = achieving objective and goals using the least amount of resources in the most cost effective manner. Within POLC there are two aspects – decision making & communication * Mangers responsible for providing correct working environment to facilitate the process (involves creating business culture). Management Roles * Interpersonal Role: – involves dealing with people inside and outside organisation – managers must communicate, act as figurehead in representing organisation to public. – they command subordinates and liaise with stakeholders by compromising and negotiating – figurehead = symbolic head to perform legal or social duties (eg greets visitors, signs documents). leader = deals with people, motivating, training and staffing (eg directs and influences subordinates). – liaison = fosters relationships with outside contacts (eg external work, responds to client complaints). * Informational Role: – access information through setup management information systems (emails, notifications), receive and collect/disseminate information – monitor information through report analysis, pass information through meetings, phone calls and notice boards. – act as spokesperson in public. – monitor = establishes and maintains an information network (eg read trade journals and internal reports). disseminator = transmits information to members of organisation (eg holds meetings, phone calls) – spokesperson = * Decisional Role: – Entrepreneur look for, initiate and oversee projects with risk – Disturbance handler control situations and take corrective action – Resource allocation capital, expenditure, space and time – Negotiator resolve disputes, negotiates wages, prices with suppliers and credit terms. Skills of Management * People skills = how managers interact with people both in and out organisation. This is the ability to communicate, lead, delegate, motivate, and negotiate. feedback skills (both positive and negative feedback, not be personal, be understood, specific) – delegation skills (tasks must be shared to allow managers to do jobs, recognise who can do the book, inform person about the job) – discipline skills (fair and consistent, attend to a problem, allow people to explain, take corrective action) * Strategic skills (long term) = managers must be able to organise business activities to achieve the long term objectives. They must have a vision for future and provide effective leadership to organisation. Vision mission statement goals and objectives strategies Flexibility and Adaptability to change = managers must adapt to changes in the internal and external environment (eg changes in tech, society, competition). – manager must be proactive (anticipate) and reactive (adapt) * Self Managing skills = must be able to manage own affairs and increasingly establish self managed teams. This encourages teamwork and a sense of belonging which can transfer into higher productivity or profits. * Teamwork = having common goals rather than individual goals eliminating competition between staff. This creates a sense of belonging. Complex Problem solving and Decision Making = must be able to define a problem, generate alternative solutions, evaluate and select one alternative and then implement and follow up on the solution. * Ethical and Personal Standards = must be beyond reproach regarding moral and ethical behaviour, responsible for developing codes of practice for the business which they must abide by. – ways to ensure ethical practice: select people for employment with high personal standards and ethics & develop codes of ethics for the business. Responsibility to Stakeholders Internal * Employees/managers – safe working environment fair wages – equal employment opportunity – follow all legal requirements – training * Shareholders – dividends – conduct ethical/moral business – good ROI – inform shareholders of business developments – uphold reputation External * Government – pay taxes – abide by laws – provide employment (reduce social security) * Environment – reduce waste – dispose waste in environmentally friendly manner – don’t deplete resources – sustainable development * Customers – safe g/s – high quality g/s – provide warranty – no price discrimination * Suppliers – pay within credit period – provide feedback – notify suppliers of insolvency abide by credit terms and condition * Society – provide employment – increase standard of living – variety of g/s – ecological sustainable development – ethical and moral correct manner – enforce social justice (anti discrimination) Reconciling Conflicts of Interest amongst Stakeholders * Conflicts exist between many stakeholders and resolutions must be negotiated to reduce this conflict by management. * Eg1) employee & shareholders – shareholders desire increases in profits while employees want increased wages – resolution: negotiate wages, profit sharing scheme, buying share options * Conflicts between owners and managers separation of owners and managers can lead to number of costs – managers no direct financial interest in success of business and may have incentives for personal gain – managers may embark on strategies that conflict with interest of owners – costs though separation called ‘agency costs’. – ways to minimise: merger and redundancy forces management to keep share prices high which benefit owners. Understanding Business Organisations with Referance to Management Theories Classical-Scientific * Key Themes include: – emphasis on technical competence – rational view of human nature (driven by money) – autocratic management search for ‘best’ way to do things – task centred – specialisation and division of labour * Management roles and functions: – Planning involves defining objectives, establishing strategies to achieve goals, developing plans to coordinate activities – Organising involves designing business processes in a way that best achieves objectives. What tasks are to be done, how they will be allocated and coordinated, how results and feedback will be reported, who will have authority and what structure? – Controlling involves monitoring activities, comparing results to planned results and taking corrective action. Organisational structure (hierarchical): – based on division of labour – long chain of command which can result in red tape. – management is divided into different departments (functional). – clear lines of authority and communication – narrow span of control – work is specialised – tasks are quickly learnt and repetitive nature means they are performed effectively and efficiently. * Leadership style (autocratic): – favours an undemocratic style where decisions are dictated to the workers without consultation. – believed that were would be less conflict and more effective decisions as they were being made by the right people.
Behavioural Theory * Stated worker productivity increased when management paid attention to improving conditions. * Based on the social man, behaviour is affected by their interpersonal relationships. * Focuses on people (both individuals and groups). * Management roles and functions: – Leadership involves direction, motivation, communication and resolution of conflicts which should be dealt with by managers. – Motivating – high effort levels to achieve business objectives could be achieve through motivation of staff by managers. Communication – mangers should communicate with worker in order to try and share their vision in order to create a common vision. * Organisational structure (flat and team based): – flat management reduces number of levels of management which gives a greater responsibility to workers (more freedom and independence thereby increasing productivity). – multi skilling allows for workers to perform a variety of tasks and saves them from boredom. – team work promotes cooperation and worker morale, allows managers for more strategic thinking, increases flexibility by allowing groups to make fast reactive decisions and increases performance. short chain of command with wide span of control. * Leadership style (participative/democratic): – encourages employees to get involved in decision making and to have some degree of control. – management has overall control but workers feel they play more of a role – involves subordinates in decision making – encourages participation in deciding goals. – feedback is used as opportunity for coaching. Political Theory * Concerned with how managers use their power and influence to manage an organisation and problems that may arise. * Emphasises the concept of power. Requires managers to understand the nature of power and have well developed negotiating and bargaining skills, form coalitions and manage conflict between stakeholders. * Power = capacity of one party to influence another into doing something. * Politics = activities relating to the acquisition and exercise of power in order to achieve outcomes. * Leadership style (negotiating and bargaining): – power can be held by non-management parties. – managers must negotiate and bargain with these parties – negotiating and bargaining are concerned with reaching compromises between parties the use of this may be required to satisfy a powerful part (eg. unions), consolidate manager’s position or to create a common goal for a business. – Types of power include coercive (threat of punishment), reward (promise a reward), legitimate (formal position), expert (special expertise) and referent (respects and admiration). * Organisational structure (coalitions): – coalitions = groups that are united by shared goals formed with the view to command greater power. – this structure of coalitions can cut across formal structures. dominant = single key group that exercises effective control at any time. Different groups may vie for this position causing instability. – coalitions need to implement decisions which sometimes require lobbying. * Management roles/functions (stakeholder view): – each stakeholder has a different view on what the business objectives should be. – stakeholders can form coalitions that wield power over the business. Strengths and Weaknesses Classical-Scientific Theory Strengths| Weaknesses| * Based on proven principles. * Methods may be improved through time and motion study. * Increased productivity. Management trained to get results. * Emphasis on promoting efficiency and waste reduction. * Specialised and division of labour produced proficient workers. * Clear, orderly lines of communication. * Emphasis on role of money as motivator. | * Boredom from repetitive work. * Rigidity, autocratic leadership style. * Lack of employee empowerment. * Neglects human and social needs. * Overlooks job satisfaction. * Sense of impersonality and alienation between employees & managers. * Fails to acknowledge the informal organisational structures. * No career prospects for workers. | Behavioural Theory Strengths| Weaknesses| Importance of human dimension of work. * Integrates ideas from sociology, psychology and anthropology. * Highlights importance of teamwork, communication, group dynamic, motivation and leadership. * Portrays employees as people not passive robots. * Highlights importance of conflict resolution. * Greater empowerment due to flatter management structure. | * Complex theoretical concepts. * Can’t accurately predict human behaviour. * Lots of research for managers. * Different things motivate different people. * Not responsive to change. * Time consuming in getting democratic ideas. * No clear lines of communication. Political Theory Strengths| Weaknesses| * Recognises power within groups of people. * Individuals will pursue own interests. * Highlights need for manager to adopt new skills in negotiating, bargaining and conflict resolution. * Strategy to work with any coalition so goals are achieved. * Explain power bases. * Takes all stakeholders into account. | * Superficial explanation of organisational politics. * Sources of real power are difficult to locate. * Relies on personal observation and perception rather than scientific measurements. * Managerial control over employees may become normal behaviour. Strategies may be manipulative. * Doesn’t attempt to change the power relationships, only explain them. | Adapting Management Theories to Circumstances Systems Approach * System = independent collection of parts that function as whole. * Views the business as a working system and studies how components interact. * Health of a system relies on its parts working in harmony – synergy. * Two important insights: – internal activities in a business are interdependent (change to one part effects others). – business is interdependent with its outside environment (interacts and influenced by the outside environment).
Contingency Approach * Aims to determine which techniques of management are appropriate in different circumstances. * Recognises individual situations are not totally unique. React to situations by identifying key attributes that are common to similar problems. * The studied theories are just guidelines, aiming to identify different situations where each theory applies. * Highlights role of management in determining what will work in particular situation. Managing Change The Nature and Sources of Change in Business External Influences * International/Global: – technology = easy access to global markets uniform consumers (people wanting same product) – business cycle alters demand for exports and imports – growing trade blocs – free trade agreements * Domestic: – people demand quality and value – population is ageing – multicultural – part time workers increasing – women in workplace – customers becoming environmentally friendly – demanding a variety of products – health conscious. * Economic (eg. recession): – this will effect consumer confidence, GDP, employment, spending, investment, sales profits, inflation. – these will affect the businesses cost structure and may force management to re-adjust production levels or prices. changes in macro and micro economic policies must be monitored by the business. * Financial (eg. decline in share market): – deregulation has caused new financial products (Aussie home loans, Rams) – foreign banks – interest rate competition as banks can set their own rates. – fluctuations in exchange rates – finances now available off shore – this all has resulted in more flexible competitive market orientated approach. * Geographic (eg. global trade borders): – climate/weather and natural disasters. – location of markets domestic – population shifts like tree change and sea change. location of raw materials (COGS may increase due to increase cartage) – location of resources i. e. labour – businesses going off shore * Social (eg. views toward smoking): – women in workforce – paid maternity leave, discrimination. – more part-time jobs – ageing population – marrying later and lower birth rates – multicultural society – EEO – skilled labour force due to training – increase in health – early retirement – environmentally friendly – decisions of business can influence social attitudes towards the business, be aware of emerging social trends and how these will affect the success of existing and planned products. Legal Influences (eg. changes to tax): – laws affecting employment * EEO * Anti-discrimination * Awards (minimum rate of pay and condition for an occupation) and agreements (covers a work place specifically) * Affirmative action * Superannuation * OHS – laws affecting environment * Environmental protection laws * Greenhouse emissions * Pollution – laws that affect business * Fair Trace Act * Work choices * ACCC * Licensing * Zoning (industrial, commercial, residential) * Tax rates * ASIC * Political Influences (eg. new gov): – different parties have different policies (eg. GST introduced by liberals, edicare was by labour, privatisation was by liberal). – parties may have different fiscal policies (eg. company tax from 36% to 30% by liberal) – public expenditure may differ * Technology (eg. cheaper production): – lowers cost of production, increases productivity, reduces distance barriers between customer, business and supplier and creates SCA. – E-commerce – new materials such as synthetic – new energy sources such as antimatter – Technological change will force a business to change its internal procedures to keep up with competitors. Internal Influences * Effects of accelerating technology to maintain SCA, businesses must introduce new tech – Costs = maintenance, training, licensing, redundancy payouts, capital cost of buying new technology. – Benefits = increases quality of products, reduction in lead time, improves productivity and efficiency, decreases in cost of staff, easier access to markets. – E-Commerce * Uses of the internet to buy and sell products * 2 main areas: buying and selling on internet with EFTPOS or advertising and delivery on internet with electronic customer support. * Both increase communication with customer and reduce lead time. * Information is in real time. Allows businesses to develop customer databases * Reduces long term staff costs * Eliminates retailers, thus products become cheaper. * Privacy issue * New systems and procedures – this often follows technological change – TQM (total quality management) * Quality is built into every aspect of the business – Benchmark against World’s Best Practice – Quality assurance – Batch production – flexible production in small groups – computerised stock control, barcodes and JIT – multiskilling, job rotation, teamwork – using tech such as internet, computers * New business culture – a change in shared values, attitudes and beliefs of the workers. characterised by industrial democracy, increased responsibility, commitment to multiskilling, encouraging autonomous teamwork, flattening structure Structural Responses to Change * Business’s structure = way it is organised that sets out chain of command, span of control, layers of management and division of labour. * Outsourcing – it is the purchase of services from a third party or contracting out core or non-core activities. – Advantage * Cost effective * Minimising staffing needs * Freeing staff to perform functions of more value to the business * More focus on consumers * Shared risks of changing market – Disadvantages Service provider may claim to have experience but doesn’t * Person may be working for variety of companies thus unable to channel concentration to yours. * Employees may not agree with outsourcing * Communication challenges * Outsourced staff may not maintain brand values * Flat structure – decreases chain fo command and widens span of control – teams are set up – benefits include increased responsibility to workers thus increasing satisfaction and loyalty, communication make workers fell more powered, decrease in costs and quicker reaction times. – problems include lack of a career path, and increased remuneration packages. Strategic Alliance – is where two or more businesses join forces to achieve a particular goal. – two types: between business and supplier (Boeing and Qantas) or between competing businesses (star alliance or one world alliance). – reasons include sharing technology, expanding into new geographical markets, increasing customer base, transferring customers. * Networks – consists of a group of businesses which work together much like an alliance – it exists where a business has a number of teams performing specialised services which share information Reasons for Resistance to Change Financial Costs (owners) Purchasing new equipment – capital cost, maintenance and insuring, may need loan which increases long term debt * Redundancy payouts – restructuring and therefore redundancy, short term cost increases as money must be paid to retrenched staff * Retraining costs – change often resulting in retraining and new skills must be learnt * Reorganising plant layout – reorganise to cater for new products results in lost production time and construction may result in production being halted. Inertia of Managers and Owners * Refers to tendency to remain in state of inactivity and threats remain unnoticed. Static state of managers means to resist change in motion. * Comfortable with their existing systems, processes and procedures * Change may threaten their career prospects or power base. Cultural Incompatibility in Mergers and Takeovers * These differ in different businesses and when 2 businesses merge or a takeover occurs, the fusion of the two cultures may not be compatible. * Tasks may be duplicated and some staff will need to be retrenched. Staffing Issues * De-skilling – reduction in the level of skill or the loss of the entire skill needed to perform a job. * Re-skilling resist retraining on new equipment as adults don’t feel they need to return to school * Loss of career prospect and promotional opportunities – resist change that threatens their opportunities for promotion – fear of possible redundancy – prospects may be threatened by downsizing, flattening management structures, merger/takeover or external recruitment Managing Costs Effectively Identifying the need for change * Anticipation, intuition, imagination and experience are 4 key qualities. * Keep up to date through meetings and surveys. * Majority of change is reactive not proactive. * Triggers: falling sales – conflict and high staff turnover – absenteeism – defects and customer complaints. – obsolete technology Setting Achievable goals SSpecific MMeasurable AAchievableDO NOT WRITE IN TEST RRealistic TTimely Creating a Culture of change * Prepare staff for change through change agent (influential staff members who is respected by their peers). * Inform staff of changes * Involve staff in decisions * Indentify support services * Accept change as continual state and constantly look to reinvent themselves by being proactive. * Change agents create a positive workplace culture * Need to communicate
Change Models * Force-field analysis – Two sets of forces: driving pushing for change and restraining resist change. – three steps: 1. Unlock driving and restraining forces that hold equilibrium 2. Imbalance is introduced by increasing driving force or reducing resisting force 3. Forces brought back to equilibrium – driving forces * Positive (competitive advantage, increasing market share, increase in sales and profit) * Negative (obsolete tech, increase in competition, recession) – resisting forces * Job insecurity, loss of career path, cultural incompatibility, inertia * Unfreeze/change/refreeze three basic steps: 1. Unfreeze – requires staff to understand why change is required. 2. Change – requires implementations 3. Refreezing – consists of providing support for staff Change and Social Responsibility Ecological sustainability * The development by businesses which meets the needs of the present generations without compromising the ability to meet the needs of future generations. * Must be aware of effect of their production on environment * Recycle, dispose of waste environmentally friendly, biodegradable products Quality of working life * Must be aware of effect on staff when change occurs OHS needs to be partaken * Ergonomics – design of equipment must be suitable for job * Low noise environment * EEO, antidiscrimination * Try to create a comfortable and satisfying work environment to increase productivity. Technology * Effect on stakeholders must be considered * May effect employees through deskilling, reskilling, redundancy * May effect customers through privacy issues * Pollution of new technology may damage environment Globalisation * Go offshore to take advantage of lower labour costs, ethical issues such as taking advantage of communities in 3rd world countries. Dumping surplus products on world markets and dumping environmental waste. Managing Cultural diversity * Aware that workforce may be multi-cultural and differences in customs, values, attitudes and religions may occur. * Instructions should be translated * Cod of Practice to encourage Cultural Tolerance could be implemented. E-Commerce * Internet (business to consumer) or Electronic Data Interchange (business to business) * Managers must provide security of credit card and personal details. * Internet sales may be responsible in the areas of quality and misleading advertising.
Topic 2 – Financial Planning & Management The Role of Financial Planning Strategic Role of Financial Planning * Financial management = how businesses raise, use and monitor funds. * Involves: – long term (strategic) financial planning – specific financial strategies to reach objectives – identify financial resources (inputs into business) – anticipate changes in interest rates, technology and customer demands – developing budgets * Recent changes in business environment have affected financial management, such as: – GST – BAS needed every quarter which is time consuming – technology – communication and internet banking financial innovation – non-financial institutions – privatisation – government owned businesses being sold to private sector * Effective financial management will allow businesses to maximise profits, increase ROI for owners and expand the business. * Strategic role is to give the business long term goals and specific strategies to achieve these goals. * General Purpose Financial Reports (GPFRs) = financial statements required by law such as balance sheets, revenue statements and statement of cash flows. – Different stakeholders need information for different things – managers (running business) shareholders (value of investment) – creditors (analysing gearing & liquidity) – ATO (tax liability) * Special Purpose Financial Reports (SPFRs) = includes GPFRs as well as breakeven analysis, budgets, sales reports and trial balances. These are usually not given out to stakeholders or competitors. – primarily used by internal stakeholders and complied on instruction by management. * Management accounting = creation of SPFRs and a specialised form of accounting that needs to mould itself to changing needs of managers. * Financial accounting = creation of GPFRs Objectives of Financial Management Financial managers try to balance short term, medium term and long term objectives of the business in order to maximise returns. * Financial objectives of the business: – liquidity – profitability – growth – efficiency – return on capital * Liquidity = ability of a business to pay short term debts as well as long term debts. * Effective liquidity management ensures that business has enough current assets to meet debt obligations. * Uncertainty of external business environment also influences liquidity (eg. consumer demand/confidence decreases the inflow of money may not be sufficient). Business must have sufficient current assets to convert into cash within one year. * If deficit (shortfall), overdraft or trade credit (S. T loan) must be organised. * If surplus (excess), cash should be invested into $ making ventures. * Working Capital = current assets – current liabilities ($ figure) * Current Ratio/Liquidity Ratio/Working Capital Ratio = Current assets ——————— Current liabilities * Profit = revenue – expenses * Income can be generated through – operations (sales) – rental properties (rent) – share ownership (dividends) loans given to other parties (interest) * Profit is important for sustainability of business impacts on shareholder confidence and the share price. * Reimbursement of owners through dividends is called retained earnings. * Owners expect ROI or capital gain in form of increases in share price. * ROI = net profit/initial capital x100 (return on original investment) * ROE = net profit/total equity x100 (return on total equity) * ROA = net profit/total assets x100 (return on assets – how effective assets have been in creating profit) * These are all shown in the Balance Sheet. Gross Profit Ratio = Gross Profit/Sales x100 (COGS as % of income) * Net Profit Ratio = Net Profit/Sales x100 (final profits of business on tax) * These are shown in the Profit/Loss Statement * To increase profitability a business can decrease expenses or increase revenue. * Decrease expenses: – labour (increase part-time workers, commission pay, downsize) – financial (cheaper interest rates) – production (JIT, update tech) – administration (outsource, change insurance) – marketing (decrease advertising, outsource) * Increase revenue: – increase promotions expand geographically – diversify – change image – pricing strategies * Conflicts between objectives of profitability and liquidity. * A business must have balance liquid assets to pay bills in the short term and non-liquid assets which produce revenue. * Efficiency = concerned with relationship between inputs and outputs. Business must maximise its outputs using minimum level of inputs. * This can be achieved through maximising productivity and minimising costs. * Indictors of efficiency (KPIs – Key Performance Indicators): * Labour turnover – how much the labour force is changing if high turnover then ER department is proving to be inefficient as this costs business money – low labour turnover is preferable. * Stock turnover – how much stock is being sold over period of time. – low turnover the inventory ordering and control of stock is inefficient. – high stock turnover is preferable * Accounts Receivable turnover – how quickly a business is able to collect accounts receivables from debtors. – if business has aged/outstanding debtors, business has liquidity problem and is inefficient as this means customers are paying after the credit period. high accounts receivable turnover is preferable. * Growth: increase in size of business will lead to economies of scale resulting in lower costs for unit. This is desirable for a business as cost per unit decline as business expands. * Growth occurs when business achieves positive increases in the size of operations. * Internal growth = business uses retained profits and invests is marketing or introduces new product, etc… * External growth = business buys another business such as merger or takeover. – diversify = different type of business – vertical = buying supplier or retailer – horizontal = competitor Return on investment = income generated by business relative to capital invested into it by owners. * Dividend yield is indicator of return to shareholders and illustrates how successful managers are in producing profits * See info on sheet about solvency even though it not in syllabus as a valid objective. The Financial Planning Cycle * Addressing present financial position determining financial elements of business plan developing budgets cash flows financial reports interpretation maintaining record systems planning financial controls minimising financial risks & losses. This is a continual process. Addressing the present financial position * Evaluation of a business’s financial position. * Information can come from primary documents, SPFRs and GPFRs. * This allows management to highlight risks and for them to think about minimising financial risks and losses. Determine financial elements of the business plan * Determining allocation of resources. * Debt or equity options for funding. * Liquidity and solvency levels need to be established. * Profitability expectations must be established. Developing budgets * Constructed to give direction * Can be operating budgets eg. ales, expenses, raw materials or labour Project budgets eg. capital expenditure and research and development Financial budgets eg. revenue statement, balance sheet or cash flow Predicting Cash Flows * These are essential to ensure a business can meet its obligations. * Often predicted using past data and knowledge. * 3 types of cash flows: – operating budgets which will budget for the forecasts of cash nflows n outflows. – investment budgets concerned with cash inflows and outflows for the purchase and sale of LT assets – financial budgets concerned with cash inflows and outflows from financing through debt or equity. Budgetary control = process where actual results can be compared to budgets so managers can act on any problems or variances. Reports * Must be compiled from data that has been recorded over a period of time. Interpretation * Actual performance can be compared with: – budget forecasts – other periods – results of other businesses – through ratio analysis where long variations will be examined called variances. Maintaining Record Systems * Ensure records are maintained and secure. May be through computer backups * Internal stakeholders such as managers require information to make plans. External stakeholders such as ATO require information for legal reasons. * Efficient record maintenance will ensure necessary documents are entered and stored. Planning Financial Controls * Controls: – budgets used to compare actual results with planned performance – Ratios used to identify trouble areas – protection of assets: locking business, surveillance, control of credit – separation and rotation of duties to minimise misuse of funds (eg. one person order, one person receives inventory, one person writes cheques and another signs). Minimising Financial Risks and Losses Financial risks = business being unable to cover its debts therefore avoiding bankruptcy and liquidation. * Assessment of risk: amount of debt to equity and ability to repay debts, when payments must be made, aware of obligations if interest rates rise and assess the level of assets needed to finance operations. * Higher the risks, the greater expectations of profits or dividends. * Profit must be sufficient to cover the cost of debt and give a return to shareholders. * Liquidity must ensure short term debts can be repaid * Solvency must ensure long term debts can be repaid.
Financial Markets and Funds Management Australian Financial Markets * Financial systems consist of markets and institutions that allow the flow of funds. * Markets = individuals, businesses and governments who supply excess funds to those customers who need. * Financial market – fastest growing market * Communication has increased allowing businesses to shop around for financial products. * Globalisation – allowed businesses to acquire finance from overseas. * Four main areas where funds can be accessed: 1. Share/equity market 2. Debt market (fixed interest and short term money market) 3.
Derivatives market (buy/sell securities based on value of others) 4. FOREX market * Financial markets are a means for the creation and exchange of financial assets. * Primary markets = creation of financial assets occurs either debt or equity for first time. * Secondary markets = subsequent sale and purchase of debt (bonds or debentures) or equity (shares). Major Participants in Financial Markets * Banks: * Most dominant participant * Facilitate the movement of excess funds to those who require them * Deregulation has occurred (eg. set own interest rates, foreign banks more competition) * Provide a range of services (eg.
EFTPOS, credit cards, internet banking) * Finance companies: * Supply credit to businesses and customers * Make loans without deposits * Acquire funds through ST promissory notes to banks and public. Then money is reloaned at higher interest. * Used for leasing finance and debentures. * Insurance companies: * Fund received from companies and individuals who insure their assets (premiums to reduce risk in event of accident) * Guarantee the assets of their policyholders in return for fee. * Good track records get lower premiums (no claim bonus) Risk minimisation for businesses to take out insurance * Merchant banks: * Wholesale sector which deals directly with big businesses * Provide loans and access capital markets for issuing of equity shares * Underwriting service provided = guarantee value of required funds should the market fail to purchase all the securities * Superannuation/mutual funds: * Compulsory superannuation payments (9%) are paid by businesses for staff into nominated super funds. * These funds invested in range of assets * Can’t access super funds until 55/60 there large pool of money to invest. * Companies: Fund acquired on financial markets through issuing debt (debentures) and equities (shares) * Excess funds (surplus) can be offered to other businesses as loan-debentures and corporate bonds. * Excess funds can also be invested in securities or short term money market * Stockbrokers: * Facilitate buying and selling for their clients in market * Provide investment services and financial advice * Also act as underwriters to buy any unsold shares * Government: * Federal government through monetary policy, buying/selling securities, will influence level of spending to either stimulate or contract the economy. RBA (Reserve Bank Australia) acts on behalf of Gov by adjusting interest rates. They also responsible for monetary policy and financial stability. * APRA (Australian Prudential Regulatory Authority) supervises and regulates deposit taking institutions. * ASIC (Australian Securities and Investment Commission) corporate regulation and consumer protection. Role of ASX as Primary Market * Majority of transaction take place in secondary market * Role in primary market is important for businesses looking to raise equity funds or debt funds. * Two main ways: 1. Selling equity (shares) Raise funds in exchange for ownership of company * List on ASX * Must be public company * ASX must give permission * Underwriter guarantees that any unsold shares are brought by stockbroking company * Prospectus for potential investors * Float an IPO (initial public offering) of shares is listed on ASX. * Each time business wants to raise funds, prospectus is required. 2. Borrowing (debt) * Release debt instruments eg debentures and corporate bonds (exchange fund for regular interest payments on the sum borrowed plus principle) * Types of securities: Shares: ordinary (dividends paid if profit), preference (paid regardless), contributing (further instalments), rights issue (owner offered more shares) and bonus (extra shares) * Bonds (debt): fixed rate of interest. Can be traded on stock exchange. Long term. Issued with predetermined maturity date. * Options (equity): right but not obligation to buy shares at current price at a later stage. * Debentures (long term debt): secured against assets of company. Paid back with interest. Expensive to set up and can be traded on secondary market. * Unsecured notes (debt): high interest and high risk.
Issued by business Financial Market Influences and Trends Influence/Trend | Affects| Financial Deregulation| Overseas companies can list in Aus. Ease of obtaining finance easier. Finance can be sourced from overseas. Increased competition. Prices of bank determined by markets. | Compulsory Superannuation| Growth of superannuation funds. Growth in managed funds. Increased on-costs for business (9% of wage)| Privatisation| Increase in shareholders nationwide. Huge increase in value of all shares. | Growth of Tech| Ease and efficiency with transactions (ATMs & Internet). Increased speed of trades.
Dealers now trade electronically and instantaneously. Increased productivity, decreased costs| Globalisation| Integrated Australia’s financial system to others. Confidence levels spread from different countries. Financial assets can be bought and sold easily overseas. Growth of internet trading. | Management of Funds Internal funds * Owner’s equity: contribution to business in exchange for ownership rights. Owners contribute a certain amount of personal funds known as initial or seed capital. * Retained profits: owners are paid a percentage of profits but the rest aren’t paid out.
They are reinvested into the business leading to growth, share price increases and financial stability. External funds * Share issue (equity): public company and lists on stock exchange * Venture capital (equity): money provided by firms or individuals for investment in young, rapidly growing companies that exhibit the potential to grow. Venture capitalists invest in business that are high risk and help with management by imparting experience and knowledge. * Short term borrowing: * Overdraft: facility drawn up by bank which allows a business to overdraw on its account for short period.
No time limit but higher rate of interest. * Credit cards: high interest rates * Trade credit: issued by suppliers with no interest. Is an agreement between a business and a supplier to pay for products within the credit period. * Commercial bills: organised with a business where a business writes a bill to a bank agreeing to repay the amount borrowed after a length of time. * Long term borrowing (have to pay back principle + interest): * Mortgage loan: security for a loan on property is known as collateral. If unable to repay loan, mortgagor take ownership of property and then can sell it to gain the money back. Debenture: repayment guarantees issued in return for a loan. The loan is secured against the assets of the business. Other sources of funds * Leasing (long term): payment of $ for use of equipment by lessee that is owned by another party. This is a tax effective method to gain access to assets. * Operational lease: shorter term where lessor is responsible to maintain equipment. * Financial lease: longer term where lessee is responsible for insurance and maintenance. Lessee has option to purchase asset for last (residual) amount. * Factoring (short term): sale of A/R to third party.
Method of debt collection to increase cash or liquidity. The factoring company pays business an amount equal to value of debt minus a fee then company owing pays factoring company. * Public float (long term): external equity where they on ASX * Grant (increases equity): funding packages provided to business from government or other funding institutions where businesses are not required to pay back funds, also known as subsidies. Financial Considerations for Funding * How long are funds needed for – matching principle, short term funds require short term borrowing. Is the business confident it can meet its debt obligations – defaulting (inability to repay borrowed funds) * How easy will it be for the business to obtain finance with a history – in establishment phase, businesses often seek private funding due to little credit history. * Where is economy going – interest rate rising? How economic conditions will affect cash flows. * What can business do if it gets in trouble – large supplies of assets may need to sell some * What tax benefits can business gain * Percentage of ownership lost if equity is chosen * Security against debt Purpose of funding – short term assets or long term assets * Gearing history Comparison of Debt and Equity Financing * Equity: * Characteristics: * Provided by owners * Dividends need to be paid * Owners have residual claim on business * Advantages: * No repayments = increased cash flows * Decreases gearing * Retained profits can be used * No maturity date * Low risk, no repayment of dividends if no profit is made * Disadvantages: * Dilutes ownership * Dividends are not tax deductable * Expensive and time consuming to set up * Debt: * Characteristics: Provided by external institutions * Contractual and businesses must repay principle + interest * Security is required * Advantages: * Financers do not have influence on business operations * Cheaper since interest is tax deductable * No dilution of ownership * Quickly take advantage of opportunities * Coincide cash inflows with cash outflows * Disadvantages: * Risky as increases gearing * Ongoing repayments of interest is strain on cash flow * Bank can call in loans if business reneges repayments * Has maturity date * Gearing or leverage: ratio of debt to equity Comparisons with industry averages and past figures will indicate if gearing has increased or decreased. * High gearing = high debt, low equity (risky) * Low gearing = low debt, high equity (not risky) Using Financial Information Accounting Framework * Principles and standards used to prepare and present financial reports. * Comply with AAS (Australia Accounting Standards): * all transactions must have monetary value * historical cost (purchases recorded with original cost) * accrual accounting * assets = liabilities + owners equity * financial reports must be prepared for regulators, government and shareholders.
Balance Sheet * Snapshot of financial position of business at a particular point in time (1 day). * Shows what business owns (assets), owes (liabilities) and owners claim on business (OE). * Indicator of liquidity, solvency (gearing) and profitability * Shows sources of funds (debt or equity) and the uses of funds (assets). * How it is set out: 1. Assets * current assets in order of liquidity (cash, A/R, inventory, prepaid accounts) * non-current assets (used to produce profits and depreciation is showed) * intangibles realised on sale of business (goodwill, reputation, copyrights). . Liabilities * Current liabilities (overdraft, A/P, commercial bills, credit cards, accrued expenses) * Non-current liabilities (mortgage, long term loans, debentures) 3. Owners equity * Capital, shares, venture capital, net profit/retained profit MINUS drawings and dividends Profit and Loss/Revenue Statement * Statement of business financial transactions over a period of time (usually one year ending 30th June). * How to set out: 1. Sales Revenue 2. LESS COGS (opening stock [1/7] + purchases + freight in – closing stock [30/6]) 3. = Gross Profit 4.
PLUS non-operating income (dividends. Interest, rent) 5. LESS other expenses * Administrative * Electricity, rent, insurance, telephone, office supplies, wage for admin * Marketing * Salaries for sales staff, advertising, publicity, sponsorship * Financial * Interest, fees, charges, depreciation 6. = NET PROFIT before tax 7. NP after tax is distributed to shareholders or retained in businesses * Managers use statement to identify changes in costs and revenue (ie. Increase revenue through price, promotion, place and product as well as decrease costs) Types of Financial Ratios Liquidity ratio/current ratio – working capital * Ability to repay current liabilities with current assets * Current assets/current liabilities * Solvency – gearing ratio * Measures businesses ability to repay debt in the long term and indicates the financial stability of the business. * Total debt/total equity * Benchmark is 60% ie. $1 of equity, there is 60c debt * Low gearing – high equity and low debt (less risky) * High gearing – low equity and high debt (high risky) * Increased gearing leads to decreased solvency * Profitability ratios – gross profit * Gross profit/sales x100 To increase this, business must increase sales or reduce COGS * Profitability ratios – net profit * Net profit/sales x100 * To increase profits, reduce overall expenses of increase sales * Profitability – Return on Owner’s Equity * Net profit/total equity * Measure of how much the owner will earn per $1 of investment. * ROE is higher if a business is highly geared. * If ROE increases then business is increasingly being financed by debt. * Efficiency Ratios – expense ratio * Total operating expenses/sales x100 * Lower the figure the better * Efficiency – accounts receivable turnover ratio How efficient the business is in collecting its accounts receivable * Accounts receivable/(Sales/360 days) * Sales/accounts receivable * 360 x accounts receivable/sales (USE THIS ONE) Comparative Ratio Analysis * Ratios must be compared with other standards to be able to comment on results. * Common standards are: 1. Over time 2. Industry averages 3. Inter-firm comparisons 4. Budgeted figures and forecasts 5. General economic indicators (IRs) 6. Ratio benchmarks * If no figures given for comparison * W/C ratio = 2:1 * Gearing = 50 – 70% * A/R Turnover ratio = 12 times a year for 30 day periods * ROI/ROE = over 12%
Limitations of Financial Reports * Historical cost = value of NCA on the balance sheet is recorded at the original price. * Assets can appreciate and depreciate therefore no true value of businesses assets can be calculated. * Value of intangibles = based on estimates and can give incorrect picture of the business. It is only realised on sale. * Owner may inflate the value of intangibles so the gearing appears better. Effective Working Capital (Liquidity) Management The Working Capital Ratio (WC) * Working Capital = firms investment in Short Term assets (cash, stock A/R) * Net working capital = CA – CL ($ value) If it negative then business will experience liquidity problems and will be insufficient fund to: * Buy stock or pay for stock which have been purchased on credit * Pay debt repayment instalments which may result in decrease in credit rating, default on loans and extra charges and fees. * Inability to repay suppliers (insist on cash on delivery or refuse to supply in future) * Positive means that business can pay short term and long term commitments. Too much or too little working capital is not good: * Too much stock – increased holding costs, theft may occur, stock may become obsolete. Too much cash – doesn’t make profit and must be used to purchase CA or NCA to be used in business. * Too much A/R – if owed cash flows shortage may occur and must be collected to pay expenses. Control of Current Assets * Cash * Kept at minimum but sufficient amounts should be kept to pay ongoing commitments * Methods of increasing cash: * Factor or collect A/R * Increase equity * Lease rather than buy * Increase sales * Increase debt * Sell non productive assets * Sale and lease back premises * Receivables * Provides the business with cash to pay its commitments * Methods of collecting aged debtors: Factoring (take a fee from business) * Invoice discounting * Debt collectors (charge the owing company) * Offering customer instalments * Batching – regular reminders * Sending threatening statements * Take to court if large sum * Methods of ensuring credit problems do not occur in future: * Check credit rating * Issue credit contract * Communicate clearly * Inventory * Too little stock results in shortages and inability to meet demand, which leads to a loss of customers to competition. * Too much stock results in: * Increased holding and storage costs * Perishables and fashionable items need to be discounted * Theft Insurance * Labour time spent in stock control * Lower turnover rates * Cash flow problems as stock needs to be paid for and if stock remains unsold * Methods of controlling stock: * JIT – inventory bought and brought into business just in time to be used * Discounts for obsolete or dated stock * Discounts for bulk purchases * Kanban (2 bin system – once one is empty, stock is re-ordered) * Perpetual (continual) and periodic (now and then) systems * Computer scanning to identify location and quantity of remaining stock * Good relationship between the business and supplier
Control of Current Liabilities * Payable * Trade credit cheapest form because interest free * Holding back payments will the due date can increase liquidity * Businesses does not want to ruin relationship with supplier so must pay accounts within credit period. * Must be careful not to incur interest or damage credit rating or relationship with the supplier if stretching occurs as the supplier may refuse to supply or demand cash on delivery. * Take advantage of discounts for early payments * Methods of controlling: Review credit period – take advantage of discounts and check if interest is charged * Ask for extension if business is experiencing difficulties * Check alternative financing plans (eg consignment – obtaining stock and paying suppliers only when stock is sold). * Backwards vertically integrate (but supplier) * Short Term Loans * Commercial bills and credit cards must be repaid by due date or fees and charges will apply and credit rating will be affected. * Overdraft * Must endeavour to reduce this ST loan as soon as cash inflows increase into the business.
Strategies for Managing Working Capital * Leasing * Advantages: * Use equipment while keeping cash in business (conserves working capital) * Math cash inflows with cash outflows * Interest is tax deductible * Access and use NCAs without any significant impact on cash reserves * Disadvantages: * No ownership so can’t be used as security * Pay interest and residual * Contractual therefore lessor can reclaim asset * Factoring * Advantages: * Immediate access to funds * Ability to pay commitments and does not reclaim the asset * Disadvantages: * Fees and charges reduce profits Changed relationship with customer as another party is collecting outstanding money owed. * Sale and Lease Back = sale of long term/NCA to raise necessary funds for continued running of the business. The business would lease the asset back. * Advantage: * Cash inflow * Tax advantage as interest is tax deductible * Retains the use of NCA or premises * Disadvantages: * Loss of ownership resulting in loss of business value/worth * Loss of ability to use the asset as security * Paying rent increases with CPI Effective Financial Planning Effective Cash Flow Management Cash flows only * DO NOT include depreciation or appreciation and only include dividends and accounts payable/receivable if paid or received. Cash Flow Cycle * Outlines where cash comes from (inflows) and where it is used (outflows) * Inflows = debt sources, equity sources, sale of assets, investment income (rent, dividends, interest), sales, payment from debtors or factor company. * Outflows = repayment of debt, dividends distributed, purchase of stock, payment to staff, tax payments, payment to suppliers, purchase of capital equipment. Statements – Cash Flow Statement Concerned with managing cash inflows and outflows to ensure the business has enough cash to pay for ST operational costs and to meet its debt obligations. * Operating flows (concerned with prime function) * Inflows (sales) * Outflows (purchases) * Investment flows (associated with purchase and sale of LT assets) * Inflows (cash from sales of investment property) * Outflows (purchase of investment – property, shares) * Financing flows (associated with debt and equity financing) * Inflows (cash from debt and equity) * Outflows (interest and repayments of debt, dividends for equity)
Management Strategies: for effective cash flow management * Distribution of payments (concerns funds out of business) * Match inflows and outflows to coincide * Timing of regular bills (eg. BAS) – business has to know its time periods for payment * Must pay within credit period * Discounts for Early Payment * Taking advantage of cash discounts or early payments * Brings forward cash inflows without pushing some customers towards competitors Effective Profitability Management * Business aims to increase revenue and decrease costs while ensuring quality remains intact. Cost Control Total cost made up of fixed and variable costs * Fixed costs incurred regardless of the production process (eg. rent, electricity, etc…. ) * Methods of decreasing fixed costs: * Renegotiating rent * Re-leasing new machinery * Reducing support staff costs * Cutting expenditure on marketing * Downsize * Capital intensive – replace workforce with machinery * Variable costs = costs that increase as production increases – direct costs associated with COGS. * Methods of decreasing variable costs: * JIT * Find a cheaper supplier * Cheaper freight * Reduce casual labour * Vertically integrate backwards * Discounts for bulk or cash Cost centres = units in business where a particular manager is responsible for all costs associated with that unit or responsible for keeping to a budget. * Accounting and finance, ER and admin * Aim at making each employee more accountable for the costs incurred by their area of the business, thereby reducing costs * Expenses minimisation * Management will often decide to minimise expenses. * Budgets will be put in place, and each level of management will be responsible for reducing expenses. * Expense budgets = list the costs of a business and gives managers a guide as to how to reduce or keep costs at a minimum.
Revenue Controls * Maximise revenue – $ received from operating, financial and investment * Sales objective = budgets of sales and actual sales must be compared * Set clear sales objective so comparisons can take place and variances analysed * Sales mix = analysing the types and ranges of products being sold and decide on which is more profitable and which should be deleted. * Ensuring quality or diversify as much as possible, offering a wide range of goods in an attempt to maximise revenue * Pricing policy = decrease prices to increase sales and increase prices to increase revenue.