Business Studies- Finance

Role of financial management

Strategic role of financial management

Strategic financial management is the process of setting long-term objectives throughout the
business and deciding what will be needed to achieve these objectives
Developing a strategic plan a part of a firms financial management will ensure the business
grows
Business goals such as increasing profits are translated into business objectives that provide
detail about the firms mission, purpose and function
Business objectives: Break the business operations into achievable and manageable outcomes
that can be measured and evaluated
Financial management: Refers to the planning, organising and monitoring/controlling of the
financial or monetary resources to achieve the goals, objectives and plans of the business
Managing business finances are crucial to ensure the success of a business, with the following
possibly occurring if finances are not correctly managed:
Overstocking materials
Insufficient cash to pay suppliers
Inadequate capital for expansion
The main role of financial management can be broken down into three types of decisions:
Finance decisions where will the business source its money from?
Investment decisions how will the business use its finance to generate income?
Dividend decisions how will the business distribute any profits?
Objectives of financial management
Profitability, growth, efficiency, liquidity, solvency
In order to achieve its long term goals, firms must first set out and achieve a number of short
term goals including:

Goal
Profitability

Description
The ability of a business to maximise its profits
In order to increase profitability, firms must monitor and aim to increase
revenues whilst reducing costs at the same time

Growth

The ability of the business to increase its size in the longer term
A significant financial objective as it ensures the firm is sustainable in the future,
The growth of a firm depends on the firms ability to use its asset structure to
increase sales, profits and market share

Efficiency

The ability of a business to utilises its resources effectively in ensuring financial

stability and profitability
Occurs when a firm can minimise costs and manage assets in order to maximise
profits
By increasing productivity through staff or technological machinery, a firm can

increase its efficiency and thus minimise costs

Liquidity

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

In order to, a firm must have sufficient positive cash flow or convert assets to
liquid funds to pay debts

Solvency

The extent to which the business can meet its financial commitments in the
longer term, usually greater than 12 months
Important to owners, shareholders and creditors as it is an indication of the risk
associated to their investment in the particular firm

Short term and long term objectives

Short Term
Are the operational (day-to-day) and
tactical (1-2 years) plans
Reviewed regularly to see if targets are
achieved, and could include sales targets
for each month or output increases

Long term
are the strategic (5 years +) plans of a
business
can involve aims to expand into emerging
markets such as Asia, become a market
leader and increase market share
in order to be achieved, the shorter term
operational and tactical goals must be
achieved first
performance is reviewed annually to see
if the targets for each year are met, such
as growing 5% each year in order to gain
20% market share in 4 years

Interdependence with other key business functions (KBF)

The key business functions include operations, marketing, finance and human resources
In order to achieve certain goals such as market share, all functions must work together in
order to achieve this
If, for example, a business was to set a strategic goal of increasing its market share by 5%, this
would affect:
Operations, as production methods would need to be altered to become more
efficient/productive and thus minimise costs
Marketing, as extensive advertising to increase market awareness would be required
Human resources, as additional labour would be required to produce higher outputs
Finance, as additional funds may be needed in order to alter operations production
methods, pay for additional marketing and additional labour costs

Influences on financial management

Internal sources of finance-retained profits

A business can finance its operations from external sources, internal sources, or, more
commonly, a combination of both
The Internal Finance: The funds provided by the owners of business or from the outcomes of
business activities (retained profits)

Internal finance comes from the following sources:

Owners Equity: The funds contributed by owners or partners to establish and build the
business
Retained Profits: Involve retained earnings which arent redistributed to dividends and other
means. In Australia about 50% of profits are retained for future reinvesting, and provides firms
with a cheap and accessible form of finance

External Sources of Finance

External Finance: The funds provided by sources outside the business including banks,
other finance institutions, government, suppliers or financial intermediaries

Debt: Short term borrowing (overdraft, commercial bills, factoring), long-term borrowing
(mortgage, debentures, unsecured notes

Short term Borrowing

Used to finance temporary shortages in cash flow or finance for working capital
Repaid within 1-2 years

Type of Debt
Bank overdraft

Commercial Bills

Factoring

Description
Common type of short term borrowing
Consists of businesses able to overdraw its account to
an agreed limit
Overdrafts assist firms with short term liquidity
problems, due to a slum in sales etc
Interest rates are lower than on other forms of
borrowing, other costs and fees are minimal

A type of loan for large amounts of money (over 100k)

issued by institutions other than banks, basically an IOU for
the period of between 90-180 days
Borrower receives the money immediately and then
promises to pay the principal + Interest by the time the
period has ended
The selling of accounts receivable for a discounted price to
a finance or factoring company

A firm can receive up to 90% of the amount of receivables

within 48 hrs of submitting its invoices to the factoring
company
Obvious downside is that not all of accounts receivable go
to the business, as the factoring company charges a
fee/commission cost of finance
A factoring company can offer:
Without recourse: The business transfers responsibility for
non-collection to the factoring company
With recourse: The business will still have the responsibility
of its bad debts
Comes with greater risks and higher costs than other
sources of finance
Previously viewed negatively but attitudes towards
factoring have improved over the last decade

Long-term Borrowing

Funds borrowed for periods longer than two years, and is able to be both secured or
unsecured with interest rates also having the options of variable or fixed
Used in real estate, offices and factories and capital equipment

Type of Debt
Mortgage

Debentures
(bond)

Unsecured notes

Leasing

Description
A loan secured by the property of the borrower (business)
A loan secured by the property of the borrower (the business), which
cannot be sold or used as security for another loan until the current loan
has been repaid in full
Issued by a company for a fixed rate of interest and for a fixed time
The amounts of profits made by the firm have no impact upon the interest
as it is fixed
Not secured to specific property
A loan for a set period of time but is not backed by any collateral or assets
Most risk to lenders, thus attracting high rates of interest compared to a
secured note
Firms sell these to generate money for initiatives such as acquisitions
Involves the payment of money for the use of equipment that is owned by
another party
The lease is an agreed period of time, and both the costs and benefits of
the equipment is transfers from the leaser to the lessee
Long term lease cant usually be cancelled
Two types of leasing:
Operating leases short-term, usually less than the life of the
asset
Financial leases lessor buys asset on behalf of lessee and as

such the lease usually lasts for the life of the asset

Equity-ordinary shares (new issues, rights issues, placements, share purchase plans), private
equity
Refers to finance raised by a company by issuing shares

Ordinary shares

Most commonly traded shares in Australia, with purchasers becoming part owners of a
publicly listed company
The return on these shares is capital growth and dividends
Dividends: A distribution of a firms profits (either yearly or half yearly) to shareholders and is
calculated as a number of cents per share (Dividend yield)
Types of ordinary shares include:
New Issue: A security that has just been issued and sold for the first time (primary
market)
Rights Issue: The privilege granted to shareholders to buy new shares in a company
which they already hold shares in
Placements: Allotment of shares, debentures etc made directly from the firm to
investors
Share purchase plan: An offer to existing shareholders in a listed company to
purchase more shares in that company without brokerage fees. These shares can also
be offered at a discount compared to the current market price

Financial Institutions- Banks, Investment banks, finance companies,

superannuation funds, life insurance companies, unit trusts and the
Australian Securities Exchange
Financial
Institutions
Banks

Investment Banks

Description

Major operations in the financial markets and most important source

of finance for businesses
Receive deposits from individuals, business and governments, make
investments and loans to borrowers
Since the GFC in 2008, banks have been more cautious in lending
policies making it harder for businesses the obtain finance
E.g ANZ, CBA, Westpac,

They:

One of the fastest growing sectors in Australia

They provide services in both borrowing and lending primary to the
business sector
Advise on mergers and acquisitions
Arrange project finance
Trade money, securities and finance futures
Operate unit trusts, cash management trusts, property trusts and

equity trusts

Finance Companies

Superannuation
Funds

E.g JP Morgan, Goldman Sachs, CITI, UBS, RBS,

Non-bank intermediaries that specialise in smaller commercial finance
Regulated by the Australia Prudential Regulation Authority (APRA)
They act as intermediaries in financial markets by providing loans to
both individuals and businesses
Some companies also specialise in factoring or cash flow financing
Capital leant out is raised through debentures (fixed term with fixed
interest)
These loans are secured, thus the asset can be sold off if the business
paying the loan fails
e.g Aussie and Yellow Brick Road

Rapid growth in the last 20 years due to compulsory superannuation

contribution legislation
Provide funds to the corporate sector through the investment of funds
received from contributions
They invest in long term securities such as company shares,
government and company debt due to long term nature of
superannuation

e.g ING Direct

Life insurance
companies

Provide corporate loans through receipts of insurance premiums

Provide large amounts of both equity and loan capital to firms
Can sometimes be very risky for those who depend upon insurance
payouts (eg QLD floods)

E.g Allianz, AIA

Unit Trusts

ASX

Known as mutural funds, and take funds from a large number of small
investors and then invest in certain types of financial assets
Include on the short term money market (cash management trusts),
shares, mortgages, property and public securities
Some trusts are connected to management firms that manage a
diversified investment portfolio for investors

E.g AXA
Australian securities exchange is the primary stock exchange in
Australia
Functions as a market operator which offers products and services
including shares, futures, real estate investment trusts, exchange
traded options etc
Both the primary and secondary market, and oversees all share
transactions with public companies

 Influence of Government- ASIC, company taxation

Government can influence business behaviour and financial management decision making
through economic policy making such as Fiscal and Monetary policy, and also microeconomic
reform

Australian Securities and Investments Commission (ASIC)

Ensures that companies adhere to laws concerning investments and collects & publishes
information about companies
Aims to assist in reducing fraud and unfair practices in financial markets and financial products
such as insider trading
Since 1998 has been responsible for enforcing the Corporations Act

Company Taxation

Tax is paid on profits, and is currently a flat rate of 30% unlike personal tax which is
progressive
Is paid BEFORE profits are distributed to shareholders as dividends
Has been systematically reduced over the last decade to increase global competitiveness and
attract foreign investment
This rate was reduced from 36 to 34% for 2000-01 and then 30% until 2013
Global Market Influences
Almost uncontrollable by businesses, however management strategies can be implemented in
order to minimise the effects on a business
Globalisation has created a larger interdependence between economies and their business
sectors which relies on trade for expansion and increased profits
The three main global market influences upon firms include:
Economic outlook (bull market-boom, bear market-bust/economic slowdown)
Availability of funds (the difficulty to obtain funds)
Interest rates (cost of finance)

Global economic outlook

Refers specifically to the projected changes in the level of economic growth throughout the
world
Positive prospects = easier availability to finance, higher consumer confidence thus increased
consumption and demand for G&S = Higher levels of economic growth, business profits etc
Negative prospects = more difficult to gain finance, lower consumer confidence thus reduced
demand for G&S = lower levels of economic growth, business profits etc

Availability of Funds

Refers to the ease with what a business can access funds on the international finance markets
These international financial markets are made up of governments, companies, institutions etc
which are prepared to lend money
Lending is determined on various conditions including:

Risk
Demand and supply
Domestic economic conditions
GFC is good example of how the availability (or rather unavailability) of funds on a global level
can have a negative impact on businesses in Australia

Interest Rates

The cost of borrowing money

Higher levels of risk = higher interest rates
Interest rates in Australia have historically been higher than most other nations, increasing the
incentive for Australian businesses to borrow from overseas sources
Changes in exchange rates can either amplify or negate the advantages of overseas borrowing,
depending on the direction of the change)

Processes of Financial Management

Planning and Implementing- Financial needs, budgets, record systems,
financial risk, financial controls

Planning processes involve the setting of goals and objectives, determining the strategies
to achieve those goals and objectives, indentifying and evaluating alternative courses of
action and choosing the best alternative for the business

Financial Needs

In order to determine where a business is heading, it is important to know what its needs
are
Financial information must be connected before future plans are made, and include
balance sheets, income statements, cash flow statements, sales forecasts etc
The financial needs of a firm are determined by:
Size of the firm
Phase in the business cycle
Future plans for growth and development
Capacity to source finance- debt and/or equity
Financial information is needed to show that the business can generate an acceptable return
for the investment being sought and should, therefore include an analysis of financial
performance such as a cash flow statement and balance sheet

Budgets

Provide information in quantitative terms (facts and figures) about requirements to achieve a
particular purpose
They provide the facts and figures for planning and decision making and enable constant
monitoring of progress and problem areas

They reflect the strategic planning decisions about how resources are to be used and provide
financial information for a businesss specific goals and are accordingly used in strategic,
tactical and operational planning
Enable constant monitoring of objectives and provide a basis for admin control, production
planning, price setting and control of expenses
Used in both the planning and controlling aspects of a firm
Planning: Can be used to review past figures and trends to plan for realistic goals for
the future etc
Control: Planned performance can be compared to actual performance with
corrective action taking place if required
Operating Budgets: Relate to the main activities of a business and may include budgets
relating to sales, production and raw materials
Project Budgets: Relate to capital expenditure and R&D
Financial Budgets: Relate to financial data of a business and include budgeted income
statements, balance sheets and cash flow statements

Record Systems

Record systems are the mechanisms employed by a business to ensure that data is recorded
and the info provided by record systems is accurate, reliable, efficient and accessible
The double entry recording system is used to minimise errors, as entries can be seen to
balance, and checks to find errors can be carried out quickly and easily
This is done as management base decisions on previous records when needed, therefore all
records must be reliable and accurate

Financial Risks

The risk to a business of being unable to cover its financial obligations such as debts incurred
through short & long term borrowing
Businesses must consider whether the profit generated as a result of borrowing is enough to
cover the repayments
Generally, the higher the risk, the higher the return both the business and the financial
institution lending the funds will expect. (e.g higher risk for banks = higher interest rates)

Financial Controls

The policies and procedures that ensure that the plans of a business will be achieved in the
most efficient manner
The most common causes of financial problems are:
Theft
Fraud
Damage/loss of assets
Errors in record systems
Common policies/procedures that promote control within a business include:
Clear responsibility for tasks
Separation of duties
Rotation of duties

 Debt and Equity Financing- advantages and disadvantages of each

Business can choose to gain finance from both external and internal sources, and usually
adopt an approach to utilise both sources

Debt Finance

Debt finance refers to the short and long term borrowing from external sources by a business
Include mortgages, loans, overdrafts etc from banks and other financial institutions

Equity Finance

Equity finance refers to the internal sources of finance in the business, such as owners equity
and retained profits
Include retained profits, owners equity and primary shares

Comparing debt and equity finance

Matching the terms and source of finance to business purpose

The terms of finance must be also suitable for the structure of the business and the purpose
for which the funds are required
The costs of each source of funding must be determined and balanced against the expected
rate of return
Structure of a business can also influence financial decisions, eg unincorporated businesses
will have difficulties obtaining equity finance
Other costs associated with a source of finance, eg setup costs and interest payments must
also be considered
Flexibility of finance should also be considered eg overdraft v debentures
Availability of finance cannot be taken for granted and must also be considered
Level of control maintained must also be considered, especially when choosing between debt
and equity finance

Monitoring and Controlling- Cash flow statement, Income statement,

Balance Sheet
Financial Statements

Monitoring and controlling is essential for maintaining business viability and affects all aspects
of financial management
The main financial controls used for monitoring are:
Income statements
Balance sheets
Cash flow statements

Cash flow Statement

A financial statement that indicates the movement of cash receipts and cash payments
resulting from transactions over a given period of time
Provides the link between the income statement and balance sheet, and gives important
information regarding the firms ability to pay its debts on time

Creditors, lenders, owners and shareholders all use a CFS to assess the ability of a
business to manage its cash and identify cash flow management trends over time

A better predictor of a firms status rather than profitability, and shows whether a firm
can:
Generate positive cash flow
Have sufficient funds for future Investment
Pay servicing costs (rent, interest, dividends, accounts payable)
The activities of the firm are separated into 3 distinctive categories on the cash flow statement
including:
Operating Activities: The cash inflows/outflows relating to the main activity of the
firm (provision of G&S, income from sales, dividends and interest received whilst
outflows consist of payments to suppliers and employees
Investing Activities: Cash inflows/outflows relating to the purchase and sale of noncurrent assets and investments, such as selling a company car or purchasing new
capital machinery
Financing Activities: The cash inflows/outflows relating to equity or debt. Inflows
involve the $ received from issuing shares or borrowing from financial institutions,
whilst outflows consists of servicing costs such as interest

Income Statement

Shows the operating results for a given period of time. It shows the revenue earned and
expenses incurred over the accounting period with the resulting profit or loss
Operating income: Earned from the main function of the business such as sales of
inventories, services and other operations such as interest and rent
Operating expenses: Including purchase of inventories, payments for services and
other operations including advertising, rent, telephone and insurance
Managers can compare and analyse trends using a collection of previous income statements
before making important financial decisions, and can identify the reasons for
increases/decreases in profits etc

Balance Sheet

Represents a businesss assets and liabilities at a particular point in time, expressed in money
terms, and represents the NET worth of the business and the stability of the firm
Assets: The items of value owned by the business, current can be turned into cash
within 12 months whilst noncurrent assets are not expected to be turned into cash
within 12 months
Liabilities: Claims by people other than owners against the assets (items of debt) and
represent what is owed by the business. Current liabilities must be paid within 12
months, whilst noncurrent liabilities are expected to be paid in a period longer than 12
months, such as a mortgage
Owners Equity: Represents the owners financial interest in the business or net worth
of the business, also referred to as capital
Shows the financial stability of a business, and analysis of the sheet can indicate weather:
The firm has enough assets to cover its debts
The interest and principal borrowed can be repaid
The assets are being used to maximise profits

The accounting equation (Assets = Liabilities + Owners Equity) forms the basis
of the accounting process and shows the relationship between assets, liabilities
and owners equity

 Financial Ratios

Analysis involves working the financial information into significant and acceptable forms that
make it more meaningful, and highlighting relationships between different aspects of a
business
Interpretation involves making judgements and decisions using data gathered from analysis
Gearing is the proportion of debt finance compared to the proportion of equity used
determines solvency
3 types of analysis including vertical, horizontal and trend analysis
Vertical: Compares figures within one financial year, e.g expressing gross profit as a %
of sales
Horizontal: Compares figures from different financial years, such as 2011 to 2012
Trend: Compares figures from periods of 3-5 years
The type of analysis utilised will depend on the reasons that the information is required for,
such as comparing figures, percentages or ratios for different firms within the same industry

Financial Ratio
Liquidity

Gearing

Profitability

Ratio

Debt to Equity Ratio

Gross Profit Ratio

Example
450 000/150 000 = 3:1
- The firm has $3 of
assets for every
$1 of current
liabilities,
indicating that
the firm is in a
sound financial
position, that is, it
is liquid and will
be able to pay for
its debts in the
short term
50 000/ 150 000 = 33.3%
- The firm has
$0.33 in external
debt (liabilities)
for every $1 of
internet debt
(owners equity).
A ratio of 1:1
indicates a sound
financial position
this firm is in a
safe position
Gross Profit Ratio
20 000/100 000 x100 =
20%

Net Profit Ratio

Net Profit Ratio
15 000/100 000 x100 =
15%

Purpose
Identifies a limited
indication of the ability of
the firm to meet its
liabilities
-

Analyses short-term
stability
Generally accepted
that 2:1 is sound
HIGHER is better

it shows the extent to which

the firm is relying on debt or
outside sources to finance
the business
-

LOWER is better
Under 100% is
accepted

Gross Profit Ratio

Represents the amount of
sales that is available to
meet expenses resulting in
net profit. It Shows changes
from one accounting period
to another, and indicates
the effectiveness of

Return on Equity Ratio

Return on Equity Ratio

15 000/150 000 x100
=10%

planning policies concerning

pricing, sales etc
-

Usually compared
to previous years
Indicates
effectiveness of
policies regarding
pricing, discounts,
sales and supply
chain.
HIGHER is better

Net Profit Ratio

Represents the profit or
return to the owners, and
shows the amount of sales
revenue that result in net
profit.
-

Represents final %
of sales received by
owners
HIGHER is better
Can identify COGS
or expenses as
problem when
compared to gross
profit ratio

Return on Equity Ratio

Shows how effective the
funds contributed by the
owners have been in
generating profit, and hence
a return on their
investment.
-

Efficiency

Expense Ratio

Accounts Receivable
turnover Ratio

Expense Ratio
5000/100 000 x100 = 5%
Accounts Receivable
turnover Ratio
100 000/10 00 = 10%

Shows how
effective equity has
been in generating
profit
HIGHER is better

Expense Ratio
Compares total expenses
with sales and indicates the
amount of sales that are
allocated to individual
expenses such as selling,

admin etc, therefore

indicating the day to day
efficiency of the firm
-

Can be used on
individual expense
categories or
expenses as a whole
LOWER is better

Accounts Receivable
turnover Ratio
Measures the effectiveness
of a firms credit policy and
how efficiency it collects it
debts. It measures how
many times the account
balance is converted into
cash or how quickly debtors
pay their accounts. By
dividing it by 365, firms can
determine the average
length of time it takes to
convert the balance into
cash

Comparison of Financial Ratios

Financial ratios are meaningless until compared to one or more of the following:
Previous years
Industry averages/competitors
Business goals

Limitations of financial reports- normalised earnings, capitalising

expenses, valuing assets, timing issues, debt repayments, notes to the
financial statements

There are six key limitations of financial reports:

o Normalised earnings the process of removing one-time or unusual income
(including high/low sales due to level of economic activity) for the balance
sheet to show the true earnings of a company
o Capitalised expenses the process of incorporating costs incurred in financing
a non-current asset into the assets value in the balance sheet
o Valuing assets either original/historical cost or depreciated/appreciated cost
o Timing issues seasonal influences may distort a financial statement since they
only represent a given period of time

o Debt repayments financial statements do not show the business ability to

collect its debts
o Notes to financial statements contain information such as accounting
methods used and how they affect the results of the financial statements

Ethical issues related to financial reports

Ethical considerations are closely related to legal aspects of financial management

Legislation exists to guard against unethical business activity, but there is often a time
lag between the recognition of a problem and its legal implementation
The ASX officiates requirements for public companies

Audited Accounts

An audit is an independent check of the accuracy of financial records and accounting

procedures
There are three main types of audits:
o Internal audits conducted by employees
o Management audits conducted to review strategic plans
o External audits required by federal law, performed by specialised
accountants outside the business
In 2005 Australian businesses were required to adopt international financial reporting
standards (IFRS)

Record Keeping

Records must be kept for ALL transactions, including cash transactions, else the
business can be found guilty of tax fraud
Accurate record keeping is necessary for taxation purposes as well as for other
stakeholders

GST Obligations

All businesses must complete a BAS every 3 months, which reflects the sum of
transactions with customers
Failure to declare all GST or claiming input credits to which they are not entitled is
both unethical and illegal

Reporting Procedures

Businesses must provide the government (ATO) and shareholders (if any) with
accurate financial reports, as well as making them available to any other stakeholders
Inaccurate and/or dishonest reporting is both unethical and illegal

Financial management strategies

Area of
Management
Cash flow
management

Working capital
management

Identify strategies and outline features

How effective is this strategy

Distribution of payments
- Involves distributing debits through
the month, year or other period to
ensure cash shortages dont occur
Discounts for early payments
- Involves offering discounts for early
payments by creditors
Factoring
- The selling of accounts relievable for
a discounted price to a finance or
specialist factoring company

Distribution of payments
- Is effective in identifying
periods or potential
shortages and
surpluses, so the firm
can overcome these
problems before the
actual event occurs
Discounts for early payments
- Is effective when
targeting creditors who
owe large amounts,
although these
discounts do reduce the
overall level of revenue
and the profitability of
the firm
Factoring
- Growing in popularity as
a way to improve
working capital

Control of CA
Cash
- Planning for the timing of cash
shortages to ensure overdrafts or
other forms of debt finance do not
need to be taken out to cover short
term liabilities
Receivables
- Monitoring the firms accounts
receivables and ensuring their timing
allows the business to maintain
adequate cash resources

Control of CA
Cash
- Effective in guarding
against sudden
shortages or
distributions of cash
Receivables
- Effective in improving
shot term liquidity
although tight credit
control policies can
sway potential
consumers away
Inventories
- Effective in generating
cash to pay for
purchases and pay
suppliers on time

Inventories
- Must ensure an efficient inventory
management to reduce holding costs

Profitability
Management

Control of CL
Accounts payables
- Monitoring payables and paying
these debts close to the due date to
improve the liquidity of the firm, as
some suppliers allow a period of
interest fee trade credit before
requiring payment for goods
purchased
Loans
- Managing short term loans or
utilising other types of short term
finance can reduce interest rates
overdrafts
- A relatively cheap form of debt
finance, however they need to be
carefully monitored as bank charges
may vary depending on the type
Leasing
- The hiring of an asset from another
individual or company who has
purchased the asset and retains
ownership of it. Allows 100% finance
Sale and Lease-back
- The selling of an owned asset to a
lessor and leasing the asset back
through fixed payments for a
specified number of years

Control of CL
Accounts payables
- Frees up funds to cover
other short term
liabilities
Loans
- This is effective in
reducing costs of a
business, as short term
loans are generally an
expensive form of debt
finance
Overdrafts
- Allows cash supplies to
be controlled and
provides the firm with
short term finance to
cover liabilities and
debts
Leasing
- Frees up cash that can
be used elsewhere in
the business so the level
of working capital is
improved, whilst also
allowing a firm to
increase its number of
assets, consequently
leading to an increase in
revenue and profits
Sale and Lease-back
- Is highly effective in
increasing the firms
liquidity because the
cash that is obtained
from the sale is the used
as working capital

Cost Controls
Fixed + variable
- Monitoring the levels of both fixed
and variable costs are important,
with changes in the volume of
activity needing to be managed with
the rising variable costs
Cost centres
- A cost centre is part of an
organization that does not produce
direct profit and adds to the cost of
running a company. Examples of cost
centres include research and

Cost Controls
Fixed + variable
- Comparing costs with
budgets, standards ad
previous periods can
ensure that future costs
are minimised and
profits maximised

development departments,
marketing departments, help desks
- Firms must identify the source and
amounts of its costs in order to
effectively reduce these costs. Cost
centres pose both direct and indirect
costs, with direct costs being
allocated solely to a particular
department, activity etc whereas
indirect costs are those shared by all
aspects of the business, such as
electricity
Expense minimisation
- Involves the business implementing
guidelines and policies to promote
employees working more efficiently
and minimising waste

Global Financial
Management

Expense minimisation
- This can effectively
reduce costs and
increase the firms
profitability as these
policies can make the
firm more efficient and
minimise expenses as
much as possible
Revenue Controls
Revenue Controls
Marketing objectives
Marketing objectives
- Altering pricing policies can influence
- These pricing strategies
the profitability and consequently the
can effectively improve
working capital of a firm. The
or worsen the current
business must decide the price of
position of the firms
their product based on the costs
working capital stance,
associated with producing the good,
as overpricing could
competition pricing, short and long
reduce sales levels and
term goals (e.g market share etc) and
consequently reduce
the image and positioning of the
working capital, whilst
product, such as a high end product
underpricing can
which is priced highly
increase sales but
reduce the profitability
of the firm, also
impacting negatively
upon the working
capital of the business
Exchange Rates
Exchange Rates
- Cyclical factors which a firm has no
- this will accordingly
control over, so the firm must adapt
increase sales and
- Can significantly impact upon the
working capital of the
international competitiveness of the
firm as their
firm
international
- An appreciation would result in
competitiveness has
higher prices for individuals overseas,
improved
consequently reducing international
competitiveness and demand for the
firms goods
- A depreciation will increase

international competiveness as the

goods will be cheaper on the world
market, accordingly increasing
demand and sales
If a firm is facing a situation of an
appreciation, they must find ways to
minimise costs so they can reduce
prices in order to regain international
competitiveness which was
diminished by the appreciation

Interest Rates
- Firms can utilise overseas debt
finance as it generally has lower
interest rates compared to
domestically in order to reduce costs,
however these savings can easily be
shifted into increased costs if the
$AUD depreciates greatly

Interest Rates
- highly risky, the risk
reward ratio is low as
there is always
uncertainty that the
$AUD could
depreciation, which
would effectively
increase costs instead of
save money which was
intended with foreign
borrowing

Methods of International
payment
Payment in advance
- very low risk for
exporters as the
payment has already
Methods of International payment
been made, however
Payment in advance
very few importers to
- Involves the exporter to receive
this as it is highly risky
payment and then arrange for goods
for them
to be sent,
Letter of credit
Letter of credit
- low risk and popular
- A commitment made by the
amongst many
importers bank which promises to
exporters as when the
pay the exporter the amount when
bank is involved the
documents proving the shipment of
transaction cannot be
the goods are presented
withdrawn, ensures
Clean payment
working capital and is
- Where the payment is sent to, but
effective at doing so
not received by the exporter before
Clean payment
the goods are transported
- minimal risk to the
Bill of exchange
exporter and ensures
- Document drawn up by the exporter
working capital as the
demanding payment from the
goods will be paid for,
importer at a specified time. Widely
however it is not
used by exporters to main control
favoured by importers
over the goods until payment is made Bill of exchange
or guaranteed, two methods include:
- high risks as importers
Document against payment: The
may not pay at for an
importer can collect the goods only
document against
after paying for them
acceptance, which will
- Document against acceptance: The
significantly impact
importer may collect the goods
upon the working
before paying for them
capital of the firm.
Hedging
Hedging
- The process of minimising the risk of
- is effective in
currency volatility. Involves a spot
minimising the risks of

exchange rate which fixes the

exchange rate for the transfer of
financial flows at the rate on the day
or agreement. E.g deciding a rate of
$AUD 1.05, with imports being paid
for this 3 weeks later despite the rate
at that point of time depreciating to
$AUD 1.02
- Natural Hedging: Can include
arranging for import payments and
export receipts denominated in the
same foreign currency, thus any
losses from a movement will be
offset by gains from the other. Along
with this, insisting on both import
and export contracts denominated in
$AUD to effectively transfer the risk
to the importer only
- Financial instrument hedging:
Through derivatives to minimise or
spread risk of exchange rate volatility
Derivatives
- Financial instruments which when
used can lessen the exporting risk
associated with exchange rate
volatility, however if used incorrectly
can pose significant negative
implications
- Forward exchange contract: A
contract which allows an agreed
exchange rate after a period of 30,90
or 180 days guaranteed by the bank
- Options contract: gives the buyer
the right, but not the obligation to
buy or sell a foreign currency at some
time in the future. This protects
holders from unfavourable
fluctuations yet maintain the ability
for gains if the rate upswings whilst
holding
- Swap contract: An agreement to
exchange currency in the spot market
with an agreement to reverse the
transaction in the future.

exchange rates which

are a cyclical factor
which cannot be
controlled by the firm
Derivatives
- Can be effective in
minimising risk of
exporting goods for a
firm, however if done
incorrectly costly
implications can arise.