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Tony Stevenson

on 23 October 2014

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Transcript of JCU FINANCIAL WEEK 1

Welcome to Financial Management
Introduction and
Short term financial management

Whats this Lecture about?

Corporate Finance and the Financial Manager
Forms of Business Organization
The Goal of Financial Management
The Agency Problem and Control of the Corporation
Working Capital management

The corporate form of organisation
Corporate Finance
Some important questions that are answered using finance:
What long-term investments should the firm take on?
Where will we get the long-term financing to pay for the investment?
How will we manage the everyday financial activities of the firm?

My expectations
That you will attend
That you will do the reading
That you will prepare the questions before seminar
That you will ask your tutor (or me) if you don't understand something

The objective of the firm

A conflict between objectives

Which claimants are to have their objectives maximised, and which are merely to be satisficed?

Pro-capitalist economists
The rules of the game

Primacy of workers’ rights and rewards
Balanced stakeholder approach

Some possible objectives

Achieving a target market share
Keeping employee agitation to a minimum
Creating an ever-expanding empire
Maximisation of profit
Maximisation of long-term shareholder wealth

The agency problem

What is the agency problem?
Shareholder wealth is not maximised by managers of a company

Why does it arise?
Differences in objectives
Divorce of ownership and control
Asymmetry of information

Part three:
Financial Management

Market Capitalisation
The amount of inventory you carry represents a use of cash, it is an investment you make. What return do you get?
How do we compare the level of risk the firm is carrying in its short term assets? One way is to compare it with peers - %

Relative to others in the food industry, how much does each firm hold in inventory?

Woolworths is probably the purest retailer, selling to individual customers (lowest level of receivables). Its inventory is around 60% of its short term assets. It also seems to hold a lot of cash (think having change for cash registers). Whereas Metcash holds very low levels of inventory and even lower proportions of cash.

Cash conversion cycle

Cash conversion cycle: time between paying for inputs and receiving cash from sales
Length of cash conversion cycle is a factor in determining the level of working capital
Level of working capital also depends upon working capital policy

Cash conversion cycle

The cash conversion cycle (CCC) is given by the formula:

ICP + RCP - PDP (days)

ICP= Inventory conversion period
RCP= Receivables collection period
PDP= Payables deferral period

The longer the period the more WC is required.

Inventory turnover 38406 / 4997 = 7.69 times 47.49 days

Receivables turnover 55897/2266.5 24.66 times 14.8 days

See you at the Tutorial, or Workshop
Financial Manager
Financial managers try to answer some or all of these questions
The top financial manager within a firm is usually the Chief Financial Officer (CFO)

- Treasurer – oversees cash management, credit management, -
capital expenditures, and financial planning
- Controller – oversees taxes, cost accounting, financial
accounting and data processing

Financial Management Decisions?

Capital budgeting
- What long-term investments or projects should the
business take on?
Capital structure
- How should we pay for our assets?
- Should we use debt or equity?
Working capital management
- How do we manage the day-to-day finances of the

Forms of Business Organization and Their Financial Impact
A businesses can be legally organized as a
- sole proprietorship
- partnership
- corporation
Legal organization has an impact on
- Raising money
- Taxation
- Financial liability

Easiest to start
Least regulated
Single owner keeps all the profits
Taxed once as personal income

Limited to life of owner
Equity capital limited to owner’s personal wealth
Unlimited liability
Difficult to sell ownership interest

Sole Proprietorship

Two or more owners
More capital available
Relatively easy to start
Income taxed once as personal income

Unlimited liability
General partnership
Limited partnership
Partnership dissolves when one partner dies or wishes to sell
Difficult to transfer ownership

Limited liability
Unlimited life
Separation of ownership and management
Transfer of ownership is easy
Easier to raise capital

Separation of ownership and management
Double taxation (income taxed at the corporate rate and then dividends taxed at the personal rate)

End of part one - take a 10 minute break.
Quick Quiz
What are the three types of financial management decisions and what questions are they designed to answer?
What are the three major forms of business organization?

Part two
The Goal of Financial Management?
What should be the goal of a corporation?
- Maximize profit?
- Minimize costs?
- Maximize market share?
- Maximize the current value of the
company’s stock?
Does this mean we should do anything and everything to maximize owner wealth?

Agency relationship
- Principal hires an agent to represent his/her interests
- Stockholders (principals) hire managers (agents) to run the company
Agency problem
- Conflict of interest between
principal and agent
Management goals and agency costs


What is the goal of financial management?
What are agency problems and why do they exist within a corporation?

The operating cycle

The time it takes to receive inventory, sell it and collect on the
receivables generated from the sale

Operating cycle = inventory period + accounts receivable

- Inventory period = the time inventory sits on the shelf
- Accounts receivable period = the time it takes to collect on

Operating cycle equations

Operating cycle = Inventory period + Accounts receivable period
Inventory period = 365/Inventory turnover
- Inventory turnover = Cost of goods sold/Average inventory
Accounts receivable period = 365/Receivables turnover
- Average collection period
- Accounts receivable turnover = Credit sales/Average accounts

The cash cycle
The time between payment for inventory and receipt from the sale of inventory
Cash cycle = Operating cycle – Accounts payable period.

Accounts payable period = time between receipt of
inventory and payment for it
The cash cycle measures how long we need to finance inventory and receivables

Cash cycle equations
Cash cycle
= Operating Cycle – Accounts payable period
Accounts payable period
= 365/Payables turnover
Payables turnover
= Cost of goods sold / Average
accounts payable

The operating and cash cyclesFigure 16.1
Example information
Operating Cycle = Inventory Period + Accounts Receivables Period
Inventory Period = 365/Inventory Turnover
Accounts Receivables Period = 365 / Receivables Turnover = Average Collection Period
Cash Cycle = Operating Cycle – Accounts Payable Period
Accounts Payable Period = 365 / Payables Turnover

Operating cycle example
Inventory period
Average inventory
- = (200 000 + 300 000)/2
- = 250 000
Inventory turnover
- = 820 000 / 250 000 = 3.28 times
Inventory period
- = 365 / 3.28 = 111 days

Operating cycle example continued
Receivables period
Average receivables
- = (160 000 + 200 000)/2 = 180 000
Receivables turnover
- = 1 150 000 / 180 000 = 6.39 times
Receivables period
- = 365 / 6.39 = 57 days
Operating cycle = 111 + 57 = 168 days

Cash cycle example
Accounts payable period
- = 365 / payables turnover
Payables turnover
- = COGS / Average AP
PT = 820 000 / 87 500 = 9.4 times
Accounts payables period
- = 365 / 9.4 = 39 days
Cash cycle = 168 – 39 = 129 days
Inventory and receivables must be financed for 129 days

end of session
if you have followed the session well done
Full transcript