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HSC Business Studies: Finance

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john lund

on 8 October 2015

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Transcript of HSC Business Studies: Finance

Topics

Strategic role of financial management
Influences on financial management
Processes of financial management
Financial management strategies

Term 1 2015

Assessment Task:

Teaching and learning strategies are in this colour
http://www.smh.com.au/photogallery/technology/technology-news/inside-facebooks-new-californian-headquarters-20120201-1qsfp.html
Facebook's new Californian headquarters
Current news

internal sources of finance
owners equity and retained profits
also called EQUITY FINANCE
external sources of finance
various external debt instruments also called DEBT FINANCE
financial institutions
banks, investment banks, finance and life insurance companies, superannuation funds, unit trusts, ASX
influence of government
Australian Securities and Investments Commission (ASIC), company tax, Corporations Law
global market influences
economic outlook, availability of funds, interest rates
http://www.smh.com.au/business/morteinmaker-culls-190-manufacturing-jobs-20120201-1qsk0.html
Mortein-maker culls 190 manufacturing jobs
Equal-pay push lands workers big rise: FWA
http://www.smh.com.au/national/equalpay-push-lands-workers-big-rise-20120201-1qsd9.html
What does financial management ensure?
What are goals broken down into?
What are some of the features of objectives?
One of the key objectives of financial objectives is liquidity. What is liquidity? Explain this concept using the following data: Current assets $2m
Current liabilities$1m
Explain the financial objective of solvency.
Consider this example: Total liabilities $1m
Owners equity $3m
Why is cash flow important to maintaining liquidity?
What are some ways that profit might be maximised?
What are the names given to short term plans and what are the time frames involved?
Explain the strategy of Boeing for its 787 Dreamliner.
Which type of plans will be reviewed regularly to ensure targets are being met?
What is a strategy?
Make a list of the potential problems that may arise if financial resources are mismanaged?
Coles opens a fresh front in discount war
http://www.smh.com.au/business/coles-opens-a-fresh-front-in-discount-war-20120130-1qpxd.html
Why do businesses need finance?
What is the usual
internal
source of finance to grow a business?
What happens to profits that are not
retained
?
The
internal financing
option to retained profits is known as
equity finance
. What does this concept involve?
Financing a business can also be done
externally
. This is known as ............ financing because the finance is borrowed from ................... the business.
The ratio of
total debt to total equity
is refered to as ..................
What financial objective does this ratio reflect?
Provide three reasons why managers generally prefer to raise the money they need to grow the business from debt rather than equity.
Debt can either be short term or long term.
What is meant be
short term debt
?
What is the
matching principle
?
What are the three main types of short term finance available?
Commercial bills
are also known as .......... bills.
It is a bill of exchange
. What does this mean?
Who is the intermediary?
Why is a commercial bill
very safe
for the for the company that lends the funds?
What does the bank get out of the arrangement?
There are four main types of
long term debt financing
.
What are they?
QUIZ: Financing options,

debt and equity
Explain what a
debenture
is (being a type of
loan contract
)?
How is a debenture different to a share?
Why are debentures considered a reasonably secure investment?
What is the link between
risk
and
return
?
What then is an
unsecured debenture
?
QUIZ: the role of financial management
Debt financing
Equity financing
Short Term Borrowings
Commercial bills
Overdrafts
Factoring
Long Term Borrowings
Debentures
Mortgages
Leases
Unsecured Notes
Retained Profits

New issues
Ordinary Shares (IPO)
Rights issues
Placements
Share purchase plans

Private equity
Ordinary Shares
Most commonly traded security
It is part ownership in a business
Part share of the business profits called a
dividend
Traded through the
ASX
( Australian Stock Exchange)
New Issues
Shares that have been registered, issued and are being sold on a market to the public for the first time
Many investors buy new issues because they often experience tremendous demand and, as a result, rapid price increases
When a business issues new shares potential investors will have access to a
prospectus
; this provides all the information about the company and it's intentions
The Australian Securities and Investments Commission (
ASIC
) gives approval to the prospectus to ensure it's satisfies Corporation Laws
Rights Issues
More capital is raised by offering
existing shareholders
the
right
to buy more shares (In proportion with their existing holdings) at a discounted price
Placements
The business sells a large
block of shares to an investment institution
Prospectus is usually not necessary
Share Purchase Plans
The company can issue a maximum of
$5000
in shares to each
existing shareholder
without having to issue a prospectus
Popular with small shareholders
Cheap way for a business to raise finance
No brokerage fee
Private Equity
Investment in unlisted (not on the ASX) businesses
Typically private equity investors
buy out
a business from existing private shareholders because they believe the business is undervalued
FINANCE
Equity financing
Banks
invest money deposited by customers
personal loans, bank bills, overdrafts, cheque accounts, credit cards, leasing arrangements
Investment banks
they help companies raise capital
best known example in Australia is Macquarie Bank
they also provide financial and business consultancy services
often investment banks hold and manage investments themselves, eg: Mac Bank owns Sydney Airport.
Finance companies
raises money through debentures to provide consumer credit and small business loans
Superannuation companies
funds are invested in shares and property
Life insurance companies
annual life insurance premiums paid by customers are invested
Unit trusts
trustees hold property on behalf of beneficiaries, when divided into 'units' it becomes a unit trust and the beneficiaries are 'unit holders'
Australian Securities Exchange (ASX)
provides market place services for stockbrokers and traders to trade shares and other securities
Australian Securities and Investment Commission
(ASIC) is responsible for administration of Corporations Law
Australian Taxation Office
(ATO) administers company taxation
Reserve Bank of Australia
(RBA) is responsible for interest rates
The Australian Prudential Regulation Authority
(APRA) is responsible for the administration of the financial sector
What is the
key internal source
of finance?
What is the
return to shareholders
called?
How can a business raise
equity finance
?
What is a
rights issue
?
What is the difference between '
ordinary shares
' and a '
new issue
'?
What is
share placement
?
Share purchase plans
are where a company can issue a maximum of $5 000 in new shares to each existing shareholder without having to issue a prospectus. Why do small shareholders find these appealing?
Which financial institutions offer the widest range of business services? What products are offered?
What is the role of
merchant banks
?

What other services do they provide?
How do
finance companies
operate?
What do
superannuation companies
invest in?
Explain how
life insurance companies
operate?
What are the roles of the
Reserve Bank
?
What has to be available to the public for the issue of
new shares
via the ASX?
What type of
tax
do companies pay?
What type of financial institutions are AMP, AXA and MLC?
What type of company is GE Capital Australia?
How do
unit trusts
work?
Explain what a
mortgage
is?
What has been a major
global influence
in the last year?
Quiz: influences on financial management
Processes of financial management
Planning and implementing
the focus of the HSC course is on large businesses
the Chief Financial Officer (CFO) will be a key member of the business's planning team
the planning involves 3 to 10 year time frames
financial planning will refer to the quantity of finance, the most appropriate type of finance, when it will be needed and other timing aspects
Budgets
these are the specific financial forecasts needed to achieve the objectives
they indicate when the finance will be needed
where the money will come from
and what it will be spent on
Record systems
these are concerned with tracking all data related to the business and will involve sophisticated software
Financial risk
there is the possibility of not being able to repay a debt when required and contingency plans will be necessary
Financial controls
control tools allow managers to compare what was planned with what actually happened and take corrective action if necessary
Factors to consider for debt funding

or financing
:

How long are the funds required for?
Can repayment requirements be made?
Can we obtain finance readily?
Where is the economy going?
What can we do if plans go wrong?
What tax advantages are involved?
Advantages of equity and debt financing

The .......................... of
equity financing
have become very apparent in the past five years, during which time the ......................................... and the ............................................. have been experienced. These events placed many businesses under .......................... strain.

Equity finance, either through the form of ..................................... or through ................. issues, have no direct financial costs. This contrasts to debt financing where ...................... payments must be paid as they fall due.

Of course it is planned that shareholders will receive ..................... on their shareholdings but should ........................ change ..........................
do not have to be .................... This means that equity funding is low ................ and the ....................... of the business, or short term ability of the business to meet its obligations, tends to remain .......................

The downside to equity financing is that business growth is likely to be conservative due to the ....................availability of equity finance. Additionally the issuing of new shares may ......................... ownership.

The ......................... of
debt financing
is that it can allow the ................ growth of a business without diluting the ...................... control over the business.

Another advantage of debt financing is that
..................... repayments are tax ........................ which reduces its overall cost. It is, however, important to note that the cost is not eliminated and the ...............................................
will affect ........................ and ............ flow.

Changes in the ......................... business ........................ may make it difficult to make repayments.
The matching principle
: the term and source of debt finance should be matched to the to life of the asset it is funding.
see page 221 and answer the question posed
http://www.abc.net.au/iview/?gclid=CMOws_Dkn64CFelKpgod_lGf2A#/series/ForeignCorrespondent?WT.srch=1&WT.mc_id=CORP_AdWords_iview_:foreign%20correspondent_e_g_15961614559___1t1
Documentaries:
"A Bavarian Fairytale":
(ABC) - examines the fiscal corporate culture of this region
"Meltdown: Global Financial Crisis"
: PBS
The more debt finance a business is carrying relative to its equity is refered to as .....................
A business with a high debt to equity ratio is said to be ................................................
http://www.smh.com.au/digital-life/mobiles/iphone-halo-launches-apple-into-stratosphere-20120215-1t546.html
Apple
http://www.smh.com.au/business/jet-fuel-price-dogs-qantas-20120216-1tawu.html
Qantas
http://www.smh.com.au/business/collapse-costs-creditors-millions-20120217-1tea8.html
Air Australia
Balance Sheet
ASSETS LIABILITIES
Current assets Current liabilities
cash
accounts receivable
inventory
short term loan
overdraft
accounts payable
Non-current assets Non current liabilities
equipment
motor vehicles
factory
mortgage
Owners equity
shareholders funds
net profit
Total ............ ...........
A=L+OE
Revenue Statement
Sales

less COGS
GROSS PROFIT ............

less expenses
wages
advertising
electricity
equipment lease
Total

NET PROFIT ............
( COGS = opening stock + purchases - closing stock )
current ratio = current assets
current liabilities

gearing - debt to equity = total liabilities
total equity

gross profit ratio = gross profit
sales

net profit ratio = net profit
sales

return on equity ratio = net profit
total equity

expense ratio = total expenses
sales

accounts rec turnover ratio = sales
accounts receivable
Financial ratios
What sort of things might large businesses need to use financial management to plan ?
What are the
two key issues
in considering debt or equity funding?
Why is it important to match the
terms and source
of finance to
business purpose
?
How are financial statements used to
monitor and

control
planning and implementation processes of financial management?
How are
financial ratios
used?
Revision
Detail four
limitations
of financial reports.
Another limitation is '
provisíons
'. Can you think what this is?
What is an
audit
?
Revision
1. Set out a table listing the advantages and disadvantages of
debt and equity finance
as a class effort.
DEBT
EQUITY
ADV
ADV
DISADV
DISADV
2. What type of financing is
leasing
? How does it work?
3. What is a
commercial bill
? Explain a situation where it might be used.
4. Identify some of the types of projects for which managers will seek
short term borrowings
?
5. Discuss reasons why managers prefer to raise money through
debt finance
.
6. Write out and learn the following terms:
factoring
:
unsecured notes
:
mortgage
:
7. What do the items mentioned in 2,3 and 6 all have in common?
8. How do
investment banks
differ to banks?
9. What are the
government influences
on large business?
10.What are
finance companies
? Explain how they operate.
11.What ratios could you use to analyse the
profitability
of a business?
12.What is
gearing
? What ratio would you use to determine this aspect of a business?
13.What is the equation for the
expenses ratio
? What are you working out with this ratio?
14.What ratio will you use to determine if your
debtors are paying you regularly
? What are you actually working out?
15.Why is
return on owners equity
important to investors? What is the ratio used to determine this?
16.What is
COGS
? How is this used? What financial statement does this apply to?
17.What are
current liabilities
? What financial statement will they be listed on?
18.How do we determine
net profit
?
19.What is a
rights issue
in regard to shares?
20.What is a
share placement
?
21.
What are the
key external influences
on business?
22.Explain the
unit trust
concept.
23.With what activity do we usually associate
private equity
ventures?
24.List the objectives of
financial management
.
Financial Management Strategies
Aspects to be managed include:
cash flow
working capital
profitability management
global financial management
Cash Flow Management
it is necessary to have cash flow statements for planning
these show cash inflows and cash outflows , usually on a monthly basis
management can be achieved through the following:
distribution of payments
: businesses often have a choice as to when some bills will be paid and so planning may help even out cash flows; this is often the case with insurance premiums
discounts for early payment
: for example the customer might be offered a 5% discount if they pay within 7 days instead of the usual 30 days
factoring
: the sale of customer debts to a factoring company can be a strategy for cash flow management although this adds to business expenses; the cost is usually around 3%, sometimes this is justifiable if suppliers need to be paid quickly




Working Capital Management
working capital is current assets minus current liabilities
it is the same concept as the current ratio
to manage this you need to keep control of two things, current assets and current liabilities

Control of current assets
1.
cash
: cash budgets are important as a way of anticipating cash requirements, excess cash over requirements should be invested
2.
receivables
: it is necessary to a credit policy and the most important part of this is the collection policy; this will advise staff on what to do when customers dont pay; it is possible that in certain instances factoring may be part of this policy
3.
inventories
: businesses need to hold appropriate levels of stock, they need enough to satisfy customer demand, but they dont want excess stock they can't sell; computerisation can be used for stock management, and some companies use the JIT (just in time) method, where storage of stock is avoided

Control of current liabilities
1.
payables
: of the various current liabilities, 'payables' to suppliers is the most critical; bills should be paid on time, but not before time, as if paid before time the business would be missing out on 'free' trade credit.
2.
loans
: in order to meet some liabilities, for example, paying wages, managers may resort to an
overdraft facility
, however a loan such as this has costs attached, an overdraft is a convenient way of dealing with a period of cash deficit, however they should not be used to cover problems such as a failure to control accounts receivables effectively
3.
strategies
leasing
: the advantage of leasing is that payments for the use of an asset can be matched to the earnings of the asset, almost any asset can be leased and it saves working capital, this is a particularly effective strategy when a business is experiencing rapid growth (lesee and lessor)
sale and lease-back
: became popular in the 1990's, where a large business sold their land and buildings to a merchant bank, agreeing to lease the property for a number of years, this significantly increases working capital, not just conserves it

Find out about BUNNINGS working capital management. p251
Find out about leasing, ALLCO FINANCE GROUP. p254




Profitability Management
Cost minimisation
profits are maximised by minimising costs
the most competitive businesses are those with a cost structure lower than their competitors
cost control is the single most important aspect of running a business
the key to effective cost control
is

benchmarking costs
, ie: comparing costs with the most efficent in the industry
cost controls - fixed and variable; fixed do not vary with output, variable increase with output
cost controls -
cost centres
may be a work area, a department or a whole factory, and th eidea is to separate it from the rest of the business, and appoint a manager responsible for those costs
cost control -
expense minimisation
; this is all about reducing expenses such as wages, rent and leasing payments to the minimum possible, note this can either improve profitability or competitiveness
Cost minimisation: Ansett and Virgin Australia, winner and loser in Australian aviation
Revenue controls
sales objectives
Improve the number of sales that occur without an error
Improve the quality of your product or satisfying your customer's needs in whatever way
Training staff to achieve better sales
sales mix
Analysis of the sales mix indicates which products generate the most profit
An example would be an electronic store where you would be analysing the relative profits generated by e.g. TVs, hairdryers and kitchen appliances
pricing mix
The psychology of pricing points apply
In the example of the electronic store there would be TVs at a number of different price points
pricing policy
This involves carefully balancing the goals of revenue maximisation and profit maximisation
Global financial management
Risks
exchange rate movements
exchange rate are likely to fluctuate over time
a strong $A dollar will make local tourism, manufacturing and international education less competitive in Australia
movements in exchange rates can erode anticipated profits
interest rate movements
interest rates vary between countries
for this reason businesses often access global financial markets for the best interst rates, but caution has to be used to ensure that the benefit of a competitive rate is not eroded by possible exchange rate movements
the risk that commodities may rise in price due to supply and demand factors

the risk that the goods will not be paid for when shipped overseas
, there are different
methods of payment
with varying risk for exporter and importer
payment in advance
letter of credit
clean payment
payment in advance
this is a high risk for the importer

which could be minimised by checking credit ratings
letter of credit
after the exporter and importer have exchanged contracts there is an exchange of documents and money through intermediaries
here the importers bank plays a significant role
the bank assumes the risk of non-payment
the bank handles and checks the shipping documentation
the bank pays the exporter when the goods arrive in the importers warehouse
the banks charges fees for the service
clean payment
the importers bank is involved, but with a lesser role
the exporter and importer handle the shipping documentation
the bank charges a fee, but it is lower

as their involvement is less
bill of exchange
a document that allows the exporter to keep control of goods until payment is made
it instructs the buyer to pay for the goods on a specified date
hedging
any financial tool or strategy used to reduce the risk of loss from financial transactions
derivatives
a contract where the value of the contract is derived from, and dependant upon, the value of another product
Teaching strategy:
students prepare a T chart comparing the two opposing fiscal approaches
Teacher: J.W. LUND
The role of financial management
The strategic role of financial management
the strategic role of financial management is the process of ensuring that the
resources needed
(money) to
achieve business goals
are available when they are needed
financial management is defined as the efficient and effective management of funds to ensure a business can meet its short term and long term financial objectives
the senior management team sets the strategy or overall goals for action of the business
this is often difficult in

light of the turbulent financial and business world
Objectives of financial management
profitability
this is the
return
on the owners investment
growth

this refers to the growth of the business over time and is usually measured by changes in the
share price
efficiency

achieving
lower costs
through increased output from the same amount of input
liquidity
refers to the ability of a business to pay its
short term debts
solvency

refers to the ability of a business to pay its
long term debts
the senior management team turns the goals into achievable objectives
these involve the following financial objectives:
short term
refers to the accounting period...usually the financial year
long term
refers to a period of time greater than the financial year
Short term and long term financial objectives

short term financial objectives are referred to as the
tactical
(1 - 2 years) plans and the
operational
(day to day) plans of a business.

long term financial objectives are referred to as the
strategic
plans of a business.
finance does not exist on its own and in isolation, there is interdependence with the other key business functions of:

operations
marketing
human resources

each function is not able to operate in isolation effectively - it relies on the others to perform its role as well
Interdependence with other key business functions
Influences on financial management
Outcomes

The student:

H2 evaluates management strategies in response to changes in internal and external

influences

H3 discusses the social and ethical responsibilities of management

H4 analyses business functions and processes in large and global businesses

H5 explains management strategies and their impact on businesses

H6 evaluates the effectiveness of management in the performance of businesses

H7 plans and conducts investigations into contemporary business issues

H8 organises and evaluates information for actual and hypothetical business situations

H9 communicates business information, issues and concepts in appropriate formats

H10 applies mathematical concepts appropriately in business situations
The focus of this topic is the role of interpreting financial information in the planning and management of a business.
Outcomes: H4, H7, H9, H10

Students learn about:

strategic role of financial management
• objectives of financial management
– profitability, growth, efficiency, liquidity, solvency
– short-term and long-term
• interdependence with other key business functions
Outcomes: H2, H4, H7, H8

Students learn about:

internal sources of finance – retained profits
external sources of finance
– debt – short-term borrowing (overdraft, commercial bills, factoring), long-term
borrowing (mortgage, debentures, unsecured notes, leasing)
– equity – ordinary shares (new issues, rights issues, placements, share purchase plans),
private equity
financial institutions – banks, investment banks, finance companies, superannuation funds,
life insurance companies, unit trusts and the Australian Securities Exchange
influence of government – Australian Securities and Investments Commission, company taxation
global market influences – economic outlook, availability of funds, interest rates
Outcomes: H2, H3, H4, H7, H8, H9, H10

Students learn about:

planning and implementing – financial needs, budgets, record systems, financial risks,
financial controls
– debt and equity financing – advantages and disadvantages of each
– matching the terms and source of finance to business purpose
monitoring and controlling – cash flow statement, income statement, balance sheet
financial ratios
– liquidity – current ratio (current assets ÷ current liabilities)
– gearing – debt to equity ratio (total liabilities ÷ total equity)
– profitability – gross profit ratio (gross profit ÷ sales); net profit ratio (net profit ÷
sales); return on equity ratio (net profit ÷ total equity)
– efficiency – expense ratio (total expenses ÷ sales), accounts receivable turnover ratio
(sales ÷ accounts receivable)
– comparative ratio analysis – over different time periods, against standards, with
similar businesses
limitations of financial reports – normalised earnings, capitalising expenses, valuing
assets, timing issues, debt repayments, notes to the financial statements
ethical issues related to financial reports
Outcomes: H2, H5, H6, H7, H9, H10

Students learn about:

cash flow management
– cash flow statements
– distribution of payments, discounts for early payment, factoring
working capital management
– control of current assets – cash, receivables, inventories
– control of current liabilities – payables, loans, overdrafts
– strategies – leasing, sale and lease back
profitability management
– cost controls – fixed and variable, cost centres, expense minimisation
– revenue controls – marketing objectives
global financial management
– exchange rates
– interest rates
– methods of international payment – payment in advance, letter of credit, clean payment,
bill of exchange
– hedging
– derivatives
Teaching and learning strategies incorporating 'Students learn to':

in groups, create a table describing the objectives of financial management – classify each financial objective as either short term or long term
using newspaper articles, examine the financial objectives of actual businesses, then write a brief summary of each objective with a supporting example for each one
class discussion: explain the potential conflicts between short term and long-term financial objectives, see p. 193, 194
Teaching and learning strategies incorporating 'Students learn to':

construct a mind map explaining the interdependence of financial management with the other key business functions (read text p 194 -196 first)
see p. 196 -197 of text, Russel and Taylor regarding continuous improvement
write down 4 ways you can improve as a Business Studies student
Teaching and learning strategies incorporating 'Students learn to':

students refer to text p. 200 - 205
research activity refer to text p. 201 http://www.anz.com.au/small-business/products-services/
classification activity: Students need to categorise a mixed list
of sources of finance into internal sources or external sources, including debt and equity
group work: Using various actual and hypothetical business situations provided by the teacher, students brainstorm reasons why different business types and industries would utilise different sources of finance
Teaching and learning strategies incorporating 'Students learn to':

Draw a T chart: show debt financing options and equity financing options
Multiple choice questions see text p 205 - 207 finance scenarios
Teaching and learning strategies incorporating 'Students learn to':

students research the roles of the relevant government authorities
students analyse the relevance of the above graphs regarding global influences
students engage in the questions and discussion leaders in the circular frames
Within less than four years, two previously non-existing product lines have taken over a good 60% of Apple’s revenue – approximately even 65% if we include the iPod touch that probably accounts for a large share of iPod revenue.
If the iPhone and iPad had not come, Apple’s revenue from fiscal Q2 2007 to Q2 2011 would have grown by a “mere” 119% instead of 466%.
I guess that’s the difference between constantly reinventing yourself and resting on your laurels.
Explain the interdependence of the finance
function with the other business functions.
Teaching and learning strategies incorporating 'Students learn to':

Describe Boeing's strategy regarding the 787 Dreamliner
What would have been the finance functions prime responsibility within this strategy?
External sources of finance can be debt or equity:
all sources in the table are external apart from retained profits
Overview of influences
Internal sources of finance
owners equity
is finance contributed by shareholders to the business or the owners financial claim to the business assets after debts have been paid
retained profits
are money that has been earned by the business and not distributed to its shareholders as dividends

these funds can be used for product research and development, purchase of equipment and training, etc
Teaching and learning strategies incorporating 'Students learn to':

Owners do not usually object to profits being retained rather than distributed. Why? See p 199 of text for clarification
Research activity: Warren Buffett, see text p. 199
What subsisuaries does 'Berkshire Hathaway Inc' have?
What was its revenue in 2011?
Describe his investment strategy.
http://en.wikipedia.org/wiki/Warren_Buffett
http://en.wikipedia.org/wiki/Berkshire_Hathaway
http://www.investopedia.com/articles/01/071801.asp#axzz2J421fvQt
Financial institutions
Influences of government
Global market influences
economic outlook
availability of funds
interest rates
The Boeing 787 Dreamliner, wide bodied with twin engines was pitched as the airline of the future – a revolutionary plane that that would use new technology to bring aircraft design into the 21st century. The Dreamliner is made of carbon-fiber reinforced plastic composites. More radically still, pneumatic (air) and hydraulic (oil) systems have been ditched for electric systems.

The technological leap was always likely to cause teething issues. But these were exacerbated by Boeing's decision to massively increase the percentage of parts it sourced from outside contractors. The wing tips were made in Korea, the cabin lighting in Germany, cargo doors in Sweden, escape slides in New Jersey, landing gear in France.

The plan backfired. Outsourcing parts led to three years of delays. Parts didn't fit together properly. The company ended up buying some suppliers, to take their business back in house. Outsourcing in general lengthened supply lines, created problems with language and culture and was extremely hard to coordinate.

Dr Amar Gupta, dean of Pace University in New York, has studied the construction of the Dreamliner and is not convinced that outsourcing itself is the issue. "We have been outsourcing since the industrial revolution," he said. The problem is one of communications, he argues, and complexity. A car has roughly 15,000-20,000 parts; a plane has more than 2,000,000 parts. "The concern is that each organisation did what it was asked but there was a failure to bring the whole thing together, to integrate the systems," he said. Gupta thinks that with better communication and organisation – what he calls "24 hour knowledge factories" – outsourcing could pull off feats as complex as the Dreamliner.

There’s almost nothing as complicated as a Dreamliner. An iPhone isn’t nearly as complicated. Apple has succeeded with outsourcing almost everything to Foxconn, mainly because they first completely manufacture the new product in the US. They make sure it’s right, while Foxconn is working in parallel with them, developing their tooling and whatever. So Apple has a finished product and they say to Foxconn: make it just like this! What Apple has done has worked amazingly well, because they have the capability to do the perfect prototype here, before it gets offshored to Foxconn. Boeing didn’t have a finished product. So there were all kinds of risks of things not coming together. The tendency is too often for companies to try to do the engineering over here and the manufacturing over there.
Commercial Bill Loans
A commercial bill loan is an arrangement you enter into with a financial institutions which results in you making an interest repayment at the end of the loan term. The full amount that you borrow is to be repaid at the completion of the contract usually between 30 and 90 days.

A commercial bill loan is primarily a short-term loan facility offered by the banking sector to clients who need more that $100,000 for investment purposes. These types of loans are generally rolled over until the borrower has the funds to repay the loan amount in full.

A good example of someone needing a commercial bill loan would be if you were building and then intended to repay the loan with the proceeds from the sale of the property.

An advantage of taking out a commercial bill loan is that you can have a fixed interest rate giving the lender the added security in knowing what their loan repayment amount is. Generally these loans are for large amounts so a couple extra points of interest on a $200,000 loan for one or two months may not be that great. However, if you have taken out a $4.5 million commercial loan then the extra percentage will be noticeable.

Commercial Bill Investments
A commercial bill investment is a contract between the bank and the customer that results in the customer receiving an up front interest payment on their deposit.

The interest return on a commercial bill deposit is greater than that offered from tradition savings and term deposit accounts.

Commercial bill investments are generally made by customers who have sold a business or property and have a large sum of money that they have not yet decided on how best to invest. A commercial bill investment gives them a high return on their money and doesn’t lock their investment in for an extended period of time.

It is not uncommon for commercial bill investments to be in the $1-10million range. They aren’t an everyday product bank staff will have to deal with over the counter but some customers do have money that they want invested at the best interest rate available through the bank. A commercial bill is a safe investment for people who want to earn the highest possible return on their funds with no risk to their investment.
What is Factoring?
In simplest terms, a factor is anyone who transacts business for someone else. Factoring can be used by businesses that need improved cash flow so that they can receive discounts from suppliers, prepare their inventory for peak seasons, upgrade equipment, and produce and sell more goods or services.

Traditionally, a debtor who takes a long time to pay an invoice causes the business to lose money due to financing, staff, and overdraft. Factoring can be a solution to this issue. Customers can use factoring on their accounts receivable in order to avoid incurring debt. When they do this they do not borrow money. Th
e accounts receivable of a company are bought by the factoring company.
Th
e factoring company receives a discount. The other company gets the cash from the selling of the accounts receivable. T
his allows them to be paid quickly and avoid the problems of a lengthy invoice.

Factoring can be beneficial to any company that operates using accounts receivables, whether they are a wholesaler, manufacturer, distributor, or in the service industry. Companies that are new, have a negative net worth, or are growth oriented will be helped the most by factoring. This is because the
cash from it can end losses from operatin
g
, allow prompt payment of creditors, or be use to increase sales and production.

Business Challenges
Recession. Cash flow crisis. Small business bankruptcies. Interest rate hikes. Words and phrases like these are potential problems for the business owner. Cash flow is negatively affected by these trends. It is also hurt, no matter the companies size, by restrictive lending policies, slow payments from debtors, and the payment pressures from creditors.

When cash flow is unable to provide for growth, business owners struggle to raise working capital. One choice is to turn to a bank, but financial institutions may only lend against secuity.

Factoring can be used to convert credit sales into cash and provide a business with instant capital.

Factoring Can Be the Answer to These Situations;

Cash flow that is unpredictable.
Low paying debtors.
Inability to collect debts due to staffing limitations.
Unable to meet lending criteria from banks.
Insufficient cash flow.
Unable to fulfill large orders due to poor cash flow.
Lending limits reached.
Accounts receivable takes up too much of management's time.
Unwilling to take on more debt.
Unable to invest in new equipment because of low cash flow.
Low cash flow makes supplier discounts out of reach.
Lack of credit checking procedures.
Commercial bills
Factoring
S
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R
T

T
E
R
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D
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B
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F
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A
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What is an overdraft?
An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero.

In this situation the account is said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft limit, then interest is normally charged at the agreed rate.

If the negative balance exceeds the agreed terms, then additional fees may be charged and higher interest rates may apply.
Overdrafts
Provide the term
1. The ease with which an asset can be converted to cash.
2. Things owned by the business which can be converted into cash within twelve months.
3. Debts of the business which must be repaid within the accounting period.
4. A situation where the accounts receivable of a business are sold to another for a discount.
5.
F
unds which are borrowed by the business.
6.

The inflow of funds from cash and credit sales of a business.
7. Funds which the business accumulates from undistributed profits.
8. The management and use of funds which achieves the greatest return for the least amount of assets.
9. The owners claim on the business.
10.A short term borrowing instrument involving more than $100,000 is borrowed and repaid on an agreed date with principal and interest.
http://www.asx.com.au/courses/shares/course_01/index.html?shares_course_01
http://www.investopedia.com/stock-analysis/streetauthority/whystevejobsbigblunderisstartingtocostapple.aspx#axzz2KpNHf13V
Risk, innovation and finance
http://www.rba.gov.au/about-rba/index.html
http://www.apra.gov.au/Pages/default.aspx
http://www.ato.gov.au/corporate/pathway.aspx?sid=42&pc=001/001/002&mfp=001&mnu=39504#001_001_002
http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Our%20role#what
http://www.smh.com.au/digital-life/digital-life-news/apple-have-team-developing-iwatch-sources-20130214-2ee4y.html
Role of finance
1. Identify two key trends in Australian and world financial markets?
2. Outline the role of investment banks and finance companies.
3. How might a business use the ASX to expand?
4. Identify three considerations businesses face when considering debt finance.
5. Use the terminology you know to describe a mortgage and retained profits.
6. Define the term gearing.
7. Draw a table identifying debt financing options as short and long term.
8. List the advantages and disadvantages of debt financing.
9. Write the accounting equation and explain the contents of the balance sheet.
10. What financial statement identifies profitability?
What is the equation for gross and net profits?
11. Which financial statement and what categories would need to be considered to consider a firm's solvency?
12. What are some of the ways in which we can think consider efficiency?
13. List the major participants in financial markets.
14. What is the role of ASIC?
15. List the range of external sources of funding.
16. What are exchange rates?
17. What is the purpose of hedging and how does it relate to exchange rates?
18. How has the rise of the Australian dollar effected Australian businesses?
19. What are cost centres and at what organisational level do they operate?
20. What is Fair Work Australia responsible for?
21. What does arbitration by Fair Work Australia involve?
22. Ratios may be used to compare the financial performance of different businesses. What limitations might there be to this analysis?
23. What is meant by business culture? List reasons for the importance of an induction program.
24. What do you think would be the best method of financing a business vehicle or light truck. Justify your choice.
25. If your business needed storage premises for building materials and equipment, what would be your financing options?
26. Business 1 has a current ratio of 1.6:1 and business 2 has a current ratio of 1.2:1. The industry average is 1.5: 1. Which business has the better liquidity?
27. Business 1 has an expense ratio of 0.30: 1. Business 2 has an expense ratio of 0.38:1. The industry average is 0.32:1. Which business is the more efficient?
28. What does the accounts receivable turnover ratio reveal?
Planning and implementing
Liquidity
Solvency
Profitability
Profitability
Profitability
Efficiency
Efficiency
http://www.boardofstudies.nsw.edu.au/hsc_exams/hsc2012exams/pdf_doc/2012-hsc-exam-business-studies.pdf
Cash flow management
Working capital management
Profitability management
Limitations of financial reports:
normalised earnings
capitalising expenses
valuing assets
timing issues
debt repayments

Audit
a detailed check of the financial records of a business by an independent certified accountant
What is control of current assets concerned with?
What is control of current liabilities concerned with?
What are some overall strategies to improve working capital?
Comparative analysis using ratios
We can compare such things as:
the performance of the business over time
the performance of the business compared to similar businesses / benchmarking
the performance against a common standard, for example return on assets

How companies raise funds.

If a company requires a cash injection to expand existing operations, protect market share, develop new businesses or buy another company, it may require more funds than its retained earnings. The company's directors have two options:
borrow the money or raise more equity.

Taking on
debt
requires the company's managers to have a reasonable expectation of steady cash flow to make regular interest repayments, and there is a risk that investors may feel the company is
too highly

geared
(has too much debt in relation to shareholders' funds), which may weigh heavily on the share price. Taken to the extreme, high debt magnifies the risk of bankruptcy. Interest is a
tax-deductible
expense, however, and less equity raised means less of the company is being shared around. So debt certainly has its attractions.

Corporate finance strategists charge big fees to decide on the best way for companies to raise funds and, despite years of effort, research remains inconclusive on the ideal capital structure to maximise a corporation's value to shareholders. It is a complex matter that spans issues as diverse as taxation, interest expense, public relations, and overall financial management, and that's probably all we need say about it for now.

If a company chooses to issue fresh
equity
, it is again faced with two main options: give all existing shareholders the right to buy more shares through a
rights issue,
or offer shares in a "
placement
" to a group of people, or an institution.

It also has a third, less common, option of creating a
specialised spin-off company
, which gives investors the opportunity to direct funds toward a specific aspect of the business, usually with high-growth prospects.

http://www.boardofstudies.nsw.edu.au/hsc_exams/hsc2010exams/pdf_doc/2010-hsc-exam-business-studies.pdf
Q.25
Q.8 and 22
http://www.boardofstudies.nsw.edu.au/hsc_exams/hsc2011exams/pdf_doc/2011-hsc-exam-business-studies.pdf
Q.8, 12 and 22
http://www.boardofstudies.nsw.edu.au/hsc_exams/hsc2009exams/pdf_doc/2009-hsc-exam-business-studies.pdf
Q.12, 13, 14, 15 and 24
FINANCE QUIZ
1. What are the 5 financial objectives?
2. What is the difference between the two objectives that relate to debt?
3. What is the time frame for short term borrowings?
4. A bank overdrafts is a short term debt instrument where………………………………………………………
5. Another name for a commercial bill is a …………………………………………… A commercial bill is a short term debt instrument that is a written …………………………………………………………………………
6. F…….. is a short term ………………. ……………………. where a business sells its accounts …………. at a discount to a ……………………………..
7. The advantage of factoring is:
• The business has ……… access to finance
• The business does not have to undertake debt collection, rather they can concentrate on their main business.
8. What is meant by a secured loan? This is a loan that is secured, or protected by the business assets.
9. Businesses often favour debt financing as it:
• It allows for rapid growth
• The extra profits generated will usually exceed the interest costs
• Interest payments is tax deductible
10. Debentures are a short term loan contract or debt instrument that is secured by the assets of the company. With debentures the business borrows money directly the general public
11. Long term debt instruments include mortgages where the loan is secured by land or buildings
12. Long term loans can be described as having a term of over one year
13. A business has current assets of $3 000 000 and current liabilities of $2 000 000. Does it feature strong liquidity? Yes, because their assets out weight their liabilities
14. What is the fastest way the business can achieve rapid growth? Debt financing
15. What are the forms of internal finance? Retained profits and owner’s equity
16. What are the disadvantages of these? Raising more owners’ equity (via the stock market) can be time consuming. Retaining profits will reduce shareholders dividends.
17. Describe leasing. Why is it popular?


composite materials
twin engines
chevron shape reduces noise
lighter weight
less fuel
Boeing 787 development costs: US$32b
Outsourcing issues
Financial management is defined as the efficient and effective management of funds to ensure a business can meet its short term and long term financial objectives.
The finance function is responsible for developing and maintaining the financial management systems and processes the company uses to conduct business.
Loss on early planes up to $40, profits not made til 2020.
Why a Boeing 787-9 Dreamliner Costs $250 Million
It took Boeing Co. (NYSE: BA) nearly eight years to get its 787 Dreamliner off the drawing board and into service with the world’s airlines. The total cost for development and manufacturing has been estimated at $32 billion. The initial estimates called for a development period of around four years and a budget of about $6 billion.

The list price on a 787-9 is $249.5 million. The most interesting thing about the price of a 787 is not how much it costs, but how little.

Airlines never pay list price for a plane, and the actual price for a 787-8 is reported to be around $117 million. An analyst has put the unit cost at $160 million in the third quarter of last year and the sale price at $115 million. The second estimate seems more likely, just because the first one is so hard to believe. Fortunately for Boeing, the highly profitable 737 and 777 planes offset the high discounts Boeing is forced to give on the 787s.

http://hsconline.nsw.edu.au/file.php/541/Finance/Influences_on_financial_management/CambridgeCh12-pp203-209-SourcesOfFinance.pdf
Internal/external
Debt and equity

http://hsc.csu.edu.au/business_studies/finance/4619/finance%20-%20influences.html
Full transcript