FINANCE

I. ROLE

STRATEGIC ROLE OF FINANCIAL MANAGEMENT

To ensure a business can operate, grow and achieve their goals through the management of financial resources.

This involves:

● Setting financial objectives

● Sourcing finance
● Preparing budgets and financial statements
● Maintaining sufficient cash flow
● Distributing funds to other KBFs

OBJECTIVES OF FINANCIAL MANAGEMENT

A business will use specific financial objectives to ensure they reach their overarching goals.

Profitability Growth Efficiency Liquidity Solvency

Maximisation of profits Increase size and value over the Maximise the use of its Meeting short-term financial Meeting long-term financial
long-term assets in a cost-effective way commitments (within 12 commitments (exceeding 12
● Ensures a business is ● Involves months) months)
thinking sustainably maximising outputs ● Enough current ● Indicates whether a
while minimising assets to pay off business will be able
inputs current liabilities to repay amount that
have been borrowed
for investments in
capital
 ● Enough non-current
assets to pay off
non-current liabilities

SHORT TERM & LONG TERM

Short-term:
● Operational (day to day)
● Tactical (1-2 years)
Long-term:
● Strategic plans (+5 years)

INTERDEPENDENCE WITH OTHER KEY BUSINESS FUNCTIONS

The KBFs depend on financial managers to fund their activities.

OPERATIONS MARKETING HUMAN RESOURCES

Purchase inputs, carry out the transformation Complete activities including market research, Pay employees, offer performance rewards,
process promotions, advertising provide training and support

Finance depends on the KBFs to increase profitability and efficiency.

OPERATIONS MARKETING HUMAN RESOURCES

COST: Reduces production Generates revenue (sales) Manage employees & provides
costs through the promotion and ongoing training and support to
selling of products to employees
QUALITY: Produce high consumers
quality products that can be
sold at a higher cost. However,
this requires adequate funding

INVESTMENT: Uses new Provides essential information Offers performance rewards

 technologies that improve the on sales and profit forecasts and incentives (influencing
efficiency of transformation employee performance)
process

II. INFLUENCES

INTERNAL SOURCES OF FINANCE

Internal sources are funds that come from within the business

1. OWNER’S EQUITY 2. RETAINED PROFITS

Funds contributed by owners of a business Earnings made through previous financial gain that are reinvested into the
business

Advantages Disadvantages

● No interest ● Potential for owners to dissolve their funds

● Not indebted to a lender
● Unlimited access to funds
EXTERNAL SOURCES OF FINANCE
Funds borrowed from an external source that must be repaid

1. DEBT

A) Short-Term Borrowing
● Borrowing funds that must be repaid within 12 months - addresses liquidity issues and improves cash flow

TYPES OF DEBT

OVERDRAFT
● Bank allows a business to overdraw their account up to an agreed limit for a specified time.

Advantages Disadvantages

● More flexibility than a bank loan ● The longer it takes to repay, the more the business will pay
● Costs are minimal
● Variable interest rate gives a business more flexibility (paid on the
daily outstanding balance of the account)

COMMERCIAL BILLS
● Short term loans of $100,000 + issued by financial institutions. Funds must be repaid within 30-180 days. (Can be paid in full at the end of the
borrowing term).

Advantages Disadvantages

● Immediate access to funds ● Secured against the asset being purchased

● Extended repayment period

FACTORING
● Selling of accounts receivable at a discounted price to a third party business. Assists with cash flow shortages.
 Advantages Disadvantages

● Immediate access to funds (within 48 hours) ● Must sell at discounted price (90% of original value)
● Must return funds if the third party business cannot access the
account

B) Long Term Borrowing

● Borrowing funds that are repaid over more than 12 months

TYPE OF DEBT

MORTGAGE
● A loan secured against the asset being purchased

Advantages Disadvantages

● Allows a business to purchase long-term assets ● Long time to repay

● Lower interest rates than other forms of borrowing ● Asset can’t be sold or used as security for further borrowing until
the mortgage has been repaid

DEBENTURES
● A loan from an investor with a promise to repay it in a set time with a set interest rate

Advantages Disadvantages

● Fixed interest rate ● Higher interest rate than a financial institution

● Secured against an asset

UNSECURED NOTES
● A loan from an investor with a promise to repay it in a set time with a set interest rate
 Advantages Disadvantages

● Fixed interest rate ● Higher interest rate than a financial institution

LEASING
● Paying another party to use their equipment

Advantages Disadvantages

● Better for cash flow and working capital ● Higher payments and interest rates than other forms of borrowing
● Fixed payments
● No added fees for maintenance and insurance

2. EQUITY
● Funds raised by inviting new owners into a business as shareholders
○ Owners dilute ownership, voting rights and dividends

ORDINARY SHARES
Finance raised by selling shares to the public on the Australian Securities Exchange (ASX)
New Issues: Securities that are issued and sold for the first time on a public primary market.
● Business will make an initial public offering (IPO) allowing anyone to purchase shares
● Must issue a prospectus

Rights Issues: An opportunity granted to existing shareholders to buy more shares in the business
● Proportional to each investor’s existing shares
● No need to reach out to new investors
● Control of the business remains with the existing shareholders
● Cheaper than making an IPO

Placements: An allotment of shares made directly to investors at a discounted price

● Discount intended to persuade specific investors to become shareholders
● Fast method for generating funds
● Does not require prospectus
 ● Can raise up to 15% of a business’s existing capital base

Share Purchase Plans: An offering to existing shareholders to purchase more shares without brokerage fees
● Shares discounted to encourage shareholders
● Doesn’t require a prospectus
● Limits the number of shareholders in the business
● However, shareholders who don’t purchase more shares dilute their ownership

PRIVATE EQUITY
Finance raised through private investments (not on the ASX)
● Owners have the right to choose who invests
● Investors receive dividend but are less involved in decision making - this gives owners more control of plans and saves on costs as it isn’t
listed on ASX

FINANCIAL INSTITUTIONS
An organisation that provides essential financial services to individuals and businesses. Financial managers must consider which options best suit their
business’s financial goals.

BANKS
Role: Receive deposits from individuals, businesses and governments which are then lended to fund business activities

Influence: Businesses must pay interest on the funds they borrow. Interest is then shared with those who save money with the bank. Provide general services
to a wide range of different customers

INVESTMENT BANKS
Role: Lend funds and provide advice to large institutional clients and governments. Assist businesses seeking to raise large amounts of capital for activities.

Influence: Specialised knowledge on how large businesses can maximise their finances. offer tailored services.

FINANCE COMPANIES
Role: Provide loans, lease equipment and offer factoring for small-medium businesses

Influence: Immediate access to funds. However, higher interest rates than other financial institutions as they lend more freely to borrowers, there is a higher
risk for the lender. Regulated by the Australian Prudential Regulation Authority
 SUPERANNUATION FUNDS
Role: Invest employees superannuation contributions into organisations. Purchase shares in businesses listed on the ASX

LIFE INSURANCE COMPANIES

Role: Provide life insurance to individuals
Influence: Protecting the financial future of your loved onesInvest premiums to grow wealth. Purchase shares in businesses (dividends). Provide loans to
businesses (interest).

UNIT TRUSTS
Role: Invest funds from a large group of smaller investors into financial assets. Unit trusts may purchase shares in a business, providing funding. Businesses
can invest in a unit trust, earning dividends.

Influence: Allow businesses to diversify their income. Small businesses can make investments they otherwise wouldn’t be able to. Greater benefits of
economies of scale which reduces transaction costs.

Australian Securities and Investments Commission (ASX)

Role: Market for purchasing and exchanging shares and other securities.

PRIMARY MARKET:

● Raise new capital through the issues of shares

● Purchase shares in other companies

SECONDARY MARKET:

● Pre-owned securities are traded between investors. Businesses cannot raise new funds on the secondary market.
● Shares purchases in other companies can be traded
● Trading securities at the right time can generate revenue (greater dividends)

INFLUENCES OF GOVERNMENT
All financial decisions made by a business are influenced by the government. The role of the government is to develop economic policies and implement
corporate legislation. They also establish government bodies that ensure businesses act within the law. Impose penalties for non-compliance. Government
influences are an essential part of the business environment.

AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION (ASIC)

An independent statutory commission of the federal government. Its role is to enforce and administer legislation (Corporations Act 2001 (Cth). Regulate
corporations’ markets and the provision of finance services. It influences by protecting consumers and investors from fraud and other unfair/unethical
practices. Can impose monetary penalties or imprisonment. However, it may result in a loss of trust from customers and reduced sales.

COMPANY TAXATION

All private and public incorporated companies must pay company tax on their net profits. Its role serves as an essential source of funding for the government.
Allows them to provide essential resources and services. It influences businesses by ensuring their financial records are maintained and up to date. Reduces
the expected returns (profits) of a business. Businesses must be aware of any tax deductions they can claim (can increase profitability by reducing expenses)
Key Facts
● 27.5% for small businesses - less than $10 million net profit
● 30% for large businesses - more than $10 million net profit
● Businesses must pay the right amount of tax: Understating profits means a business will pay less tax (tax evasion is a serious crime).
Overstating profits means a business will pay too much tax.

GLOBAL MARKET INFLUENCES

Not all businesses operate globally, but every business is influenced by the global market. Globalisation has created more interdependence between the
world’s economies. The global market is part of the external environment, so it is outside the control of a business. Businesses must implement financial
strategies to maximise opportunities and minimise threats.

A) GLOBAL ECONOMIC OUTLOOK

The projected changes to the level of economic growth throughout the world. Forecasts of how the economy will fare in the future impact the financial
decisions of a business.
When the economic outlook is positive:
● Businesses are more profitable and have greater access to borrowing.
● Consumers are more confident, more likely to spend disposable income, providing greater demand for goods/services, increasing business
production increases the need for funds, greater access to borrowing (lower risk for lender)

B) AVAILABILITY OF FUNDS
The ease with which a business can borrow funds from international financial markets. Due to globalisation, businesses can easily borrow funds from
overseas lenders, giving a business more flexibility if they want to expand. The availability of overseas funds is limited due to transaction exposure (the risk
of exchange rates changing after signing a contract).

C) INTEREST RATES
Payment for borrowing funds as a percentage of the loaned amount. As businesses can borrow funds globally, different economies offer different interest
rates. However, if exchange rates change during the repayment period, the interest to repay will also change.

III. PROCESSES

PLANNING & IMPLEMENTING

Financial planning determines how a business’s goals will be achieved.

The planning and implementing cycle: Determine financial needs - developing budgets - maintaining record systems - identifying financial risks - establishing
financial controls

The financial needs of a business will be determined by:

● Size of business
● Current phase of business cycle
● Future plans for growth and development
● Capacity to source finance - debt/equity
● Management skills for assessing financial needs and planning

Budgets are often prepared to predict a range of activities relating to short-term and long-term plans and activities.

BUDGETS OPERATING BUDGETS PROJECT BUDGETS FINANCIAL BUDGETS

A financial document used to The main activities of a business and Relate to capital expenditure, and The financial data of a business -
estimate future revenue and may include sales, production, raw research and development income statement, balance sheet,
expenses over a period of time materials, direct labour, expenses cash flow statement
and cost of goods sold
Record Systems: Mechanisms employed by a business to ensure that data are recorded and the information provided is accurate, reliable, efficient and
accessible

Financial Risks: Refers to the possibility of financial loss to a business.

Credit risk: danger associated with borrowing money

Market risk: risk of changing conditions in the specific marketplace in which a company competes for business

Liquidity risk: refers to a business’s cash flow and whether the business has sufficient funds to meet their financial obligations

Operational risks: the various dangers faced during the day-to-day management of a business

Financial Controls: the procedures, policies and means a business uses to monitor and control the allocation and usage of its resources

● Clear authorisation and responsibility for tasks

● Separation of duties
● Employing specific certified and qualified staff for certain roles
● Control of cash
● Protection of assets
● Control of credit procedures

DEBT & EQUITY FINANCING

DEBT

Advantages Disadvantages

● Funds are readily available and can be acquired on short notice ● Increased financial risk as well as paying interest
● Increased funding leads to increased earnings and profits ● Establishment fees and ongoing maintenance costs
● Interest payments are tax deductible ● Regular repayments or late fees are incurred
● Flexible and predictable repayment periods ● Security is required by the business
● Does not dilute ownership of the business
 ● Lenders have first claim on any money if the business ends in
bankruptcy

EQUITY

Advantages Disadvantages

● Funds are not repaid ● Lower profits and returns for owner as it is shared with investors
● Cheaper source (no interest or additional fees) ● Dividends are not tax deductible
● Low gearing (using sources of owner instead of external sources) ● Ownership is diluted
● Less financial risk (no liabilities) ● Connecting with new investors is costly (preparing a prospectus is
● Owners who contribute equity retain control over how funds are expensive and lengthy process
used ● Conflict may arise as shareholders have ownership and voting rights

Matching the terms and sources of finance to business purpose

Businesses must find the source of finance that is most appropriate to fund their activities. Short-term finance should be used to purchase short-term assets
and long-term finance should be used to purchase long-term assets. This means financial managers should match the length or term of the loan with the
economic lifetime of the asset the finance is being used to purchase.

Monitoring and Controlling

Financial statements are an important monitoring and controlling tool for all businesses. Used by stakeholders to assess a business’s financial situation and
make informed decisions.

BALANCE SHEETS

Summarises the assets, liabilities and equity of a firm at a given point in time. Indicates a business’s ability to cover its debts with assets, repay debts on time,
make a return and maximise assets. Current and noncurrent assets and liabilities.

● Assets = liabilities = owner’s equity

 ● Liabilities = assets - owner’s equity
● Owner’s Equity = assets - liabilities

INCOME STATEMENTS

Summarises income earned and expenses incurred over a period of time. Shows how much money has entered a business as revenue, left as expenditure and
been derived as profit. Selling, administrative, financial categories.

● COGS = opening stock + purchases - closing stock

● Gross Profit = operating income/sales - COGS
● Retained/Net Profit = gross profit - expenses

CASH FLOW STATEMENT

Records the movement of cash receipts and payments over a period of time. Indicates a business’s ability to generate cash flow, repay debts on time, pay
dividends and fund future expansions. Operating, investing, financing activities.

● Add all receipts and subtract payments for each activity

● Add all net cash from each activity in order to calculate net increase in cash
● To calculate at the end of reporting period add cash at beginning of year + net increase in cash

FINANCIAL RATIOS

RATIO FORMULA ASPECT OF WHAT DOES THIS SHOW ABOUT A INTERPRETATIONS OF RATIO
FINANCIAL BUSINESS? MEASURE RESULTS
STATEMENT
CURRENT Current LIQUIDITY Shows the short-term financial stability of business 2:1 indicates a sound financial position.
RATIO assets/current Should have double the amount of assets
liabilities to cover its liabilities

DEBT - TO - Total GEARING Measures the extent a firm relies on debt to finance 1:1.5 indicates a sound financial position.
EQUITY liabilities/total (SOLVENCY) the business as opposed to equity The lower the ratio, the more solvent the
RATIO equity firm (low gearing). The higher the ratio,
the less solvent the firm (more financial
risk)

GROSS Gross PROFITABILITY Shows the percentage of sales revenue that results in The higher the ratio, the better (more
PROFIT profit/sales (x gross profit profitable)
RATIO 100)

NET PROFIT Net profit/sales PROFITABILITY Represents the net profit or return to the owners. How A higher net profit ratio = more
RATIO (x 100) much revenue is spent on expenses rather than kept profitable. Low profit ratio indicates the
as profit. firm is incurring high expenses
 RETURN ON Net profit/total PROFITABILITY How effective the funds contributed by the owners 10% is a sound financial position. The
OWNERS equity (x 100) have been in generating profit and return on higher the ratio/percentage, the better the
EQUITY investment (ROI) return for the owner. (Comparisons need
RATIO to be made with alternative investments)

EXPENSE Total EFFICIENCY Indicates the amount of sales that are allocated to Indicate day-to-day efficiency of
RATIO expense/sales individual expenses (selling, administrative, business. Needs to be kept at reasonable
financial, COGS) level and must be monitored to each type
of expense (sales)

ACCOUNTS Sales/accounts EFFICIENCY Measures the effectiveness of a firm’s credit policy 30 day turnover indicates efficiency. Too
RECEIVABLE receivable (365 and how efficiently it collects its debt low leaves implications for cashflow.
TURNOVER divided by)
RATIO

LIMITATIONS OF FINANCIAL REPORTS

Financial reports can be limited in their ability to accurately represent the financial position of a business.
Normalised Earnings: The process of removing one-off or unusual items from the balance sheet to show the true earnings of a company. Provides a more
accurate representation of the business’s financial position. Normalising expenses is a good practice. However, issues arise when financial managers do not
normalise their business’s earnings.

Capitalising Expenses: The process of adding a capital expense to the balance sheet as an asset rather than an expense. Limits accuracy of financial
reporting.

Valuing Assets: The process of estimating the market value of assets or liabilities. The value of assets change over time due to inflation. Businesses must put
monetary value on their assets and liabilities.This means assets have to be revalued to account for the appreciation or depreciation.

Timing Issues: Usually, a financial report represents the activities of a business within one financial year. Businesses can make adjustments to the timing of
activities to make their profits appear higher or their costs seem lower.

Debt Repayment: Financial reports don’t have the capacity to disclose specific information about debt repayments. Usually, the only available information
regarding a repayment is how much money is owed and who it needs to be paid to. Specific information such as when the debt is due, what the rate of interest
is and the capacity of the debtor to repay the amount is not included in any financial reports.

Notes to the Financial Statements: Any additional information that is left out of the main report. Often, these notes are included at the end of a statement,
and allow businesses to add any extra information that isn’t already represented. These notes can often fill in the gaps, and the financial position of a business
can be represented more accurately. However, it is at the business’s discretion as to what is included in the notes. Because there isn’t a set list of items that
must be covered, businesses can omit certain information.

ETHICAL ISSUES RELATED TO FINANCIAL REPORTS

Financial reports are an essential tool when it comes to financial management. Business owners & managers base most organisational decisions on the
information contained in financial reports. Shareholders & investors rely on financial reports to make informed decisions about their involvement with a
business. Lenders also use financial reports when deciding whether or not to lend money to a business. Therefore, financial data must be honest, reliable and
truthful, to provide all stakeholders with a realistic image of a business’s performance.

UNETHICAL FINANCIAL REPORTING PRACTICES

1. Misrepresentation of Financial statements: Manipulating financial information to give a false impression of financial performance. Overstating
revenue and understating expenditure.
○ Case study: ENRON caught overstating its revenue and understating its spending. Encouraged investors to purchase shares, losing over $74
billion USD
 2. Misuse of Funds: Manipulating financial information to conceal the misuse of funds
3. Tax Minimisation: Understating revenue to minimise company tax.
○ Case Study: GOOGLE understating revenue in high-tax countries allowed the business to minimise company tax. Recorded $23 billion USD
in revenue in Bermuda, rather than where the income was actually earned

ENFORCING ETHICAL FINANCIAL REPORTS

Auditing: An independent check of the accuracy of financial records and accounting procedures.

Internally: To check accounting procedures and the accuracy of financial records

Management: To review a firm’s financial plan and take corrective action if needed

Externally: Independent and specialised audit accountants investigate a firm’s financial reports to guarantee authenticity and accuracy. Done in accordance to
Australian Accounting Standards Board & International Standards of Auditing - a requirement of Corporations Act 2001 (Cth)

Record Keeping: The Australian Government requires source documents to be created for every transaction. With a paper trail, businesses who manipulate
financial reports can be traced and penalised. The Australian Taxation Office regularly monitors businesses, and penalises those evading tax.

● All businesses must keep all of their financial records for a minimum of 5 years.

Reporting Practices: Businesses are legally obligated to produce accurate financial reports. The Australian Securities Exchange Corporate Governance
Council outlines that all listed companies must disclose their financial reports to shareholders and the public, and they must be honest and accurate. Penalties:
loss of reputation/sales, fines and imprisonment.

IV. STRATEGIES

CASH FLOW MANAGEMENT

ROLE: Matching cash flow in with cash flow out is the basis of sustainable cash flow management. If this is achieved, all costs are covered (breaking even)

● However, if more goes out than what comes in or if money is paid out before payments are received, businesses experience temporary shortfalls - can
lead to overdue fees or potential business failure.
 ● Cash flow statements record the movement of cash receipts and payments over a period of time. Comparing statements over time allows a business to
identify trends such as cash shortages and surpluses.

STRATEGIES

1. Distribution of Payments: Distribution payments throughout the month or year so expenses aren’t due at the same time. Ensures there are no
large cash outflows at any given time. Giving businesses enough time to generate cash inflows. Reduces the risk of potential cash shortages.
2. Discounts for Early Payment: Offering debtors a discount for repaying debts early. Debtors usually have 30 days to make their payment.
Most effective when targeted at debtors who can affect profitability as the business is earning less income.
3. Factoring: Selling accounts receivable to a third party for a discounted price. Firms earn 70-90% of their original value, affecting
profitability.

Working Capital Management

The funds available to cover short-term financial commitments (relates to liquidity)

● Cash or current assets can be used to cover debts

● If a business is not liquid and needs to repay a debt, they may need to sell non-current assets. Working capital is important when borrowing from a
lender or negotiating with a supplier.
○ Lenders and suppliers need to know a business will make repayments on time

Control of Current Assets

Financial managers must select the right amount of each current asset to be held by the firm. The costs and benefits of holding too much or too little of each
asset needs to be assessed.

● Managers must consider how to obtain its current assets

CASH
Management must plan for the timing of cash receipts, cash payments and asset purchases. This is the most liquid asset. Cash can be used instantly to repay
debts and cover any unexpected expenses. Cash can be used to take advantage of investment opportunities.

● Businesses typically keep cash balances a a minimum and hold assets that can be easily converted to cash

ACCOUNTS RECEIVABLE
Must ensure the timing of accounts receivable allows the business to maintain adequate cash. Selling to customers on credit can increase sales as it offers
customers a repayment period which provides time to generate more income.

The faster debtors repay their account, the better the business’s cash position. Businesses can implement credit policies to ensure its debtors pay faster.

● Check credit ratings

● Set up a reasonable repayment period
● Follow up on unpaid accounts
● Charge late fees
○ If a credit policy is too strict, customers may go to a competitor

INVENTORIES

Management must consider how much inventory to keep at any given time

● Too much inventory can lead to cash shortages

● Too little inventory can lead to loss of sales

○ To do this, businesses must consider their rate of inventory turnover. The rate of inventory turnover differs depending on the type of business.
The rate of inventory turnover differs depending on the type of business

Control of Current Liabilities

Understanding the current liabilities a business has, when they need to be repaid and how they will cover the cost. Avoid additional or unexpected expenses.

● What current liabilities they have

● When they need to be repaid

● How they will cover the cost

○ Looking for opportunities to minimise the amount a business owes its creditors. The less current liabilities a business incurs, the greater their
working capital is
● Accounts Payable
 Managers must monitor accounts payable and ensure the timing of their payments allow the business to maintain adequate cash resources.

○ Distributing payments throughout the month allows businesses to avoid cash shortfalls
○ Planning ahead allows a business to take advantage of discounts for early payment. Allows businesses to use available cash for other purposes
and generate more cash inflow. Otherwise will incur late fees if cash is not available on the due date
● Loans

While loans are an important source of funding, managers need to utilise them effectively. Managers must aim to minimise costs where possible:

○ Compare lenders
○ Negotiate lower interest rates
○ Rework loan terms
■ The term of a loan must match the economic lifetime of the asset being purchased. Short term loans used to finance current assets
whilst long term loans used to finance non-current assets
● Overdrafts

While overdrafts are a conventional source of funds, managers must employ them effectively. Overdrafts often have a variable interest rate meaning
the faster the loan is repaid, the less interest is owed.

WORKING CAPITAL MANAGEMENT STRATEGIES

Leasing, Sale & Lease Back

Used to improve working capital. A business with a ratio lower than 2:1 would consider using these strategies

● Leasing: The payment of money for the use of equipment that is owned by another party. The business does not own the asset being leased so it
becomes a cost (liability).

Sale and Lease Back: The selling of an owned asset to a lessor, then leasing the asset back. Business loses ownership of the asset, but they retain the
use of it

○ Frees up cash to be used elsewhere

○ Repayments can be matched with cash flow
○ Depreciation doesn’t affect the business
○ Repayments are tax deductible
PROFITABILITY MANAGEMENT

ROLE: To maximise profits by maximising revenue and minimising costs. Implementing cost controls and revenue controls can increase profitability.

A) Cost Controls

Measures used to minimise costs and avoid unnecessary spending. The costs associated with an activity must be considered worthwhile before it is
implemented.

FIXED CONTROLS: Costs that don’t depend on the level of operating activity in a business.

VARIABLE COSTS: Costs that do depend on the level of operating activity in a business. When a business recognises their variable costs, they can identify
opportunities to save money

COST CENTRES
Departments of a business to which managers can directly attribute costs. Managers can identify costly departments and make changes to reduce
costs.

DIRECT COSTS
● Costs incurred by one particular product or activity within a cost centre, department or region.

INDIRECT COSTS
● Costs incurred by more than one product or activity within multiple cost centres, departments or regions.

- Separating direct and indirect costs allows a business to identify costly departments

Expense Minimisation: Reducing expenses across a business where possible. Guidelines and policies are established to encourage staff to minimise
expenses. Expense budgets make expense patterns within a business visible.

B) Revenue Controls
Measures used to maximise revenue
Marketing Objectives: Establishing these ensure a business engages with consumers, makes sales and earns revenue

SALES FORECASTS
 Must be set at a level that will generate enough revenue to cover costs and result in profit. Cost-volume-profit analysis is used to determine how
changes in cost and volume affect income

SALES MIX
4P’s (Price, product, place, promotion) must be constantly reassessed to ensure they reflect the needs and wants of consumers

PRICING POLICY
The pricing of products directly affects revenue (Sales x Price) Overpricing: loss of customers Underpricing: cash shortfalls

GLOBAL FINANCIAL MANAGEMENT

Globalisation has created an integrated global market, allowing businesses to reach consumers all over the world. Globalisation exposes businesses to more
uncontrollable risks.

EXCHANGE RATES

● Countries use their own currency for domestic purposes

When Global transactions take place, one currency must be converted to another. Exchange rates fluctuate due to variations in demand and supply of various
currencies. Fluctuations affect the price paid and received for products sold internationally. Exchange rate fluctuations can affect the profitability of
businesses.

● Businesses must monitor exchange rate fluctuations

APPRECIATION

When the Australian dollar appreciates, it is worth more when converted to other currencies.

● Imports from Australia become more expensive for international consumers. This reduces competitiveness of Australian businesses selling products
internationally.
 ● Imports from overseas become less expensive for Australian Consumers. This reduces competitiveness for Australian businesses selling products
domestically. Reduces expenses for Australian businesses importing suppliers (improves efficiency).

DEPRECIATION

When the Australian dollar depreciates, it is worth ;ess when converted to other currencies.

● Imports from Australia become less expensive for international consumers. This increases competitiveness of Australian businesses selling products
internationally
● Imports from Overseas become more expensive for Australian consumers. This increases competitiveness for Australian businesses selling products
domestically

INTEREST RATES
● The fee for borrowing

Globalisation has allowed businesses to access debt financing from all over the world. Generally interest rates in Australia are higher than many other nations
in the world. Borrowing, can therefore, be cheaper internationally. Businesses should monitor and adjust lending as a strategy to minimise costs

METHODS OF INTERNATIONAL PAYMENTS

Payment in Advance: Exporters will receive payment before shipping goods. This is the least risk method of accepting payment for the exporter.

Letter of Credit: A letter from a bank to guarantee to exporters that payment will be made once conditions of sale are granted. This is risky but usually a
supported method.

Bill of Exchange: Riskier than the previous two, but the most common method of payment. Under contractual agreement, the exporter will ship goods when
certain levels of payment have been made. E.g deposit at purchase, 25% payment in construction, reminder of payment at product completion.

Clean Payment: Riskiest method of payment. Exporter ships goods before payment is received

HEDGING

● The process of minimising the risk of currency fluctuations

Natural hedging: strategies adopted by a business to minimise the risk of foreign exchange exposure
 ● Establish offshore subsidiaries: opening a branch in a foreign country, removing the need for exchanging currencies
○ No need to exchange currencies
● Use the same foreign currency for import payments and export receipts e.g US dollars for all international transactions
● Implement marketing strategies to reduce price sensitivity - businesses can increase prices to cover the exchange rates losses

Financial instrument hedging: The use of financial products to spread the risk of exchange rate fluctuations

● Most commonly, businesses will use derivatives

DERIVATIVES
Derivatives are simple financial instruments used to reduce the risk of exchange rate fluctuations

Forward exchange contract: contract between a business and a bank to exchange currencies at an agreed exchange rate on a future date

Option contract: Gives a buyer the right to buy or sell foreign currency at a particular rate in the future.

● Not obligated to go through with the exchange, but they have the option
● Option holders are protected from unfavourable exchange rate fluctuations, yet can also access new exchange rates if they improve
○ Protected from unfavourable exchange rate fluctuations
○ Can access new, more favourable exchange rates

Swap contract: an agreement to exchange currencies in the spot market, then reverse the transaction in the future

● Used when businesses are not well known to lenders from a foreign country, meaning higher interest rates