Lecture Notes: Finance

Introduction

• Finance perceived as difficult for many students, including the lecturer.
• Aim is to simplify and break down to basics.

Key Concepts in Finance

Strategic Role of Finance

• Long-term financial stability is essential.
• Objectives must be balanced for profitability and value.

Five Objectives of Finance (PLAGES)

• Profitability: Money left after expenses.
• Liquidity: Ability to pay short-term debts.
• Efficiency: Revenue left after expenses.
• Growth: Company size relative to competitors.
• Solvency: Ability to pay short and long-term debts.

Important Financial Terms

• Dividends: Profits paid to shareholders.
• Gross Profit: Revenue minus cost of goods sold (COGS).
• Net Profit: Gross profit minus other expenses.
• Invoice: Financial receipt or docket.
• Accounts Receivable/Payable: Expected incoming/outgoing money.
• Debtors/Creditors: People who owe you money vs people you owe money to.

Financial Influences

Internal Sources

• Retained profits, selling assets.

External Sources

Debt

• **Short-term (< 12 months) and long-term (> 12 months)
  • Overdraft: Bank balance goes below zero.
  • Commercial Bill: Written loan from another person.
  • Factoring: Selling accounts receivable at a discount.
• Long-term Debt:
  • Mortgages, Debentures, Unsecured Notes, Leasing.

Equity

• Private Equity: Selling shares to private investors.
• Public Equity: Selling shares through stock exchange.
  • New Issue: First time issued.
  • Rights Issue: Offered more shares to existing shareholders.
  • Placement: Targeted share distribution.
  • Share Purchase Plan: Offering discounted shares to existing shareholders.

Financial Institutions & Government Influences

Financial Institutions

• Banks, investment banks, super funds.

Government Policies

• Fiscal Policy: Government budget.
• Monetary Policy: Interest rates set by the Reserve Bank.
• Government Departments & Taxes: ASIC, company taxes.

Global Financial Influences

• Exchange rates and interest rates.
• 1980s Deregulation: Increased access to international funding.
• Global Financial Crisis (GFC): Demonstrates interconnectivity of global markets.

Planning and Implementing

Steps

1. Determine financial needs.
2. Create budgets.
3. Set up record systems (e.g., MYOB).
4. Assess financial risks.
5. Implement financial controls.

Financial Controls

• Ensure objectives are met by setting limits/restrictions.
• Examples: Text notifications, daily spend limits.

Financial Processes

Debt and Equity

• Use the matching principle: Match the right type of debt to the right investment.

Monitoring and Controlling

Statements

• Cash Flow Statement: Opening balance + cash in - cash out = closing balance.
• Income Statement: Revenue - COGS = Gross profit - expenses = Net profit.
• Balance Sheet: Current assets + non-current assets = current liabilities + non-current liabilities + owner’s equity.

Financial Formulas

Liquidity

• Current Ratio: Current assets divided by current liabilities. Aim for a 2:1 ratio.

Solvency

• Debt to Equity Ratio: Shows financial stability and investor risk.

Profitability

• Measure using gross/net profit and return on owner’s equity.

Efficiency

• Expenses: Revenue per dollar of expenses.
• Accounts Receivable: Efficiency in collecting debts.

Limitations in Financial Reporting

• Normalized earnings, capitalizing expenses, valuing assets, timing issues, debt repayments, notes to financial statements.

Ethical Issues in Finance

• Chartered Accountant Standards: Ensuring international consistency.
• Corporation Act 2001: Requires salary transparency.
• Triple Bottom Line: Financial, social, environmental impacts.
• Audits: Independent checks by ATO.

Financial Strategies

Cash Flow Management

• Utilize budgets, distribute payments, offer discounts for early payments, factoring.

Working Capital Management

• Control current assets and liabilities, use sale and leaseback.

Profitability Management

• Minimize fixed/variable costs, use cost centres, expense minimization, adjust marketing strategies.

Global Financial Management

• Exchange Rates: Strategies like hedging, derivatives to manage fluctuations.
• Interest Rates: Borrowing from international sources.
• International Payments: Payment in advance, letter of credit, bills of exchange, clean payment to manage risks.

Practice

• Practice with exam papers for better understanding.

Conclusion

• Finance is challenging but practice makes perfect.
• Next lecture: Human Resources.