all right welcome back to video number three we're going to be talking about Finance like the last video ended off by saying Finance is probably the worst topic for most students now I can tell you from past experience I would agree with you I hated Finance as well I'm also really bad at math if you've never been to one of my lectures you won't know but if you have been to one of my lectures you will know how bad I am at math that's why I chose to study law and commerce and not like Finance or something like that now in terms of Finance we really need to make this as simple and easy as possible how I can do this for you is let's just break it down to the basics get the basics down first once you've got that done then we can go in and do more developed strategies and ideas all right now what I'll do is I'll relate this to as much real life as possible so that it kind of becomes a bit more relatable because that's what my struggle in Market in in finance was it is that you know it kind of never made any sense for anyone because no one's really seen this in real life before so let's give you some examples to help you all right now let's hit it Finance Finance is about the analysis interpretation and evaluation of your financial records again strategic role is about the long run especially for finance this is the most important you need to make sure that your financial stability in the long run is maintained for your business other otherwise your business is going to suffer from low cash flow poor um not enough money in the bank um you know not being able to invest not being able to pay staff not being able to pay suppliers the list goes on so strategic role long-term must focus on it but again with all of our objectives we must remember that we can't achieve all at the same time we need to balance our objectives according to what we profit or what we what we value the most so we must weigh out what our goals are and fit those that match all right now in terms of the role of Finance the easiest way to remember the five objectives is by using the phrase plagues that is profitability liquidity efficiency growth and solvency if you can remember these five for the whole Finance topics you've got practically everything this helps you with formulas this helps you with strategies it literally does everything for you so very very important all right now in terms of profitability that is how much money is left over after all expenses are paid in terms of liquidity that is are you able to pay your short-term debts now a lot of people used to get confused between liquidity and solvency so we'll go through those too quickly now so again liquidity short-term debts solvency is your ability to pay short and long-term debts so the way I used to remember it is think about a glass of water like this liquid is really you know flexible it's all about the ability to pay in that short term um in solvency solvency is more about the long and short term so are you solvent in the long um in the long and short run now the best way I remembered it as crazy as it sounds was because when I was studying about what the difference between liquidity and soleny is is I had a cup of water sitting next to my laptop as we speak and I spilled it on my laptop and there goes $2,000 so I'll never forget liquidity is that short term how liquid your funds are in the short run the way I remember it is in the middle of the exam just do one of these ones you know liquid water flexible short-term flexibility that's the easiest way to remember it next is efficiency efficiency is how many is all about your expenses how much revenue is left over after all of your expenses have been paid off and lastly is growth that is the size of your your company compared to competitors now some key terms here to go through just to keep you in mind of what's going on um a lot of kids get stuffed up with these words so let's help you fix that stuff up dividends dividends is when you go and buy a share and the company makes profit your return is in return you get dividends which is the company paying you a portion of those profits because you invested in shares gross and net profit are two totally different things kids need to realize this gross profit is revenue Minus cost of goods sold and net profit is that gross profit minus expenses so if you have a look at this diagram over here the easiest way to remember it gross is revenue minus cogs like normal yes it does give you profit but it's not the best estimation net profit is the best estimation of profit because it gets rid of all your other expenses so think about this when you've got a fishing net in water for example you scoop out that that gross profit and all you're left with is the net in the uh inside the net is your net profit and you've kind of scooped out all of those expenses that you um are charged so net profit is really the best one to go with there an invoice is just like a receipt or a docket that businesses use to show Financial transactions now debtors and creditors and accounts receivable and accounts payable are very much linked accounts receivable is money you expect to receive that is money that comes in accounts payable is money you have to pay out that is to your suppliers now if you have money coming in you're they're your debtors if your money going out that's your creditors so you're expecting to pay them now you have to really kind of get an understanding or an idea of what these words mean because the pluses and minuses make a real big difference um why we use account receivable and accounts payable is because in real life let's say I went and bought you know a pallet of nails for my parents company even though I receive those nails today I don't have to pay for those nails for another 30 days 40 days 60 days depending on our contract between our agreement so whilst I receed the nails today I in my accounts payable have to pay them the nail company the money in about 30 days then for the nail company they have an account receivable for that exact same amount next is financial influences now Finance can be sourced from internally and externally internally is using your own capit using your own retained profit from last year or selling unwed machines cars assets that you don't need anymore they're all internal sources of Finance because they come from within the business external Finance though is separated into two categories debt and Equity debt is when you get loans borrowing money from a financial institution you pay interest Equity is more about shares and ownership now we're going to go through both of those first let's go through debt first so debt can be broken up in short or long-term influences that is shortterm is less than 12 months longterm is greater than 12 months so the first one is an overdraft that is when your bank balance goes below zero the bank Bor you money overdrafts though are very very expensive yes they're convenient but they're super super super expensive because Banks know you're in a lot of trouble in order to do it so they know they can charge you a higher interest rate so biggest advice if you're seeing a business report or an essay or strategy or whatever like that you need to make sure that the company is not abusing its overdraft because if it's using an overdraft at all slash too much then the company is not being financially responsible there is so many other strategies a business can use to be more financially responsible next is a commercial Bill a commercial bill is a written loan amount borrowed from another person or another account who has extra funds and again you have to repay it at a certain date at a certain rate and it can be rolled over to the next month or to the next you know 3 months and it's pretty it's a much more cheaper way to do it than say overdraft factoring on the other hand is when you sell your accounts receivable so remember the nail story we were just talking about before let's say that I am the nail company and I'm in a bit of financial pressure I can't wait those 30 days what I do is I sell it to a factoring company I sell my accounts receivable at a discounted rate they'll pay me instantly but it is a less amount so let's say for example I sell $1,000 of nails and I'm waiting for $1,000 to come into my bank account now if I go and sell it to a factoring company because I can't wait those 30 days whilst yes it's good it does mean that I sell it to them maybe for maybe $600 not the full a th000 so I don't get the full value of the money but I do get it much faster so you've got to weigh up what you need more um obviously they charge a commission or fee depending on the risk depending on the amount depending on who the supplier is so that's the short-term strategies now the long-term strategies is things like um mortgage which is where you get to borrow money from the bank paying back both the full amount plus interest you need to usually have an asset on security so a security is when let's say I can't pay the loan anymore they come and take my house that's what a morage is debentures debentures are um when one business lends another business money for a fixed time rate and amount they can either be issued publicly on the stock exchange with a prospectus or just done priv privately between two businesses to get money really quickly um so that's what a debenture is an unsecured note now remember in an unsecured note note that is notes that are issued by a finance company but because it is unsecured it means that if I go Bank bankrupt that that financial company can't really get their money back now because that's a lot more riskier they charge a higher rate of interest very very risky so you have to be very careful next is a lease that is when you rather than owning an item you just rent to sorry you rent the item on an agreement so for example instead of owning a car you lease the car and you pay certain amounts the benefit is is that you're able to realize you know there's a fixed amount at a fixed time you're able to really budget that a lot easier it's also tax deductible the negative of it though is that you know at the end of the day you don't own the product so you can't count it as an asset you you can however decide to release the item update and get a newer model or buy the item after the lease is finished for a discounted value at whatever its leftover cost is so in terms of these debt strategies you really need to pick a strategy or an INF a strategy or a financial um um option here that suits the company and we'll go through that in a second now in terms of equity you can either have private or public private is all about selling shares to private investors that is you pick the investor yourself you don't have to pay back dividends until profit is made but you pick private investors yourself public is ones that are sold through shares so it can either be a new issue where it's the first time being issued on the stock exchange it could be a rights issue it could be a placement or a share purchase plan now uh in terms of the um rights issue isue it's more about where an existing shareholder who's already invested in your company is offered more shares proportional to the amount they own so if a com a person owns 10% of shares and I'm about to go and release another 100 shares I'll offer them another 10% of the next slot of shares if they want to placement is literally in the name it's when you place certain shares into a certain shareholder that you specifically want to have it's a lot faster can happen in less than 24 hours and you can raise a lot of money you don't need a prospectus either now a prospectus a lot of kids ask what this is a prospectus is when you issue shares on the Australian stock exchange you usually have to issue a prospectus which is almost like a document a brochure telling you what company how much you're investing how much stock you're raising what you're going to be doing with the money what your expected anticipated results and returns and dividends is going to be it's almost like a sales brocher for your shares that's what a prospectus is um now number four is a share purchase plan that is when you offer existing firms up to $5,000 in new shares according to who already own shares you offer them at below current price ratees so that way you can get funding really quickly it does need the approval from Asic but it is quick and inexpensive the problem is is it really does undervalue your company shares a lot because if you're selling shares less than the market value it means each share is now worth less because you're not only putting more shares but they're worth less other Financial influences are financial institution themselves that is Banks investment Banks super funds unit trust all those kind of things government however government also do influence you through their fiscal and monetary policy fiscal policy is their budget so every year the government sets a budget and they set how much money they're going to be spending on certain areas of government now this influences businesses because it determines you know what taxes they're going to collect what items and surpluses they're going to be charging those kind of things they also do something called monetary policy that's where the Reserve Bank of Australia charge an interest rate now what happens is the four big Banks or any Bank in Australia buys and sells money from The Reserve Bank of Australia so pretty much the government sets a level of interest rates for businesses and consumers through the Reserve Bank of Australia once that's done then people so if the government increases monetary policy which means they increase the insur interest rate it means that to go and get a loan it's now more expensive which means the cost of getting that same car that same Factory upgrade that same machine now costs you more because you're paying more in interest so government can really control spending and consumption using fiscal and monetary policy they also have government departments like Asic Australian Securities investment commission to really control what's going on there they also have company Tax that is they charge 30% of your net profit goes to company Tax Global marketplace now we've already spoken about this a million times you've got exchange rates interest rates um these things influence our financial strategies the biggest two things that you need to remember is the 1980s deregulation that is that the government deregulated a lot of financial investments that businesses can now seek and get fun fing from businesses all over the world so there's a lot of deregulation that happened both within Australia and for funding coming from overseas investors the other really amazing thing is the GFC my biggest recommendation to you is if you can integrate the GFC as like a case or a little quick example do it it is the best example that we have lived through as much as it did cause a lot of drama and a lot of stress a lot of financial loss it is a great example for business studies because it Prov proves to you how the government can influence our strategies for finances how businesses are affected by other businesses and how for the first time globalization proved that if an a a financial you know downfall happens in America it can totally totally affect Australia almost instantly and it has lasting effects that last years so 20 2008 GFC go and Google a couple of videos about it Go on YouTube it get a bit of a brief understanding of what happened there really really good idea next planning and implementing your processes now first things first you need to determine what are your financial needs then you need to create budgets to determine forecasts and figures setting budgets and limits to know what are your you know what are your Maxis and minimums of how much you can spend here it then enables you to later on compare your actual and planned results later on you also need to set up record systems like computer programs that record money coming in money coming out a good example is Mob that's a computer program that um a lot of businesses use to manage their businesses taxes finances employees everything you then need to assess the Financial Risk and you need to make sure that the investment strategy or the financial strategy that you're employing matches your goals matches your capacities otherwise you're going to be you know in a lot of trouble next is financial controls that is financial controls are ensuring your objectives are achieved by setting certain limits and restrictions on what you can and cannot do so for example let's say we have uh in our company we have a company and we controlling we have a staff member sorry that's paying out wages from our company's business account a good Financial control is setting up maybe like text notifications or setting up Financial daily spend limits so that companies don't overspend too much so that Administration error doesn't happen and so that the employee doesn't go Rogue and start transferring millions of dollars into their own account these are Financial controls that are really really important for us next is financial processes in debt and Equity now the important part here is we use a matching principle whether or not we use debt or whether or not we use equity financing depends on these strategies here but the most important is we use the matching principle that is that you need to give businesses advice to say to give and take the right credit option for the right amount so for example if I needed a quick short-term loan there's no point in going and getting a 30-year morgage why you need to match the right type of debt to the right type of investment that you need with the right term of loan as well so this might determine you know are you better off going and buying it an overdraft or are you better off getting a long-term loan that kind of thing all right now in monitoring and and controlling we've got three different statements let's run through through them so here you can see a cash flow statement now in terms of calculation it's quite simple it's opening balance plus cash in minus Cash Out equals closing balance now the closing balance in January will technically go up into February and vice versa the closing value of $5,000 in February goes up to March's opening balance of $5,000 as well so let's go through and do a bit of math so we're starting in with $6,000 we're cash out of $3,000 that is we're left with $3,000 at the end of January now if we're moving over to February we finish off with $5,000 so that's March then starts with $5,000 and if we put another $3,000 in but we've got minus X out we're left with $1,000 now how do you find out how much the cash out value was in March all you need to do is go 5000 + 3,000 - x = $1,000 and all you do is you move those numbers around to solve for x and you'll be able to do it again same deal once you do it once you kind of get a bit of practice on it and you're able to do it so you know don't stress too much very very simple stuff very very easy the reason we use Clash flow statements is because it shows us where it's un how we can understand and and and see how money is going in and out of the business so for example let's do April now we're left with an opening balance of 1,000 only 1,000 comes in but 3,000 goes out which means we have a negative 1,000 balance this should be ringing alarm bells for you this is a massive massive problem the company has not got enough money to pay for its Financial stability here this means we are not liquid we cannot pay our debts in the short run why we'll find out why later on let's continue on income statements income statements go through the same strategy just following the same steps and procedures every single time that is revenue Minus cost of goods sold equals gross profit and then gross profit minus expenses equals net profit that's all it is very very very simple so once you've got that setup strategy memorize it write it down a million times Revenue Minus cost of goods sold equals gross profit gross profit minus less expenses equals net profit very very simple every Revenue state income Revenue statement follows the exact same steps and procedures the other good important thing is remember how I was telling you how gross profit isn't as good an indicator as net profit net profit is better have a look whilst the company may look profitable because it's making $115,000 gross profit it's only making $88,000 in net profit which is not much at all so by the time you pay off all your expenses the company is only left with $88,000 even though it made $229,000 where did that other 221,000 go it went to expenses and cost of goods sold crazy crazy crazy amounts so always look at that net profit that's your biggest scale there all right next statement is the balance sheet and as it suggests current assets non-current assets is equal to current liab ities non-current liabilities and owner's equity you must must must remember that very very important in order to do it again use um a almost like algebra to put X's where you need to to find out how much an a value is worth remember the left side must equal to the right side exactly all right now let's get into the dreaded formulas now formulas are given to you in the exam so don't stress too much but the major thing is you need to know how to interpret it it's also not that hard to remember the formulas I would suggest it because it just really helps you really understand what's going on all right in order to measure liquidity remember liquidity is how able you are in the short run you need to look at your current ratio sorry your current ratio is your current assets divided by your current liabilities now where do we get this information from the balance sheet what it shows us is how much Financial stability we have in the short run can we pay our bills on time now if we've got one: one ratio that's two risky it means for every dollar in an asset we have $1 in liabilities what happens if an unexpected Bill comes in we can't pay for it one to one is too risky 4 to one is inefficient what's the point of having millions and millions and millions of dollars sitting in the cash bank whatever ready to go if we're not investing that money in more profitable experiences so for 4 to one is too efficient one: one is too risky what's a good balance most textbooks most Industries say two: one is the best that way if you have any unexpected you're not any unexpected bills you're not financially up creek without a pedal but you can financially afford it all right next is solvency that is your ability to meet short and long-term debts we use the debt to equity ratio um which is shown here on the screen why it shows a risk to investors so if we relying heavily on loans debt loans other people financing the company it shows that there's a higher risk that the company can go bankrupt um so the higher means the more unstable financially the business is we need to make sure that we are financially secure by making sure we're balancing up that debt to equity ratio next profitability profitability is measured by gross net and return on owners Equity now they're pretty much all there and what they show is for every $1 of sale how much gross profit do you make how much net profit do you make return on owner's equity shows you how much money is getting returned on the owner's contribution this kind of shows you whether or not it's worthwhile for you to stay in business so for example if you measure your value of money and Sor your value your profits and all that coming in what's the point of stressing and running a business if you're not earning a return on owner Equity more than what you could have if you put it in the bank on an interest loan or more than if you put it in property you've really got to make sure your return on owners in equity is is enough to not only sustain yourself but to make sense to continue to run the business now in terms of efficiency we look at two different scales of efficiency we look at expenses and accounts receivable expenses is for every dollar for every revenue of dollar we make what how much does it cost in expenses so the higher the expense the more inefficient you are you need to really reduce those expenses as much as possible next is accounts receivable that is how effective and efficient you are in collecting that accounts receivable so for example if you say to customers look you have 30 days to pay my your your bill and they don't pay it until the 37th day that's not efficient at all means your collection is not doing really good so you really need to improve that all righty now some Financial processes here now in terms of the normalized earnings these are some limitations in financial reporting by the way normalized earnings is when Financial reports sneakily try and make adjustments for ups and downs in the economy to make it the pro company seem more profitable than what it actually is so you need to be careful about that the way I remember it is Imagine you've got you know economy going up and down up and down a normalized earning is when they take an average or a normal standard and they apply that which kind of downplays the you know the negatives that the company might go through not very ethical and it is a limitation in reporting next is capitalizing expenses that is let's say I go and buy a property tomorrow and it cost me $1,000 to also hire a lawyer to transact the property just because the property is a million dollar and I paid $1,000 doesn't mean the property is now worth $1,000 $11 million $1,000 it's not worth that at all you're still only worth ,000 million so what a lot of people do is they add the cost of those legal fees taxes into the value of the asset making it seem more valuable than what it actually is you can't do that very very bad again valuing assets depends on you know how and when you value your assets different different uh is different sorry between every single company so you know you've got to be careful when comparing assets over time what are the companies doing to um uh depreciate and calculate depre ation what's the company valuing their tangibles and intangibles um their patents their trademarks their copyright do they value you know a copyright a million dollars when it's really not worth anything at all anymore do you know what I mean you got to be careful about how companies value their assets they'll obviously overstate it to try and make the company seem more profitable than what it is next is timing issues that's when Financial accountants try and move expenses into the next financial year so that you seem more profitable this financial year we need use the matching principle here as well that is record the transaction at exactly the right time that is the time it actually did occur so make sure you do it the right way next is debt repayments that is is there when when we're looking at a financial statement it doesn't necessarily show us you know are employees about to go and leave are we covering vacationing stuff are we um paying too much on our loyalty programs that kind of thing last but not least is notes to financial statements this is the most important thing have a look notes to financial statements whilst yes they can be a little bit biased they help you give more details of what's going on where why and it's actually helpful to realize and see how the company calculates its um assets what plans the company has what um debts the company has how much the interest rates are that kind of thing all right next is ethical issues so again we just need to be careful that um ethically we're doing the right thing for financial statements so when making Financial reports we need to follow um certain standards now these are made in chartered accountant so a ched accountant is an international standard for all accountants to follow and when someone is a chared accountant it means that they've gone and undertaken training and extra um understanding so that whenever they do financial reporting it is equal for all businesses worldwide really really good standard um we need to make sure that accountants aren't being creative in their reporting they're not trying to sneak extra funds in somewhere or something crazy like that the corporation act 2001 also now states that we must reveal our salary packages for staff and directors we also have something called the triple bottom line that is where we measure the Financial social and environmental impacts so not only are we looking at just finances anymore but we're looking at the social environmental impacts of the company as well and lastly we're also looking at the audit that is independent checks done by the Australian taxation office they can come in and check your financial statements making sure they are accurate you're paying the right amount of tax and that you are authentic because if you're not criminal charges May ensue fees as well as um fines may be charged as well so you have to be really careful with it all right now in terms of strategies strategies are quite simple they're pretty much everything that we've already discussed strategies are broken up into different sections ones that follow cash flow working capital profitability and Global finances all right so let's go through cash flow cash flow management is when we use a budget for example to make sure that we have enough money throughout the year ways we can do this to make sure we have enough money throughout the year and avoid negative balances is to distribute our payments that is spread large predictable payments throughout the year so for example when you're buying a car you might ensure the car and then have rejo paid at a different time have your green slip paid at a different time that way you're not paying everything all at once in one month and suffering a big Financial bang like that next is maybe offering discounts for companies who pay you early on your account's receivables giving them a discount to kind of incentivize them to pay early or you can also use factoring where you sell your accounts receivable for a little bit lower but you get the money at uh instantly sorry next is working Capital Management that is making sure your current assets is greater than your current liabilities having that good balance that efficient balance we were talking about before how we do it we can either control our current assets or control our current liabilities we do this through making sure we've got enough cash on hand making sure we've got enough uh accounts receivables and not having too much inventory we can also make sure that we're paying our accounts on time and making sure we're paying them maybe on the last day possible so that we're maximizing that effectiveness of efficiency there and we're also looking at you know making sure we're getting the right loan with the right terms we're looking at overdrafts making sure we're not you know spending too much on overdrafts and we might even do something like a sale and Lease back where let's say you own the car you can't afford to pay the car off anymore so what you do is you sell the car to a leasing company and then you lease the car back off them in monthly installments um that might help some for working capital as well now in terms of profitability to maximize profit you either have to reduce your costs or increase in your Revenue so to do that you must do these strategies which run through here that is running through things like setting up fixed and variable costs making sure you're maximi minimizing your fixed costs and your variable costs as much as possible um you can also use things like cost centers which is where you use financial reporting to see where your wastage is coming from which departments are spending the most money why how can we reduce that by setting up cost centers we can find those details out we also must use expense minimization finding new cheaper suppliers seeing how you can get a discount from your current suppliers things like that Revenue wise we need to make sure we've got good marketing strategy so that we're increasing our revenue and sales we can also adjust our pricing according to demands stocking quantity in order to maximize Revenue as much as possible all right last but not least is Global Financial Management so when a company in uh interacts with finances overseas they're obviously going to have to do exchange like encounter exchange rates which is the value of purchasing one currency for another so what a lot of companies do is they need to be careful and use some strategies which will go through in a second called hedging in order to enter a contract with um a business and supplier using one equal currency so for for example we might even though I'm in Australia and my supplier might be in China we both might agree to do the transaction in US Dollars that way any ups and downs are equally felt by both company and supplier what you have to be careful of is that if you're not doing things like this you know a product that might be worth a dollar today might have an exchange rate that goes up meaning the dollar the the the same item might be worth a120 a130 that's why it's very very scary you got to be very very careful similarly think about the new iPhone the new iPhone in America sells for $9.99 in Australia that's $1,500 89 or something like that um which you know when you take into the fact of exchange rates that's that's how much the item is worth so you got to be careful about that very very important all right next is interest rates interest rates is the cost of borrowing money and now with global finances a lot of people go and seek money from overseas cuz it's cheaper it's less um interest rate that kind of thing what you do have to be careful of is there are different laws different um risks Associated as well so you can't you know just go and invest a million dollars in Zimbabwe because you might not ever get your money back if you know what I mean next is some strategies to do this we look at the method of international payment so for example some companies use payment in advance letter of credit bills exchange those kind of things which reduce and get rid of the risk so to quickly go through these a payment in advance is when you pay for the item before it is sent it's the most riskiest for the person who is buying the item CU they're paying for it in full before they've even gotten anything whereas a clean payment on the other end is when you don't have to pay for the item at all until it arrives on your doorstep but again very risky for the supplier what we do is we use letter of credit and bills of Exchange in order to move that risk from one or the other into a third party usually a bank so the bank can either issue a letter of credit or a bill of exchange requesting certain amounts under certain conditions so that money is held on trust with the bank and isn't released to the other party until all the terms of the contract are fulfilled good way of doing business especially to reduce risk um so we've already gone through hedging but we can also use something called derivatives now derivatives is where you buy and sell certain currencies using swap contracts currency options or forward exchanges in order to get that Financial strategy underway for exchange rates that's it guys Finance is done the whole Finance topic covered in 37 minutes not bad I say all righty let's get on to human resources in the next video my biggest recommendation for finances is practice practice practice for me Finance was the hardest as it probably is for you go into those re exam papers find those questions and do as many practice questions as you can it's the easiest way to get that content down and dusted all righty have a good day we'll see you in the next video