(PI-MFLE)

Planning and implementing

Determine how a business goals will be achieved

RNRBC (Records Need Really Big Commitmeit)

Financial needs
Needs are determined by;
- size of the business
- current phase of the business cycle
- future plans for growth and development
- capacity to source finance — debt and/or equity
- management skills for assessing financial needs and planning.

Budgets
Forecast of furutre expected results - provide numerical data to help reach targets
- Show areas where adjustments need to be made to achieve goals
- reflect strategic planning decisions about how resources are going to be used

Shows;
- Cash required for over a particular period - wages, rent
- Cost of capital expenditure
- COGS; Estimated use and cost of raw materials or inventory
- estimated sales, fixed costs, variable costs.
 - Fixed; these don't change as volume changes (rent)
- Variable; do change with volume. Quality of product.

Record systems
Software used to ensure data are recorded and the information provided by record systems is accurate, reliable, and
accessible
- Business need to record all information and provide financial statements

Financial risks
The risk to a business of being unable to cover its financial obligations - debt
- To minimise, bus must consider the profit they are able to generate

To assess the financial risk for a business, consider:

- the amount of the business’s borrowings
- Due dates
- interest rates
- the required level of current assets needed to finance operations

Financial controls
Policies and procedures that ensure that the plans of a business will be achieved in the most efficient way
- Contorls ensure that the planned processes are occurring when plans are implemented and prevent financial
problems
- Used to stop; theft, fraud, damage/loss of assets
- Budget, financial statments, ratio analysis

Some common policies and procedures are:

- authorisation and responsibility for certain tasks
- control of cash - use of cash registers, cash banked daily,
- protection of assets - buildings are kept locked, regular checks of inventory, security surveillance systems are
installed

Dont need to remeeber formalua,

Debt and equity finance

Debt finance; short and long term borrowing from external sources
Equity finance; internal sources of finance in the business es of debt are available

Debt advantages
- Funds are available and can be acquied at short notice
- Increased funds leads to increase earnings and profits
- Flexible payment periods and type
- Will not dilute the current ownership in the business
- Interest payments are tax deductible (income statement, in expanse)

Disadvantages
- Increase risk; fluctuation of economy; interest, bank charges and government charges may increase
- Regular repayments have to be made
- Lenders have first claim on any money if the business ends in bankruptcy
- Can be expensive; interest
Equity advantages
- Doesn't have to be repaid unless the owner leaves the business
- Cheaper than other sources of finance; no interest
- Less risk for the business and owner

Disadvantages
- Lower profits and lower returns for the owner
- Long, expensive process to obtain funds this way
- Ownership is diluted (current owners will have less control)
- Expectation that the owner will have about the return on investment
Monitoring and controlling
- Evaluating performance
0 comparing current data with prev years

Cash flow statement

Provides link between the income statement and balance sheet
- Shows the ablitiy to pay debts on times
- Predict inflows and outlfows, identify trends or periods where liquidity problems may happen
- Money going in, and money flowing out
0 Cash flow positive; getting profit
0 Period in time; cash flow and income statement

Operating activities à sales, dividends, rend, insurance.

Investing activities à cash from purchase aid sale of assets
financing activities à cash inflow/outflow from debt aid equity transactions
19/57

Income statement
COGS; opening stock + purchases - closing stock
Gross Profit; Sale revenue - COGS
Net Profit; Gross profit - expenses
Expenses; Wages, salaries, rent
expenses differ from COGS as it is not a physical product

Inflows
1. Sales revenue (other income)

outflows
1. COGS (cost of physical product we sell)
0 COGS = opening stock + purchases - closing stock
2. Expenses
 - Tax
- Dividend

Financial goals that are shown in income statments

- Profit, Growth (need serval years)

Shows;
- profit and outflow
- If income is high encough to cover the expenses
- Mark-up on purchases is sufficient

Balance sheets
NEED TO KNOW THESE FOR BALANCE SHEET
Asset; something that the business owns - cash, inventory
Labilities; somethings that the business owes (has to pay back) - wages, accounts payable, loans
Owner's equity; the money the shareholders or the owner have put in. Captial money the owner has put in

- Shows financial stabliltiy and indicates net worth of the business

assests Libilities + owners equitys

Assets = labilities + owners equity
A = L + OE

Currents assets;
intend to convert to cash in less then 12 months. Three types;
- Cash, inventory, accounts receivable
Non-currents assets;
Not intend to convert to cash in less then 12 months.
- Factory, equipment, vehicles, intangibles

Currents assets + Non-currents assets = total assets

Current libilites; less 12 mouths

- Accounts payable
- Credit cards
- over draft
Non-current libilies; more
- Mortgages
- Lease

Currents labilities + Non-currents labilities = total labilities

Owners equity
- Captial
- Retained profit

- Solventy and liquity

1. Accounting equation
2. What information does a balance sheet provide?
What the business owns, show how much the owners put in.
3. What are assets?
something that the business owns
4. Distinguish between current assets and non current assets
Current; intend to convert to cash in less then 12 months. Three types;
Non current; Not intend to convert to cash in less then 12 months.
5. What are liabilities?
somethings that the business owes (has to pay back)
6. Distinguish between current and non current liabilities?
7. What is owners equity?
the money the shareholders or the owner have put in. Captial money the owner has put in
8. What is the accounting equation?
9. Distinguish between a balance sheet and an income statemen
What the business owns, show how much the owners put in.
Income statement shows your profit and expenses in a given period of time
Financial Ratios
Must know to analyse and interpret
Creditor; (credit card) we owe - liability
Debtor; they owe us
Liquidity
Use current ratio (current assets ÷ current liabilities)
- Current; less than 12 mouths.

Extent which a business can meet its financial commitment in the short-term
- Must have enough funds for unexpected expenses
- Ensure there is has enough current assets that could be used to generate cash quickly
0 but not a lot that resources are not being used

Current ratio (working capital ratio)

Measures a business's ability to pay back their current liabilties with their current assets
- Ratio of 2:1 is a sound financial position to pay their short term finance (important).
0 firm should have double the amount of assets to cover its liabilties
- Always to 1. and 2 decimal places
- X of current assets for every dollar owed in the short term

A business wants more assets than liabilities (ie. a ratio greater than 1:1)
- If too high, inefficient use of working capital
0 5:1
- If too low, risky financial situation; debt. when creditors demand payments
0 0.5:1 (don't have enough to pay short term financial obligations)

Strats to improve;
- cash flow stratgiesc (DCFD)

Example
1. if current assets are $1000 and current liabilities are $500, what is the current ratio?
- 1000/500 = 2
- Thus, 2:1
- this business has 2 dollars of liquid assets very dollar owed in the short term,

2. comment on a business who has a current ratio of 0.5:1

- business only has 50 cents in current assets for every dollar owed in the short term.
- This business may face problems as it appears unable to meet its short term obligations.

3. comment on a business with a current ratio of 4:1

- This business has $4 sitting in current assets for every dollar is owes.
- This business is likely missing out on maximising its profit, as they are unnecessarily hoarding cash which could be
used for more profitable opportunities.

4. calculate and comment on the current ratio if current assets are $2,500 and current liabilities are $3,000
- 2500/3000 = 0.83
- Thus, 0.83:1
- the business only has 83 cents in current assets for every dollar owed in the short term,
- This means the business may face problems in the near future in meeting its payments.

- X dollars for every 1 dollars off

1. Explain why liquidity is so important to a business

For short term financial obegations
2. Identify an acceptable current ratio
2:1

3. Calculate the current ratio for the following business.

 Cash $4,000
Stock $10,000
Debtors $3,000

Creditors $5,000
Overdraft $1,000
17000/6000 = 2.8333
Thus, 2.83:1
4. Calculate the working capital for Green’s Nursery for both years
20X1 - 1.30:1
20X2 - 0.97:1
5. Comment on the change in liquidity between 20X1 and 20X2 (show working)
- The current ratio was 1.30:1 in the first year, whilst the in the second was has decreased by 33c to the current
ratio of 0.97. thus the business has a low liquidity and not have enough to pay their financial obligations

Gearing (solvency)
Meeting long term financial obligations
- How much debt is the business relaying on
Gearing measures the relationship between debt and equity:
- business that is ‘highly geared’ is one that has a high proportion of debt compared to equity
0 higher = debt is bigger
- High levels of debt, growth potential. But has limited opertunity to take more debt.
- shows whether the creditors will be paid or whether investors can expect a good return on their money
- X of debt for every dollar of equity

Strats to improve;
- Use more equity when purchasing assets
- Leasing
- Review source of finance: using to much short term loans or overdafts (high interest rate)
use debenture or mortgage (low interest) less cash on cash

Debt to equity ratio: Total liabilties ÷ total equity

extent to which the firm is relying on debt or outside sources to finance the business.
- A ratio of greater than 1 means that the business has less equity than debt
- A ratio of between 0 and 1 means that the business has more equity than debt.
- The higher the ratio, the less solvent the firm. That is, the higher the ratio of debt to equity, the higher the risk.
0 Highly geared mean less solvent
- 1:1 is considered acceptable
- ratio higher than 1:1 is considered high.

Highly geared mean less solvent

Example
1. A business has debts of $20,000 and equity of $15,000.
- 20,000/15,000 = 1.3333
- 1.33:1
- the business has $1.33 in debt for every $1 of equity they have.
- As the business owes more than they own, they may be seen as high risk for future debt, so banks might not want
to give them another loan

2. Comment on a business with a debt to equity ratio of 0.5:1

- This business has $0.50 in liabilities for every $1 of equity.
- They would likely have no difficulty in securing additional finance.
- However the business is probably not maximising its profitability. It could borrow some more money and expand
its operations without putting itself at risk from having too much in liabilities
- The business is in a safe financial position; low rsik and have low debt paypayments. Lower risk of business failure.
However having a low gearing ratio would be that the business may be missin gout on using more debt than equity
which would ldea to greater potential for profit.
Less geared
- Debt is low, the business is not invesenting in growth, and the business should put in debt to expand the business

Profitability
Shown as a percentage %

Gross profit ratio

Gross profit ÷ sales
- shows changes from one accounting period to another.
- indicates the effectiveness of planning concerning pricing (selling price), sales (amount we sell), valuation of stock
(COGS, stock value)
- If the ratio is low, alternative suppliers may need to be sourced
0 reducing COG, increase price
- X in gross profit for every one dollar of sales
- the higher the number, the more efficient management is in generating profit

Strats to improve;
- reduce COGS; outsourcing, economics of scale, cheaper suppliers
- Increasing sales; marketing more promotation
- using cost centres; track expenses (profit management)

Example 1 –
A business sells 20,000 shirts for $30 each. Each shirt cost the business $20 to make. What is their gross profit ratio?
- Sales rev = 20,000 * $30 = $600,000.00
- COGS = 20,000 * $20 = $400,000.00
- Gross profit = 200, 000
- GP ratio; 200,000/600,000 = 0.3333
- Thus, 33.3%
- This means the business is making a gross return of 33.3 cents per dollar of sales
7

Example 2 –
A business has a 75% mark up on items which cost $100 to make. What is their gross profit ratio?
- Mark up is $75 so item is sold for $175, COGS is $100.
- Therefore gross profit = $75 per item.
- 75 / 175 = 42.9%
- This means the business is making a gross return of 42.9 cents per dollar of sales
Net profit ratio
net profit ÷ sales
shows the amount of sales revenue that results in net profit.
- Business is making 22 cents of net profit per one dollar of sales
- X of net profit for every dollar of sales
- If the net profit is low reduce expenses
- Higher means effectively control its costs

Strats to improve;
- Cost controls: fix and variable costs
- Reducing labour costs, make staff more effecitency
- Cutting expenses, not use over draft (high interest) use short term loan
- Cost controls
Example 1 – If a business has sales of $400, COGS $100 and $200 in other expenses, what is the net profit ratio?
- Net profit: 400 – 100 – 200 = $100
- Net profit ratio: 100 / 400
- = 25%
- This means for every dollar of sales, it is making 25 cents profit

Example 2
A business has sales of $1.2m, COGS $500,000 and $250,000 in other expenses. What is the net profit ratio?
- Net profit: $1,200,000 – 500,000 – 250,000 = $450,000
- Net profit ratio: 450,000 / 1,200,000
- = 37.5%
- Business making 37.5 cent net profit per every dollar of sales

36c

- 15c of net profit per dollar of sales sold

Return on equity ratio
Equity; the money the owners put in.
net profit ÷ total equity
- how effective the funds contributed by the owners have been in generating profit (and hence a return on their
investment).
- Higher ratio = better return from the owner, consider expansion
- Low ratio = selling off the business
- Percent

Strats to improve;
- Reduce expenses

For the every dollar, the owner recives 10c

Example 1
If a business makes a net profit of $100,000 and they have total equity of $550,000, what is their ROE?
- ROE: $100,000 / 550,000 = $0.18
- 18.18%
- This means for their $550,000 investment they have made 18.18 cents per dollar.

Example 2
If a business has a gross profit of $100,000, running costs of $20,000 and total equity of $200,000, what is their ROE?
- Net profit: $100,000 - $20,000 = $80,000
- ROE: 80,000 / 200,000 = 0.4
- 40%
- This means for their equity investment they are making 40 cents per dollar.
Owners Equity = Net Profit + Capital

Efficiency
- Minimising expense and maximising profit
Expense ratio
Total expenses ÷ sales
- amount of sales that are allocated to individual expenses
- indicates the day-to-day efficiency
- compare their results with their past performance and industry averages, budget
- The lower the percentage is better.
- If too high, monitoring and controlling their expenses and avoiding unnecessary expenses.
- X of expenses for every dollar earned

Strats to improve;
- Increase sales: marketing objectives
- Reduce labour costs
- Cost concentres;

Example 1
A business has total sales of $75,000 and expenses of $35,000. What is their expense ratio?
- $35,000 / $75,000
- = 46.7%
- This means for each dollar of sales earned, the business has 46.7 cents of expenses to pay.

Accounts receivable turnover ratio

Sales ÷ accounts receivable = to times per year (tells turn over rate is x times per year so divide 365)
- In balance sheet current assets
- Measures the effectiveness of a firm’s credit policy and how efficiently it collects its debts.
- measures how quickly debtors pay their accounts
- By dividing the ratio into 365, businesses can determine the average length of time it takes to convert the balance
into cash.
- Turn over (times per year) must be higher. Number of day must be lower
- Accounts receivable X times per year
- Average receive payments every X days

Strats to improve;
- Cash flow stratgies; discoutns for early payment, factoring
- Working capital - control of current assets; credit cheak, late fee payment,
Example 1
A business has sales of $100,000. It has accounts receivable of $25,000. What is the accounts receivable turnover ratio?
- 100,000 / 25,000 = 4
- This means the company turns over its accounts receivable 4 times in a year, or every 365/4 = 91 days.
- If the company has a 30 day credit policy, this shows that most people are not paying when they should

Example 2
A business has sales of $150,000 and accounts receivable of $10,000.
- 150,000 / 10,000 = 15
- 365 / 15 = 24.33
- Therefore they on average receive their payments every 24.33 days

Comparative ratio analysis

compare them to benchmarks such as:
- Prior years
- Industry average
- Our budget/projection
- Other ‘standards’ (our ‘rules of thumb’)
- ratios are taken at a specific point in time and business numbers (such as sales, inventory or accounts
payable/receivable) may vary greatly throughout the year.

Intended to make 10% but made 17 good.

Expense ratio; 8.2 percent
Accounts receivable turnover ratio; 49 days

Comparative ratios involves comparing business results to a bench mark. One bench mark is industry average, in this
case the expense ratio can be compared to the industry average. The expense ratio of the business is at 8%. Meaning
the business pays 8c in expense to generate every dollar of sales. Thus they are performing better than the industry
average which is at 10c per dollars. Another benchmark is the predicted accounts receivable turn over (credit policy)
compared to what accounts receivable turn over was. The accounts receivable turn over is 49 days, whilst the predicted
credit policy was 30 days. Resulting the business to have to implement strategies in order to lower the number days for
customer to pay their invoices/accounts receivable.

limitations of financial reports

DR CEN has TINA

Moral; there are limitation

Limited to interation of results for shareholders and investers
- Dont have all the information
Normalised earnings
The process of removing one time or unusual influences from the balance sheet to show the true earnings of a company
- Profit (income statement)
- Like taking off profit from wipes that was sold a lot this year

Capitalising expenses (MULITPLE CHOICE)

The process of adding a capital expense to the balance sheet that is regarded as an asset rather than an expense on the
income statement
- Capital expense; machinery
- Overstates the profit of the business

Valuing assets
The process of estimating the market value of assets or liabilities
- No fixed values of assets/liabilties

Timing issues
Financial reports cover activities over a period of time, usually one year. Therefore, the position may not be obvious if
seasonal fluctuations are relevant concerns

Debt repayments
Financial reports can be limited because they do not have the capacity to disclose specific information about debt
repayment

Notes to the financial statements

This reports the details and additional information that are left out of the main reporting documents, such as the
balance sheet and income statements
Ethical issues related to financial report
Examples of areas where ethical issues might arise:

Over estimate revenue and understate their expensure, giving a false impression of profitality.
- False impression of the true captial of the business, invester will invest thinking the business has a strong
financial postition than it acutally is.

1. valuing of assets: including non-current, inventory, accounts receivable. (what you own)
- If inventories and accounts receivable are overvalued, it will indicate an untrue working capital figure for a
business. may hide a liquidity problem.
- If debt funds are used extensively to finance activities in a business, added risk for shareholders.

2. In preparing budgets,
- expenditures and revenues are estimated.
- business overestimating expenditures and understating revenues to allow for unexpected events
- mislead shareholders and influence their decision making

Legislation for unethical business activity.

The Australian Securities Exchange (ASX);
- ensuring that businesses comply with the law on disclosure and transparency of financial information to
shareholders and the public.
- Accurate financial reports are necessary for taxation purposes

methods are in place to safeguard ethical behaviour in financial management

Audits;
An independent examination of a business’s accounting system and financial reports.
- provides an independent opinion whether the financial statements accurately present the financial position of
the business.
- ensure that the accounting standards are being adhered to.

Accounting Standards
Shareholders in a private company are legally entitled to receive financial reports annually,
- Record keeping – proper financial records must be kept for a minimum of 5 years

Assets; you own

Liblity; owe