Planning and Implementing

Process  

Planning and Implementing

Financial planning is essential to achieve goals. Determines how goals will be achieved. Process involves setting objectives, determining strategies, identifying/evaluating courses of action and choosing best alternative for firm.

a. Financial Needs

• To determine where firm is headed- goals
• Includes: balance sheets, income statements, cash flow statements, sales and price forecasts, budgets, bank statements, break-even analysis, financial ratio analysis, etc
  

b. Developing Budgets

• Provide information about requirements to achieve particular purpose. Monitoring of objectives.
• Show: cash required for planned outlays, cost of capital expenditure and associated expenses against earning capacity, estimated use and cost of inputs/inventory.
• Control: planned performance measured against actual performance- action taken.
• 3 types: operating, project or financial

1. Operating: sales, expenses, inputs- main activity of firm.
2. Project: capital expenditure, R&D
3. Financial: income statement, balance sheet, cash flow statement

c. Record Systems

• Mechanism employed to ensure data recorded and information provided is accurate, reliable, efficient and accessible. Minimising errors
  

d. Financial Risks

• Risk to firm of being unable to cover financial obligations (e.g. debts short and long term). Inability to meet debt= bankruptcy
• In assessing risk, consideration given to: amount of borrowings, terms, interest rate, and required assets needed to fund operations. Higher the risk= greater expectation of profits or dividends- to minimise risk: consider profit generated to cover costs.

e. Financial controls

• Problems/losses prevent achievement of goals. Common causes: theft, fraud, damage or loss of assets and errors in record systems.
• Controls: ensure plans determined lead to achievement. Budgets- assist firm to estimate resource requirements- compare to actual.

Debt Finance

• Funds usually readily available and interest is tax deductable- reducing cost.
• Risk/return must be considered when determining whether to use debt/equity
• Greater level of risk with borrowing

Apple’s short-term debt was approx. $20.3billion and long-term approx. $21.4billion (September 2013).

Equity  

Equity Finance

• Most important source: - do not have to be repaid at set date. Generally safer than debt. Paid back to owners- drawings, dividends.
• Requires sufficient profits to be made to continue operating

• Total Shareholder Equity:$124,020m (2013) and $117,711m (2012)
• Apple paid total of $10.5billion in dividends in 2013 compared with $2.5b in 2012

Matching Terms and Sources of Finance to Business Purpose

Firms must find source most appropriate to fund activities arising from these decisions. Influenced by:

1. Terms of Finance: must be suitable for structure and purpose of funds.
2. Cost of each source of funding: whether from equity capital or debt capital such as borrowings must be determined. Rate of return also considered
3. Structure of business: Small firm- fewer opportunities for equity.
4. Costs: incl. set up costs, interest rates, etc. Measured for each of available sources of finance- costs fluctuate (depending on market/economy)
5. Flexibility of source: Firms require sources to be variable so that if firms have excess funds, borrowings paid off quicker, increased or renewed conditions change.

1.  Level of Control maintained by firm: If lender requires security over asset- firms ability to consider future financial possibilities is reduced.

Limitations of Financial Report

Caution must be exercised in reading information. Misleading= impacts on decision making/puts firm at risk.

• Financial reports used in caution: E.g. Special circumstances may distort analysis of Q results. E.g. 2001 natural disasters and weather events (cyclone Yasi) adversely affect profitability

Ethical Issues Related to Financial Reports

Generally accepted that financial decisions must reflect objectives of firm in the interest of owners or stakeholders.