hsc business studies notes sh

8/17/2019 HSC Business Studies Notes SH

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BUSINESS STUDIES Year 12

SHADDY HANNA

EPPING BOYS HS

†


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DISCLAIMER

The following set of notes has been compiled by Shaddy Hanna in the years 2012-2013.

These notes were intentionally written out for personal use and NOT as a teaching resource. For this reason,bear in mind, that the quality of these notes were, and never have been, intended for publishing purposes.

Thus, due to the purpose of these notes, they are definitely not a full proof reference to the content covered in

the Board of Studies Higher School Certificate Syllabus for this subject, and should not be used as a point-of-

call reference. They were written as a personal reference and at times, ‘cheat sheet,’ to help with personal

memory. On this note, use them at your own discretion.

Along the same notion, these were never intended to be sold. If you have been sold these set of notes, please

contact the seller and ask for a refund.

Finally, all ideas and diagrams expressed in this sheet are not my own and have been adapted from the

references listed at the end of this document. For more thorough explanations on any of the topics covered in

this document, refer to these textbooks.

A PERSONAL WORD FROM ME (:

If you’re reading this, you’re probably a year 12 student about to sit their HSC this year. You may skip through

all this, and that doesn’t bother me, but if you haven’t, I hope this advice can be helpful.

The tip to succeeding in the HSC isn’t a high ATAR. The reality is, that ‘succeeding in the HSC’ comes down to

what you make out of this last year of high school, and every next one that follows. And that goes beyond the

ATAR you get. So what does make a successful year? Build your character. The rant will probably start about

now, just because I can since I’m writing this, and you’re choosing to read this, lol. By the way, please don’t get

offended by my use of Bible quotes to back up what I believe. I’m a proud Christian and profess that the

wisdom I’ve learnt in the last few years of my life are straight from the Bible. I don’t share them to arrogantly

‘bible-bash’ you. Again, remember, whether you choose to skip this or not, is up to you. So here goes:

Don’t be remembered as the kid who was competitive all year round, who screwed others to get themselves

ahead, or maybe, you didn’t actively screw others but you chose not to help them. I’m not trying to judge

you, believe me, I’m the last person to do this. I just want to give you advice I wish more people heard when I

was in high school. This quote from the bible well captures what I mean by the power of indifference:

So whoever knows the right thing to do and fails to do it, for him it is sin

Don’t be remembered as the kid who cared more about his ATAR then the people around them. Let me

frame it this way, if you were to die tomorrow, what would people remember you for? What legacy do you

want to leave behind? That you got a 99 ATAR? That you got a band 7 in Ext 2 Maths? Here’s another quote

from the bible which has often spoken truth into me:

Do not store up for yourselves treasures on earth, where moths and vermin destroy, and where

thieves break in and steal … For where your treasure is, there your heart will be also.

Don’t be remembered as the kid who never took anything serious. There’s a lot to reap from hard work

which extends beyond an ATAR. Hard work and diligence is what build character.

In Christ ,

Shaddy Hanna


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TABLE OF CONTENTS

TABLE OF CONTENTS 1

OPERATIONS 5

ROLE OF OPERATIONS M ANAGEMENT 5

STRATEGIC ROLE OF OPERATIONS MANAGEMENT 5

GOODS AND/OR SERVICES IN DIFFERENT INDUSTRIES 5

I NFLUENCES ON OPERATIONS 6

GLOBALISATION 6

TECHNOLOGY 7

Q UALITY EXPECTATIONS 8

COST-BASED COMPETITION 8 GOVERNMENT POLILICES 8

LEGAL REGULATIONS 8

ENVIRONMENTAL SUSTAINABILITY 8

CORPORATE SOCIAL RESPONSIBILITY 9

OPERATIONS P ROCESS 10

INPUTS 10

TRANSFORMATION PROCESSES 11

OUTPUTS 13

OPERATION STRATEGIES 14

PERFORMANCE OBJECTIVES 14

DESIGN AND DEVELOPMENT 14 SUPPLY CHAIN MANAGEMENT 15

OUTSOURCING 16

TECHNOLOGY 16

Q UALITY MANAGEMENT 16

INVENTORY MANAGEMENT 17

OVERCOMING RESISTANCE TO CHANGE 18

GLOBAL FACTORS 19

MARKETING 20

ROLE OF M ARKETING 20

STRATEGIC ROLE OF MARKETING GOODS AND SERVICES 20

PRODUCTION, SELLING, MARKETING APPROACHES 20

TYPES OF MARKETS 22

I NFLUENCES ON M ARKETING 23

FACTORS INFLUENCING CUSTOMER CHOICE 23

CONSUMER LAWS 23

ETHICAL ASPECTS OF MARKETING 24

M ARKETING PROCESS– DEVELOPING A MARKETING PLAN 25

SITUATIONAL ANALYSISX 25 MARKET RESEARCH 26


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ESTABLISHING MARKET OBJECTIVES 26

IDENTIFYING TARGET MARKETS 27

DEVELOPING MARKETING STRATEGIES 27

IMPLEMENTATION, MONITORING AND CONTROLLING 27

M ARKETING STRATEGIES 28

MARKETING SEGMENTATION 28 GOODS/SERVICE DIFFERENTIATION AND POSITION 28

PRODUCTS 28

PRICE 29

PROMOTION 30

PLACE/DISTRIBUTION 31

PEOPLE, PROCESSING AND PHYSICAL EVIDENCE (ADDITIONAL P’S TO MARKETING MIX) 32

E-MARKETING 32

GLOBAL MARKETING 33

FINANCE 34

ROLE OF F INANCIAL M ANAGEMENT 34

STRATEGIC ROLE OF FINANCIAL MANAGEMENT 34

OBJECTIVES OF FINANCIAL MANAGEMENT 34

I NFLUENCES ON F INANCIAL M ANAGEMENT 36

INTERNAL SOURCES OF FINANCE 36

EXTERNAL SOURCES OF FINANCE 36

FINANCIAL INSTITUITIONS 39

INFLUENCE ON GOVERNMENT 40

GLOBAL MARKET INFLUENCES 40

P ROCESSES OF F INANCIAL M ANAGEMENT 41

PLANNING AND IMPLEMENTING 41

MONITORING AND C ONTROLLING 43

FINANCIAL RATIOS 44

LIMITATIONS OF FINANCIAL REPORTS 46

ETHICAL ISSUES RELATED TO FINANCIAL REPORTS 46

F INANCIAL MANAGEMENT STRATEGIES 47

CASH FLOW MANAGEMENT 47

WORKING CAPITAL ( LIQUIDITY ) MANAGEMENT 48

PROFITABILITY MANAGEMENT 50

GLOBAL FINANCIAL MANAGEMENT 51

HUMAN RESOURCES 53

ROLE OF H UMAN RESOURCE M ANAGEMENT 53

STRATEGIC ROLE OF HRM 53

OUTSOURCING 53

K EY INFLUENCES 54

STAKEHOLDERS 54

LEGAL – THE CURRENT LEGAL FRAMEWORK 55

SOCIAL 58 ECONOMIC 58


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TECHNOLOGICAL 58

ETHICS AND CORPORATE SOCIAL RESPONSIBILITY 59

H UMAN RESOURCES P ROCESSES 60

ACQUISITION 60

DEVELOPMENT 61

MAINTENANCE 61 SEPERATION 62

H UMAN RESOURCE STRATEGIES 63

LEADERSHIP STYLE 63

JOB DESIGN 63

RECRUITMENT 64

TRAINING AND DEVELOPMENT 64

PERFORMANCE MANAGEMENT 65

REWARDS 66

GLOBAL 66

WORKPLACE DISPUTES 67

E FFECTIVENESS OF HU MAN RESOURCE M ANAGEMENT 68

INTERDEPENDENCE 69

I NTERDEPENDENCE WITH OTHER KEY BUSINESS FUNCTIONS 69

OPERATIONS AND HUMAN RESOURCES 69

OPERATIONS AND MARKETING 69

OPERATIONS AND FINANCE 69

HUMAN RESOURCES AND MARKETING 70

HUMAN RESOURCES AND FINANCE 70

FINANCE AND MARKETING 70


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OPERATIONS

ROLE OF OPERATIONS MANAGEMENT

Operations: the creation of goods and the provision of services by a business

The transformation of inputs into outputs.

STRATEGIC ROLE OF OPERATIONS MANAGEMENT

Strategic decisions: those that affect the business in the long term

o Gaining a long term competitive advantage over competitors by improving productivity,

efficiency and quality of outputs

COST LEADERSHIP

Business aims to be have the lowest manufacturing costs in the business

o Economies of scale

Increase size of operations = reduce in average cost of making each item

o Using cheaper inputs

o Maximising efficiency, by minimising waste

o Implementing better technology = increased productivity

o Outsourcing product components

DIFFERENTIATION

Business aims to create unique outputs in industry

o Better quality products

o Custom designed outputs (more variety to suit different specific needs)

Incurs higher cost in production

o More features, application and versatility

o Clever design

Products can demand a higher price in the market if successful

o Yet consumers may switch when competitors imitate leader’s innovation

GOODS AND/OR SERVICES IN DIFFERENT INDUSTRIES

Goods Services

Physical, tangible Intangible

Capital intensiveLabour intensive

People-focused

Measurable Hard to measure

Difficult to modify Easy to modify

Sectors of the economy:

o Primary (extracting): Provision of raw materials e.g. mining, fishing

o Secondary: Use inputs to change the shape of product e.g. dishwashers

o

Tertiary: Provision of a service e.g. transportation, logisticso Quaternary: Provision of intellectual activities e.g. teachers, government


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INFLUENCES ON OPERATIONS

GLOBALISATION

The integration and interdependence of different countries and their economies

o Gives consumers the opportunities to purchase products from a wider market

o Leads to the development of a worldwide economy

GLOBAL BUSINESS

A business that has integrated with economies of a number of different countries

o Leads to: Increasing flow of goods, services, people, finance, information around the world.

May offer the business tax incentives

TNC’s gain benefits from global web of operations:

o Exploits the competitive advantage that each country has to offer:

Manufacturing: where inputs and labour are cheap (e.g. developing countries)

Raw Materials: from where they are abundant

Finance: controlled from headquarters in one of the World Finance centres - Wall St

Distribution: To consumers in developed nations

DIFFERENT CURRENCIES

A depreciation of the AUD against the currency of the country inputs are being sourced from will lead

to rising costs

Hedging: is used to avoid the risk of fluctuations in the value of currency.

o

Businesses sign derivatives (a purchase contract) at the current rate of currency.o Businesses avoid transaction exposure by transacting between subsidiaries in the same

currency

Transaction Exposure is the risk that comes with fluctuations in currency

Subsidiary is a business that is owned by the global corporation that supplies inputs

Derivatives are special contracts used between global businesses.

TRADE AGREEMENTS

Treaties made to reduce globalisation barriers between economies and promote economic

integration

o

Bilateral Agreement: between two (2) countries

o Multilateral Agreement: between more than two (2) countries

When a business is a part of a Trading Bloc, corporations gain reductions in trading restriction

o The North American Free Trade

o South East Trade


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TECHNOLOGY

The development of new methods of production/equipment

Businesses may gain access to tech through joint venture strategic alliances

o Different Cultures

Use of local experts (resolve culture and communication clashes)

Advantages

o More efficient reducing waste

o Save time

o Increase productivity

o Lower cost

o Increase quality

Factors that could affect decision to use tech

o High initial cost

o Speed of change

o

Redundancy in staffingo Need to acquire new staff with appropriate IT skills

ROBOTICS

The development of programmable/automatable machines w/ sensors to detect changes in

environment

o Complicated or Repetitive Tasks

o Dangerous or Hazardous Work

Benefits

o Increased efficiency

o

No boredom of repetitive work – no HR

o No wages to be paid

Limits

o Power source

o Mechanical failure/repair

Have become desirable due to their cost-effective working conditions

CAD

Computer aided design allows architects/engineers to design more efficiently on computers

o

More effective visual representation, alterations can be made easily. Steps involved:1. Receive info from clients

2.

Make comments

3.

Make alterations

CAM

Computer aided manufacture uses electronic data to manufacture/produce products

o Ensures less error involved

o Fewer mistake


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QUALITY EXPECTATIONS

Customers relate price to quality, and often have certain expectations of:

o Durability

o Reliability

o

Fit for purpose

Marketing relies on operations to fulfil consumer expectations promoted

o Brand name affecting consumer choice

COST-BASED COMPETITION

Business are influenced by competitors to decreases prices

o Here, the operations unit is influenced to decrease costs so they can lower prices and

maintain the profit margin

o Achieved through a cost-leadership strategy

GOVERNMENT POLILICES

AUSTRADE: supports Aus. businesses that are innovative in operations and able to develop products

to be exported.

AUSFTA: trade policy to promote trade relationships

LEGAL REGULATIONS

Legal obligation of operation managers to be aware of laws and ensure business complies with them

Legal regulations are put in place to promote safe and fair conduct of businesses

o

Trade practices

o WHS

ENVIRONMENTAL SUSTAINABILITY

Limit the negative impact business operations has on the environment

Stakeholders pressure businesses to incorporate sustainable resource use:

o Protect resources from depletion

o Ensure that operation processes are sustainable

o Store/remove waste appropriately


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CORPORATE SOCIAL RESPONSIBILITY

CSR is the duty of care a business has towards its stakeholders

o Extension of the triple bottom line concept – financial, social and environmental evaluation

o Such steps can often have a great influence on operations not only socially and

environmentally, but also economically in the sense that by promoting itself as a socially

responsible corporation, the business can indirectly increase brand awareness and sales.

ETHICAL RESPONSIBILITY: AN EXTENSION TO LEGAL COMPLAIANCE

Legal compliance refers to developing operations processes and strategies to obey the law

CSR can be measured by a business’ degree of ethical responsibility

o Making decisions that are not only legally correct, but also morally right

o Businesses should aim to make decisions which extend beyond the law, and reflect the

intention and “spirit” of the law portray the business as a good corporate citizen

Following international labour standards that come from the International Labour Organization (ILO) o Devoted to promoting rights at work and encouraging equal employment opportunities

Code of conduct: voluntary set of guidelines of the behaviour of a business to benefit stakeholders

o Producing value-for-money quality products

o Improve customer service

ENVIRONMENTAL SUSTAINABILITY AND SOCIAL RESPONSIBILITY

CSR can be easily assessed by how environmentally sustainable a business is

o Business should not endanger the environment for means of economic growth

o Requires business to evaluate the full environmental effects of their operations

CSR is also measured by how socially responsible a business can conduct itself

o Trying to improve the quality of life of all stakeholders

o By demonstrating social responsibility, a business demonstrates that it values its social and

environmental responsibilities even greater than their financial objectives

Furthermore, this can in turn increase sales and brand awareness for a business

Environmental sustainability and social responsibility can be achieved by:

o Minimize negative impact on environmental – adopting greenhouse measures

o Adopting policies of conservation of waste, recycling and restoration

o Comparing and tracking social responsibility through Aus. SAM Sustainability Index

Determines ecological sustainability and social responsibility of Aus. Businesses

o

Comparing and tracking environmental sustainability through Reputex Measures how a business incorporates clean technology/manages Carbon emissions


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OPERATIONS PROCESS

Operations processes: the activities involved in the transformation of inputs into outputs

Value adding analysis: allows managers to closely examine transformation stages and determine how

much value each stage adds.

‘Top down’ approach: operations sector interprets and aims to play its role in businesses objectives

Systems management approach: focuses on integrating operations with other business sectors

INPUTS

TRANSFORMED RESOURCES

Inputs that are changed and converted into something else as:

o an input for other businesses (component)

o finished good or service

RAW MATERIALS

Supplies used up in operations are transformed throughout the TP to form a product

o They are usually current assets (not kept for > 12 months)

INFORMATION

Information can be a transformed resource since operations may transform the information

o E.g. Market research takes data from a client and transforms it for them to understand

Information is also processed as an input when it is storedo E.g. Archives and libraries which are paid to store data.

CUSTOMERS

Customers are a transformed resource when the operations process may be changing their location,

physiological or psychological state.

o E.g. hospitals and surgeons transform a customer’s physiological state

o E.g. airlines and bus companies transform a customer’s location

o E.g. theme parks and cinemas transform a customer’s psychological state

TRANSFORMING RESOURCES

Resources that remain in the business and are applied to the inputs to change them/add value

HUMAN RESOURCES

Mental and physical labour who apply knowledge, skills and effort into inputs

FACILITIES

Buildings, land, equipment and tech etc.

o Non-current assets (kept for > 12 months)


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TRANSFORMATION PROCESSES

Activities which determine value addition

Production method

o Job

Produced individually

Unique customisation

o Batch

Produced in bundles

Flexible production

o Flow:

Continuous production

Low variation of product

INFLUENCE OF THE 4 V ’S

VARIETY

The variety of different models offered in the product

o High variety usually results in batch or job production

VOLUME

The number of products/services produced by the operation

o High volume (mass production) usually results in a more standardised product

VARIATION IN DEMAND

Variation in demand can change according to time e.g. seasonal products

o Operations needs to be flexible to increase/decrease output

VISIBLILTY

The degree to which customers can see the operations in action

o High level = service based e.g. restaurant

o Low level = manufacturing e.g. beef producer

Job Batch Flow


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SEQUENCING AND SCHEDULING

Tools used to identify all steps in the operations process and organise them into the most efficient

order to complete

GANTT CHARTS (SCHEDULING)

Scheduling: is a term used to indicate a detailed timetable of what work needs to be done

Records the number of tasks in the project

Records the time needed for each project

Allows the business to compare planned

progress with actual progress

Does not show interdependence of tasks

CRITICAL PATH ANALYSIS (SEQUENCING)

Sequencing: the planning of activity that decided on the order in which the work is to be performed

Shows the interrelationship of tasks

Critical path time: shortest time for project to complete

o Longest path taken reflects the longest process which must

complete to finish project

TECHNOLOGY, TASK DESIGN AND PROCESS LAYOUT

TECHNOLOGY

Can lead to sustainable competitive advantage

Process technologies are the improvements in the tech components used in operations

Product technology is the innovation in the product themselves

Flexible manufacturing systems (FMS): use tech to perform multiple tasks at once

TASK DESIGN

Task analysis is the breakdown of all the tasks in the entire transformation process

Task design then determines how the task will be performed

o Allows ongoing analysis of each step, ensuring improvement in productivity

PROCESS LAYOUT

Process layout: where all operations activities are arranged by what they do.

o Generally used in service and human intensive industries

Product layout: where machinery is arranged in sequential order of production – assembly line

Facilities layout planning: the physical layout of the business’ factory/office


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MONITORING, CONTROL AND IMPROVEMENT

Monitoring: involves collecting information about the performance of the operations process

o Aims to ensure operations process are running efficiently and effectively

Control: involves adjusting operations process to keep observed performances as close to intended

Improving: analysing and determining what can be changed to improve the operations process

OUTPUTS

The purpose of the operations process is to produce an output that has a value to the customer,

greater than the cost of the inputs

CUSTOMER SERVICE

Intangible output that requires human contact

Can increase consumer satisfactiono Contributes to the competitive advantage

Maintains 80/20 relationship

o 80% of revenue comes from 20% of the customer base

WARRANTIES

An assurance that a business stands by the quality claims of their product

Retailers must comply with warranty by repairing or replacing the product

Under the Fair Trading Act 1987 and Competition and Consumer Act 2010 products must:

o Have a level of quality comparable to price and product description

o

Suitable for the purpose they are used for

o Match the product description

o Free from defects or faults


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OPERATION STRATEGIES

The activities and specific decisions about how the business produces goods/supplies services.

PERFORMANCE OBJECTIVES

Key area of focus for operations

o Product differentiation strategy through performance objectives

How to remember? FCC-QSD

FLEXIBILITY

Ability to deal with market changes and variation in demand

CUSTOMISATION

Reproducing products to match customers desire

COST

Keeping costs as low as possible

o Fixed: do not change as output changes

o Semi-fixed: parts are fixed and parts are variable

o Variable: change as output changes

o Direct: directly related to production

o Indirect (overheads): indirectly related to outputs e.g. salaries of admin staff

Break-even point: determines the amount of sales necessary to begin making a profit

o By reducing costs, breakeven point is reduced and more profit is made at lower output levels

Operating expense ratio: the cost incurred per $1 of sale =

× 100

Average costs: the cost incurred per unit produced =

Q UALITY

Quality must be high

Durability, reliability, aesthetics, features, fit for purpose

SPEED

Speed is related to productivity (

)

o Increased by tech (CAD, CAM or robotics)

o Production line will move as fast as its slowest machine

Risk of increasing speed

o Quality may suffer

DEPENDABILITY

Reliability of the product


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DESIGN AND DEVELOPMENT

New products = competitive advantage

o Lengthy/expensive process

o Risky since not all products end up being produced

Design includes: activities such as identifying an opportunity, screening the ideas and basic costing.

Development includes: building a prototype, testing a sample market, making technical changes, trial

runs, business feasibility study.

SUPPLY CHAIN MANAGEMENT

The stream of processes from receiving an initial order and distributing the product to a customer

o Includes all businesses that are linked to the supply of the product to the consumer

o Outsourcing of the management of supply chain has become more popular

Lead time: the time it takes for a supplier to provide the consumer with the product ordered

o

Shorter lead times lead to more flexible purchasing

LOGISTICS

The transport of physical inputs, outputs and resources through the supply chain

Goal is to achieve an efficient steady flow of materials

o Correct and timely info is crucial

o Strategies to save time/control the flow of materials

o Increased complexity of supplying business with materials due to globalisation

Transport logistics: the organisation of the physical movements of products from their point of origin

to their destination.

E-COMMERCE

The use of internet to both buy and sell products

o Has increased B2B and B2C interaction

o Part of E-business: the use of internet to carry out business functions

E-tailing: businesses that only use virtual stores to sell products through a website

Electronic data interchange (EDI): use of tech (barcodes, scanners etc.) to monitor stock

GLOBAL SOURCING

Where a business seeks to find the most cost-efficient location for manufacturing

o Includes tax incentives to encourage globalisation

o Exploit cost advantages offered by cheaper inputs

Businesses may decide to vertically integrate: take over a business that can supply inputs

o Ensures a secure supply of resources and inputs


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OUTSOURCING

Outsourcing involves the transfer of part of (or all) a business function to an external 3 rd-party business

Advantages Disadvantages

Access to specialist knowledge and expertise

and better equipment/technology

Breakdowns in external client will affect

operations

Increased speed and quality of outputs Loss of control over quality and reliability

Free up resources to be used in the core

function of the business

Slower lead time/response to market

changes

TECHNOLOGY

The equipment and knowledge that are available to help business perform functions or produce

o Bleeding edge: so advanced there is a high risk/uncertainty of customer use

o Leading edge: (cutting edge) will give the company a competitive advantage

o

Established: tried and proven = reliable

QUALITY MANAGEMENT

Ensuring that the outputs of a business are consistent, durable and reliable

o Allows business can gain competitive advantage

Government Legislation:

o Competition and Consumer Act 2010

o Fair Trading Act 1987

QUALITY CONTROL

Involves checking transformed and transforming resources in all stages of operations:

o Feed forward: the use of careful planning before product, to prevent any problems occurring

o Concurrent: used during manufacturing process – real time control

o Feedback: after production or delivery of the service

Establishing evaluation procedures and setting standards

QUALITY ASSURANCE

Establishing and using a set of procedures (standards) to prevent product defects from occurring

o

ISO (service-based industry) are examples of certificates Quality Circles: a group of employees from diff sectors to discuss issues arising in the workplace

Code of Practice: the min. level of service registered members of a profession are expected to provide

o Set up by professional associations e.g. the Institute of Chartered Accountants.

QUALITY IMPROVEMENT

TQM approach relies on continuous improvement in all areas, not just operations

Zero defects = brand loyalty = market reputation = competitive advantage gained

Quality circles to present findings and pressure management

Benchmarking (average industry performance): business can compare themselves with industry

World’s Best Practice: firms can compare performance to high productivity standards world wide


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INVENTORY MANAGEMENT

Inventory management: the management of inventory in the business to maximise effeciency

o To have enough stock available as it is needed, but not too much

o To identify stock that is not selling well

Monitoring:

o To identify and sell off slow—moving or close-to-obsolescent stock

o To avoid accumulating dead stock (used by dates, damaged stock etc.)

Inventory: the raw materials and inputs that are used in the production process

Stock: the businesses transformed resources

HOLDING STOCK

The stock a business holds as a reserve to cover in case of interruptions or unexpected demand

Advantages Disadvantages Stock is ready to use Capital intensive (dead cash)

No delays, quick lead time

Cost of holding stock – warehousing etc.

Planned purchases Accumulating obsolescent (dead) stock

No need to rely on suppliers

LIFO (LAST-IN-FIRST-OUT)

The stock purchased most recently is sold first (Last stock delivered is the first used and sent out)

o Used for goods that have no use-by-date

Income Statement: COGS is higher = lower profit = less tax

Balance Statement: stock= older value, therefore is lower than actual cost

FIFO (FIRST-IN-FIRST-OUT)

The stock ordered first, will be sold first

o Used for perishable goods

Income Statement: COGS is lower = higher profit = higher tax

Balance Statement: Closing stock is higher, therefore current assets is higher

JIT (JUST-IN-TIME)

Holding minimal stock and only ordering as required

o Improves liquidity and efficiency of operations process

o Lower storage costs and less chance of obsolescent stock

o More flexibility to respond to changes in market


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OVERCOMING RESISTANCE TO CHANGE

Force-field Analysis: change occurs when

>

Driving forces: the push for the need for change

Restraining forces: those that hold back from change

PURCHASING NEW EQUIPMENT

Long term reductions in costs

Decreased time delays

Faster decision making

REDUNDANCY PAYMENTS

When an employee is made redundant, businesses are legally obliged to pay redundancy payments.

RETRAINING

May take extended period of time to re-gain productivity once re-trained

REORGANISING PLANT

Requires closure of the business while equipment is physically moved

o Temporary loss of sales

INERTIA

The resistance to change is caused mainly by fear and uncertainty of deskilling and being job less

External driving forces to overcome inertia include:

o Training programs

o Demographics and attitudes in the work place

o Flatter management structure

o Introduce change agents


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GLOBAL FACTORS

GLOBAL SOURCING

Less expensive inputs from other countries - low cost region (LCR)o Business may use global web of operations to reduce costs – use of subsidiaries

Manufacturing in developing countries

Marketing and distributing in developed countries

Finance from country with cheapest interest rates

Disadvantages

o Time taken to research suppliers

o Cultural barriers

o Increased lead time

ECONOMIES OF SCALE

The larger business operations are, the lower cost of producing individual cost becomes

o Buying bulk orders of supplies (inputs)

o Using equipment to total capacity

Diseconomies of scale can occur however

o Inefficiency due to poor communication

o Complex and dysfunctional management

o Loss of direction/slow decision making – not flexible = not adapting to market changes

To overcome diseconomies, expand through joint ventures or strategic alliances

SCANNING AND LEARNING

Monitoring the global business to identify critical global trends

o Global demand of the product

o Supply of transformed and transforming resources

o Advancements in product and process tech

o Emergence of new competitors

o Changes to government policies

o Changes to suppliers of inputs – (quality, price, delivery delays etc.)

RESEARCH AND DEVELOPMENT

The strategy associated with the creation of new products and the improvement of existing ones

o Crucial to the long term survival of any business

o Process innovation: development of operation processes to bring benefits to the business

o International patent: gives business 20 years protection from any organisation copying idea

Advantages Disadvantages

Provide higher profit margin

May lead business from prime function

Lead to quality improvements Opportunity cost

Gain competitive advantage May not yield financial return


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MARKETING

ROLE OF MARKETING

Developing a product and implementing a series of strategies aimed at correctly promoting, pricingand distributing the product to a core group of customers

Develop and implement strategies that generate revenue and sales for the business

o Researching the changing nature of consumer tastes and preferences

o Development of products to provide consumers with improved standard of living and choice

STRATEGIC ROLE OF MARKETING GOODS AND SERVICES

Society

o Increased employment

o Increased choice

o

Increased standard of living

Business

o Increased brand awareness

o Increased market share

o Increased revenue streams

CHOICE

Competitiveness drives businesses to produce unique products

As such, customers are provided with increased range of choice

STANDARD OF LIVING

R&D has promoted the development of better products, to increase the quality of life

Innovation has led to newer, and a wider range of products provided by business

EMPLOYMENT

Provides a source of income and employment to many Australians

o Business employ labour to provide a product, salesmen sell the products and finance

BRAND AWARENESS

Allows a product to remain in the consumers subconscious to influence consumers’ purchasing choice

Achieved through strong and effective marketing campaigns

Increased brand awareness = stronger market share

MARKET SHARE

Refers to the percentage of total sales a business has compared with competitors in the market

Increased market share = increased sales and profitability

REVENUE STREAMS

Great sales due to marketing relates to access to greater revenue streams


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PRODUCTION, SELLING, MARKETING APPROACHES

PRODUCTION APPROACH – EARLY 1900’S

Relies on the view that consumers base their purchasing decision on the quality of the product

Product was the element of the marketing mix that was emphasised

o Promotion and place insignificant

o Price reflects the quality of the product

SELLING APPROACH – MID 1900’S

Relies on the view that business will be successful if they promote the benefits of the product

Promotion was the element of the marketing mix that was emphasised

o Product (small emphasis) – used to differentiate the product

o Price and place insignificant

MARKETING APPROACH – LATE 1900’S

Relies on the view that the consumer is at the core of all business activities

o All actions of the business should be aimed at meeting the needs of the customer

All elements of the marketing mix are needed to ensure customer satisfaction:

o Product - quality and features to attract the customer

o Price - to encourage the customer to buy the product

o Promotion - so that the customer knows about/desires the product

o Place - so that customer gains access of the product to buy it


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TYPES OF MARKETS

RESOURCE MARKETS

Where the product and sale of raw materials occur

o

E.g. gold, silver, aluminium, sugar, wheat etc.

o Produced by BHP Billiton, Rio Tinto etc.

Labour is traded on the resource market – as it is a key factor of production

INDUSTRIAL MARKETS

Where goods that are used as supplies in the production process are traded

o The outputs of another business are used as inputs for a business with more transformed

resources

o E.g. Aluminium to build cars

INTERMEDIATE MARKETS - WHOLESALERS

Where businesses retail products, produced by other businesses, to sell retail businesses

Involves purchasing in bulk to offset costs and then distributing the goods in smaller quantities to

retailers

CONSUMER MARKETS

Markets where businesses sell directly to the consumer

o Most widely recognised markets

o

E.g. Harvey Norman, David Jones, Myers etc.

MASS MARKETS

Where the products are aimed at all consumers irrespective of age, gender, income, location

o Usually includes goods that appeal to all consumers

Water, petrol, electricity etc.

MARKET SEGMENTS

Market segmentation refers to the dividing of the mass market to smaller sub-categories

o

E.g. milk is a mass market product, yet low-fat and skim milk are produced to appeal to asegmented market of “healthy-wise individuals”

NICHE MARKETS

A smaller section of a larger market segment

Have a very specific customer base

Due to less sales volume, businesses compensate with higher prices to retain profitability

o E.g. rice milk


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INFLUENCES ON MARKETING

FACTORS INFLUENCING CUSTOMER CHOICE

PSYCHOLOGICAL FACTORS

The personal characteristics of a consumer that influences their behaviour:

o Motivation: the belief of the need to buy a particular product.

Maslow’s hierarchy of needs shows that a consumer must first fill their basic needs

o Attitudes: what we believe, feel about something and how we respond to it

o Perception: the opinion that a customer has about the wider world (and the product)

Different people have perceive the same thing differently

Marketing can have a slight influence on a consumers perception

o Personality/Self-Concept: what people buy reflects how people see themselves

o Lifestyle: the daily activities and routine of consumers, how they spend their day

o

Learning: the knowledge and experience a consumer develops in the marketplace

E.g. satisfaction from previous purchases, brand awareness from promotions etc.

SOCIOCULTURAL FACTORS

The influences on a consumer’s choices from their society, culture and religion.

Culture: defined as the society’s values, beliefs and customs

Subculture: subset of people within the culture which share specific values

o Socioeconomic status: subdivision by factors as income, education and occupation

o Family: values/customs that are specific to the individual family

o Reference the groups a consumer identifies themselves in e.g. religion – Christianity etc

ECONOMIC FACTORS

A person’s economic situation influences the products they will buy

o Ability to borrow, level of income, savings/inheritance etc

GOVERNMENT REGULATIONS

Fiscal policy: the use of annual budget to regulate consumer spending

o E.g. increasing tax discourages consumption of products

Monetary policy: the RBA influencing interest rates to regulate money supply

Government laws and regulations: such as the legal age limit to purchase alcohol.

CONSUMER LAWS

Laws that protect the interest of consumers within the business environment

Business must market their products according to strict legislation which attempts to promote

fair/competitive behaviour in the marketplace

o Competition and Consumer Act 2010 (Cwth)

o Fair Trading Act 1987 (NSW)


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DECEPTIVE/MISLEADING ADVERTISING

Because of advertising’s benefits, some businesses attempt to use it deceptively

o Giving misleading information (about product features or contents)

o Overstating the benefits of the product

o

Offering discounts/offers that do not existo Bait and Switch advertising – switching the consumers interest to a more profitable item

PRICE DISCRIMINATION

Giving preference to some retail stores by providing them with stock at lower prices

Exceptions:

o Bulk buying where stores are discounted for purchases of larger stock

o The retailer is trying to temporarily meet local competitors prices

IMPLIED CONDITIONS/WARRANTES

By law, a business must refund or exchange any faulty good when purchased regardless of warranty

RESALE PRICE MAINTENANCE

Manufacturer cannot discriminate against retailers for not selling at RRP

ETHICAL ASPECTS OF MARKETING

Not enforceable by law

Rely on the goodwill of stakeholders in the business

TRUTH, ACCURACY AND GOOD TASTE IN ADVERTISING

Information in advertisements must be truthful, accurate and in good taste

Some businesses deliberately implement controversial advertisements to generate further publicity

PRODUCTS THAT MAY DAMAGE HEALTH

Government restrictions on the provision of certain products which may act as a health detriment

o These goods are known as “sin” goods e.g. cigarettes and alcohol

ENGAGING IN FAIR COMPETITION

Examples of unfair competitive behaviour:

o Price Fixing between major competitors to reduce competition

o Loss Leader undercutting small competitors in the short term forcing them to engage in a

price war

o Misleading Advertising

SUGGING

Disguised marketing process that use questions in a service to determine the needs of the consumer

and offer the consumer a product that the business believes caters to the consumer’s desires.


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MARKETING PROCESS – DEVELOPING A MARKETING PLAN

Planning allows a business to examine its current position in the market, strengths, weaknesses and

the most effective method of implementing such changes

SITUATIONAL ANALYSIS

Provides the firm with an opportunity to examine its current position within the markets:

o Product market share

o Future trends and changing consumer tastes and preferences

o Behaviour of competitors

SWOT

Examines internal and external environment of the business to develop strategies to:

o Strengthen the organisations weaknesses and maintain it’s strengths

o

Handle possible opportunities/threats Strengths/Weaknesses - Internal business environment

o The business’ reputation, financial stability (liquidity), quality of products et c

Opportunities/Threats - External business environment

o Degree of competition in the market and changing trends in the marketplace

PRODUCT LIFE CYCLE

Examines current position of a product in the marketplace

ESTABLISHMENT PHASE

When the new product is launched

o Emphasis on building customer loyalty

o Little awareness in the market = low sales volume = limited profits

o Costs remain high = small profit margin

Appropriate pricing strategies for businesses to establish market share

o Penetration pricing: low price to establish quick entry

o Prestige pricing: to establish an image of high quality to consumers

GROWTH PHASE

Brand awareness and customer loyalty grows

Strong growth in sales volume, revenue, profitability and market share

Emphasis on more promotional activity to combat competitors = higher costs

MATURITY PHASE

Product is well established = consistent sales, revenue

Increased consumer choice = limited prospects for growth

New marketing strategies to establish a competitive advantage

o Product differentiation: price, quality, after-sales service etc.


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POST-MATURITY PHASE

Final stage of product life cycle

o Key decisions made by management to affect the survival of the product

o More competitors in the market = lower sales volume = lower profit margin

Decline: Production may be ceased o The product no longer meets the needs of consumers

Renewal: aimed at revitalising the product

o Re-establishing competitive advantage

o New marketing strategies to sustain interest - possible new target markets

o Modifications to marketing mix – product in particular

E.g. change of packing to invigorate new perception of product etc.

MARKET RESEARCH

Provides businesses with information needed to make decisions

o

Must establish reliable sources of information

PRIMARY DATA

Info that is collected for the specific purpose it will be used for.

Observational research: Observing the target market, their actions

and how they respond to conditions

Surveys: Asking the target market the same questions over a range

of variables e.g. buying behaviour

Experimental research – usually testing the product on the market

and examining their reaction to different products and features

SECONDARY DATA

Info that already exists, pre-collected by another person i.e. historical data, Gov. census statistics

Internal Sources

o Data within the business itself i.e. financial reports, past surveys

o Used to compare past and present results

External sources

o Data collected by organisations outside of the business

o Used to identify current and ongoing trends


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ESTABLISHING MARKET OBJECTIVES

Provide the framework to guide business operations

o Must be flexible to adapt to changing nature of market

Adopt a SMART approach

General market objectives

o Increased Market Share

o Expansion of Geographic Markets

o Expansion of Product Range

IDENTIFYING TARGET MARKETS

Group of consumer whom the product is developed for – usually a section of the consumer market

o Use of market segmentation (marketing strategy)

DEVELOPING MARKETING STRATEGIES

The process of developing a product and then implementing strategies to encourage purchases

o Market segmentation

o Developing a product with strong brand, position and packaging

o Pricing, promotional and placing/distribution strategies to encourage sales

o Use of technology (e-marketing) and global marketing

NOTE: This syllabus dot point does not require you to expand on marketing strategies, only list the

types of marketing strategies a business can implement as part of its marketing plan.

IMPLEMENTATION, MONITORING AND CONTROLLING

IMPLEMENTATION

Implementation is the process of putting marketing strategies into action

Developing a financial forecast: a financial forecast is the expected costs of the marketing plan

MONITORING

Monitoring is the process of collecting info to measure if plans are achieving desired outcomes

Sales analysis: Examines the sale of a particular product

o Determines which products are performing well

o

Allows management to assess the effectiveness of different marketing strategies

Market share analysis: Comparing the sales performance of the business to competitors

o Assessment of marketing strategies in terms of brand awareness can be made

Marketing profitability analysis: Assessing the profitability of marketing strategies

o Comparing monetary/non-monetary benefits of strategy vs. costs of implementation

CONTROLLING

Controlling is the process of comparing actual results with desired results

Revising the marketing strategy: Strategies should be revised according to analysis

S specific

M measurable

A achievable

R realistic

T timely


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MARKETING STRATEGIES

MARKETING SEGMENTATION

Breaking down a market depending on similar characteristics of a customer group

o

Allows business to focus resources, tailor its marketing plan for target market

METHODS OF SEGMENTATION

Geographic: Based on customers’ location

Demographic: Based on particular features of the population: age, gender, income etc.

Psychographic: Based on differing personalities, lifestyles and interests of consumers

Behavioural: Based on differing knowledge and attitudes of the benefits a product provides

GOODS/SERVICE DIFFERENTIATION AND POSITION

Goods Differentiation: distinguishing the features of a product from those of competitors’ product

o Price: where it promotes itself as the cheapest provider

o Product Quality: providing higher quality to gain competitive adv.

Service Differentiation: maintain customer loyalty

o Involves an immediate form of contact between the business and consumer

PRODUCTS

Tangible benefits: physical attributes of the product

o E.g. features, colour etc.

Intangible benefits: benefits a consumer associates with the product

o e.g. prestige/image of owning the product

POSITION

The image of the product in the view of consumers

BRANDING

Reputation of the product

Strong brand name = higher expectations from consumers

PACKAGING

The physical appearance of the good

o Protects the quality of the product

o Last point of contact before final purchase

Includes the attitudes/product knowledge of the sales person


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PRICE

Price must reflect position and branding of the product

o most influential factor for customer’s (before purchasing)

PRICING METHODS

Careful decisions must be made by management

o Can result in loss in market share, brand name, consumer loyalty and even product failure

Cost-plus: Adding a profit margin to the costs per unit of output

Competition-based: setting prices according to the competitor’s prices

Market-based: set according to supply and demand of a product

PRICING STRATEGIES

MARKET SKIMMING

Setting a high price to recover costs – e.g. from establishment phase or new technology implemented

o May back-fire if consumers respond negatively to high price

PENETRATION PRICING

Setting prices at the lowest price to gain immediate group of consumers

o Aims to undercut main competitors in hope that consumers will switch to new product

o Establishes consumer base despite comprising profit margin

LOSS LEADERS

Providing a limited number of goods at cost price or less in hope that consumers will continue buying

o Again, establishes consumer base despite comprising profit margin

PRICE POINTS

Setting different prices for similar products

o Products are differentiated by features

o Used to market to a large market segment

o Can result in higher costs (varied production methods)

OTHER PRICING STRATEGIES

Product-deletion pricing: Used to clear stock of unsuccessful “distressed” product

Prestige pricing: charging a higher price for products consumers regard as prestigious

Psychological pricing: influencing customers by minor price differences (e.g. $9.95 vs. $10.00)

Demand-based pricing: charging a higher price for higher demand products

o NOTE: This is very similar to market-based pricing methods – I would not refer to it

PRICE AND QUALITY INTERACTION

Consumers often associate price with quality

o High prices reflect higher quality, durability and service, which may serve as a comp. adv.


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PROMOTION

THE PROMOTION MIX

ADVERTISING

Seeks to convey a message to a broad group of consumers

Traditional advertising conducted through mass media e.g. newspapers

o Rise of e-commerce forces business to embrace tech for advertising e.g. Facebook

PERSONAL SELLING

Selling directly and personally to an individual consumer— e.g. Door-to-door sales

Whisper marketing: business engages other businesses to sell products in return for benefits (goods)

RELATIONSHIP MARKETING

Process of building long term relationships with customers

o High level of customer satisfaction, value and service

o Encourages regular client base

SALES PROMOTIONS

Intended to generate interest and awareness of a product

o Promotions include discounts, samples, competitions, sales etc.

o Usually use internet and email due to its cost-effectiveness

PUBLICITY AND PUBLIC RELATIONS

Creating an event to generate product awareness

o Often promoted by famous individuals

THE COMMUNICATION PROCESS

OPINION LEADERS

Seeking individuals respected in the community to influence consumerso Ideally, consumers will link the leader’s reputation with their use of the product

WORD OF MOUTH

Involves consumer’s reactions to products and their degree of satisfaction.

May influence consumers to either try or avoid a product, depending on info circulated

Business has no direct influence over this publicity


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PLACE/DISTRIBUTION

Process of distributing the product from the manufacturer to the consumer

DISTRIBUTION CHANNELS

USE OF AN INTERMEDIARY

(i.e. retailer and/or wholesaler):

o Decreased costs as retailer takes over marketing strategies, although control also decreases

o Decreased storage, warehousing and SCM cost for wholesaler

o Increased distribution of goods

o Used in large industrial companies (e.g. Arnott’s biscuits)

NO USE OF AN INTERMEDIARY

(i.e. straight to consumer):

o Increased efficiency and control e.g. marketing, quality control

Better understanding of consumers’ needs, relationship marketing etc.

o Used in service industries (e.g. dentists, hotels etc)

o Used in large resource companies (e.g. oil companies who control their whole supply chain)

CHANNEL CHOICE

Influences the type of consumers the product attracts, perception of the product and ease of access

INTENSIVE

Product being available to a wide selection of stores/locations

o The market is saturated – all buyers already have the product

o E.g. convenience items such as milk, newspapers etc.

SELECTIVE

Limited number of distribution outlets

o Allows business to control where product is sold

o Ensures places are consistent with marketing strategy and goals

o

E.g. oxford shirts only sold to Myers, David Jones etc.

EXCLUSIVE

Restricting the number of products or their availability

Selling at a limited number of venues

o Allows business to control all methods of the marketing mix

o Used by hyper-exclusive products e.g. sports cars, jewellers


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PHYSICAL DISTRBUTION ISSUES

TRANSPORT

Process of moving goods from one location to another

Considerations:

o Cost of transport and time needed

o Type of good e.g. fresh fruit = refrigeration

WAREHOUSING

Process of storing products before they are distributed

Build up in holding stock decreases lead time

Considerations:

o Type of good e.g. perishables = can only warehouse for short period

o Cost of warehousing, inventory becoming toxic (obsolescent)

INVENTORY

Must manage levels of inventory

Considerations:

o Overstock can lead to obsolescent stock and clearance sales = reduction in profit

Restricts capacity to store new/updated stock

o Undersupply could damage customer loyalty

Not enough stock to satisfy consumer demand = loss in sales

PEOPLE, PROCESSING AND PHYSICAL EVIDENCE (ADDITIONAL P’S TO MARKETING MIX)

People: Refers to the performance of human resources

o Excellent customer service = high level of customer satisfaction

Process: The consumer’s total experience from searching for a product to using the product

Physical evidence: The physical appearance of the product’s presentation

o Visual packaging influences consumer buying behaviour

o Crucial in promoting a positive image

E-MARKETING

Provides business with opportunity to interact with consumerso Use of emails to directly communicate

o Online operations reaches a global audience = faster sales volumes


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GLOBAL MARKETING

Strategies must be modified to cater new foreign marketing

GLOBAL BRANDING

Effective global branding can deliver same message to customers regardless of culture

o E.g. Coca-Cola logo

o As product is marketed globally, brand becomes universally recognisable

STANDARDISATION

Assuming the way the needs the product satisfies is the same world over

o E.g. mobile phones, music, cosmetics, electrical equipment

Cost savings option

o Higher economies of scale

o

Less R&D needed

CUSTOMISATION

Used to alter the core product to suit a variety of target markets

o Differing economic, political, sociocultural characteristics of country

o E.g. McDonald’s in Egypt – all halal

Company’s try to use a combination of the two

GLOBAL PRICING

Customised pricing

o Different countries are charged diff prices for the same product

o Uses cost-plus method to cover the added costs of exportation (e.g. taxes, tariffs etc.)

Market-customised pricing

o Sets pricing according to local market conditions

o Varies pricing depending on level of demand and comp. in overseas market

o Influenced by foreign currency exchange rates

Standard worldwide price

o Charging customers same price for a product worldwide

Domestic businesses may undercut the standardised price

Changes in exchange rate may negatively impact the exported price

COMPETIVITIVE POSITIONING

The formal process of a business determining how to differentiate itself from competitions

o Developing strategies for the business to create value from these differences

Value proposition

o Operational excellence: ability to run as efficiently as possible – e.g. low cost operations

Business can pass on cost savings to consumers

o Customer Intimacy: business develops personalized profile of customer shopping habits

Business can devise correct marketing strategy over time

o

Product Leadership: business’ ability to produce the best product first


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FINANCE

ROLE OF FINANCIAL MANAGEMENT

The role of finance involves managing financial resources of the business to achieve its strategic goals.o Involves the analysis, interpretation and evaluation of all financial records to the business

STRATEGIC ROLE OF FINANCIAL MANAGEMENT

Aims to ensure the business continues to operate, grow and achieve goals and objectives

OBJECTIVES OF FINANCIAL MANAGEMENT

PROFITABILITY

The ability of a business to maximise its profits

o Achieved through increased revenue or decreased costs

Measuring profitability using income statement

Costs of goods sold = + ℎ −

Revenue − Costs of goods sold =

− Expenses =

Measuring profitability using income statement and balance sheet

=Net profit

Total equity

GROWTH

The ability of the business to increase its size in the long term more outputs = sales = profit

Measuring growth using income sheet and secondary data:

=Business Sales

Total Market Sales× 100

o NOTE: This is not a “ratio” you need to know – an understanding of market share will suffice.

EFFICIENCY

The ability of a business to minimize costs and manage its assets to achieve maximum profit

Measuring efficiency (in cost minimization) using the income sheet:

=

NOTE: Lower expense ratio = higher efficiency

Measuring efficiency (ability to collect accounts receivable using the income sheet and balance sheet:

=Sales

Accounts receivable

NOTE: higher accounts ratio = higher efficiency


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LIQUIDITY

The ability of a business to convert their assets into cash

o The ability for a business to pay short term debts using current assets

=

SOLVENCY

The extent to which the business can meet its financial commitments

o Measures the financial stability of a company important for investors

() =

Gearing: how much debt the business has with respect to their equity

o

Higher gearing = greater financial burden the firm has to deal with = greater risk involved

SHORT TERM

Tactical and Operation goals

o e.g. maintenance of liquidity, upgrading equipment

Reviewed regularly to see if targets are being met and if resources are being used

LONG TERM

Strategic goals Broad goals e.g. increasing profit or market share

o

Often involves a series of short-term goals Business reviews progress annually to determine if changes need to be implemented


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INFLUENCES ON FINANCIAL MANAGEMENT

INTERNAL SOURCES OF FINANCE

OWNERS’ EQUITY

The funds contributed by owners to build the business.

RETAINED PROFITS

Profits of a business which are not distributed to be used as a source of finance in the future

EXTERNAL SOURCES OF FINANCE

DEBT

Any money that is loaned – with short or long term maturity

o Often incur some form of interest – set and predictable

o Shareholders do not lose ownership/control of business

If business is liquidated, the follow investors are payed first;

1.

Holders of preferred stock (do not have voting rights)

2. Debenture holders

3.

Ordinary shareholders

4.

Unsecured notes

SHORT TERM: < 12 MONTHS Overdraft: flexibility to borrow money from a bank at short notice through cheque account

o Allows a business to overdraw its account to an agreed limit

Allows a business to have a negative value in its account

Assists businesses with short-term liquidity problems – by providing working capital

o Can have very high costs – high daily interest rates

However, interest rates on bank overdrafts are tax deductible in Aus.

o Alternative: using business credit card – offers lower fixed interest rates

Commercial Bill: Borrowers receives an amount from another business with surplus funds

o Promising to pay principal + interest back between 30-180 days

Can be rolled over for extended time period – reassessed each time it matures

Factoring: Business sells its accounts receivable (money owed by debtors) to an external business

o Provides business with immediate (within 48 hours) short-term finance

o Generates immediate short-term liquidity

o Factoring company charges the business a fee according to credit risk

Analysed by credit sales and credit rating of accounts

o Trade credit: can also be provided by suppliers – result of good relationship


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LONG TERM: > 12 MONTHS

Mortgage: loan secured by the asset (being purchased) of the business

o Provides the business with a large amount of finance to purchase a non-current asset

o Business repays through regular repayments (often monthly) over agreed period (e.g. 15yrs)

Includes interest rate charged on topo Interest only loan: only the interest is paid and then once a business resells the asset, which

they initially loaned out the finance to buy, the business pays back the principle; whilst

keeping the excess capital gains.

Debenture: when a large business seeks to obtain finance by issuing debentures

o Large firms are invited to invest by lending finance become debenture holders

o A trustee is appointed to monitor the debenture-issuing business

Ensure it remains profitable and can therefore repay loans + interest

o Debenture holder’s loans are collateralised and given preference in the case of liquidation

Unsecured Notes: essentially corporate bonds that are uncollateralised

o Used to finance short term liquidity short falls

o

Incur higher rate of interest – since there is greater risk for investor

Requires strong reputation and good credit ratings

Leasing (rental agreement):

o Payment of money for the use of (non-current) assets owned by another business

At the end of period, business can buy leased item at the agreed ‘residual value’

o Operating lease: shorter than the life of the asset – owner carries out maintenance etc.

o Finance lease: lessor purchases the asset on behalf of the lessee

Repayments are fixed for the economic life of asset (e.g. 3-5 years for a TV)

Often incur higher interest rates

Incur penalties for cessation of lease

Payment includes insurance, maintenance etc.

EQUITY

Finance raised by a company by issues shares to the public

o Increases number of owners = less control over business = dilution of returns to owners

o No obligation to repay an initial capital investment

o More difficult to secure: prospectus must be filled, approved by ASX and ASIC

PRIVATE EQUITY

Money invested into a (private) company not listed on the ASX Venture capital

o Buys shares to boost capital of a business (source of finance) and receives dividends

o Very little to say in day-to-day management of business


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ORDINARY SHARES

Occurs when a company becomes public and lists stocks on the ASX

o Allows business to raise additional capital

Individuals who purchase such shares become part-owners in a company and receive dividends

o

Can be issued with or without voting rights New issue

o First issue is known as primary market

Prospectus is issued through a stockbroker

Shares are made available on the securities exchange

Underwriter such as an investment bank is enlisted

o Shareholders pay for each share they purchase

Payments go straight to the business

Shareholders receive a dividend (proportion of company’s profits)

o Secondary market: shares are sold by previous owner

Rights issue

o

Additional shares are offered to the existing shareholders of a company

The number of shares an owner can buy is proportional to the number they own

Shares will be at a discounted rate yet shareholders are not obliged to buy

o However, if they do not, their rights will be diluted

o If part of original prospectus, rights issues does not incur expenses of new prospectus

only a written proposal to shareholders is necessary

Placements

o Offering additional shares to specific institutions/investors

Does not require formal prospectus or general shareholder approval

Can raise up to 15% of current capital base

o

Funds can be raised quickly, and without minimal publicity Great for businesses seeking to expand or seek funding to perform a takeover

Share purchase plan (SPP)

o Allow existing companies to issue new shares (max $5000) to existing shareholders

Similar to a rights issue, yet whoever wants shares puts their hand to buy

Thus, ownership is almost always diluted

Does not require a prospectus, however does require permission from ASIC

OTHER SOURCES OF FINANCE

NOTE: This is isn’t in the syllabus. Don’t bother learning it, just read it to have a general understanding

to place into a long response question if you have time. The others above are much more significant.

Government gifts and grants: Financial gifts to assists establishing/growing businesses

o E.g. subsidies, low interest loans, tax deductions, grants etc.

o Business must meet strict criteria to receive such grants takes time and effort


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FINANCIAL INSTITUITIONS

BANKS – RETAIL/COMMERCIAL

Receive savings as deposits from individuals and then make investments and loans to borrowers

o

Supervised by the RBA

o Since 08-09 GFC, banks have adopted more cautious lending policies

Provide a range of financial products for clients: e.g. online banking, credit facilities, legal/tax advice

BANKS - INVESTMENT

Serve large institutional clients/governments seeking to raise substantial amounts of capitals

o They offer to underwrite shares for businesses in their IPO, often asking for equity in return

Underwriter: 3rd party which provides a business with the assurance that it will buy

excess shares which aren’t sold in the IPO

They also offer advice for merging, takeovers and other financial decisions

FINANCE/LIFE INSURANCE COMPANIES

Provide diff. types of secured/unsecured loans to business

o Have large amounts of capital that has been gained from clients, that needs to be invested to

generate returns for the business, in the scenario where it must be pay-out a client

o Interest rates are often higher than general banks since they lend more freely

SUPERANNUATION FUNDS

Have large amounts of capital that needs to be invested to generate returns for the investorso Used to invest in long-term securities (company shares, Gov. /company debt etc.)

UNIT TRUSTS

Individuals trust a trustee with their funds

o Types of unit trusts: property trust, equity trusts, mortgage trusts, fixed-interest trusts

Trustee places funds into various investments in hope to generate the highest yield for investors

AUSTRALIAN SECURITIES EXCHANGE

As a primary market, enabling businesses to raise new capital through the issue of shares As a secondary market, transaction of existing shares between individuals

Initial public offering (IPO): process a business must initially undergo to list on the ASX

1. Must be of reasonable size, and have been successful in operations for a reasonable time

2.

Business then must issue a prospectus

Gives potential investors a detailed depiction of the business and its finances

Comprehensive outline of key functions, past finances and predicted performance

3. Investors can then apply for a share allocation

An investment bank is usually hired as an underwriter

4.

According to supply and demand, the stock may become oversubscribed, or undersubscribed

Funds received are then used by the business to expand or invest

5.

Shares may then be re-traded on the secondary market by shareholders


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INFLUENCE ON GOVERNMENT

Monetary policy: the RBA uses the cash rate to influence the interest rate of banks

o This in turn will influence economic activity

o Increasing interest rate = higher cost of debt finance = less borrowing = less spending

Government grants: the federal government offers low-interest loans and grants to businesses that

will make a significant contribution to the economy

o The Export Market Development Grant: 50% rebate on marketing costs for exporters

o New Enterprise Incentive Scheme: proves new small businesses with accredited training,

advice and mentoring + ongoing income support for up to one year

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION (ASIC)

Regulates corporations, markets and the provision of financial services - Corporations Act 2001 (Cwth)

o Aims to assist in reducing fraud and unfair practices in financial market

o Primary legal instrument that oversees business operations and financial reporting, ensuring

that company directors and financial service providers carry out duties honestly

COMPANY TAXATION

Flat rate of 30%

o Paid before dividends are distributed

Aus. Gov. has undertaken a process of reform of the federal tax system

o Decrease company tax by 2-3% or introduction of a progressive taxation scheme

SMEs are taxed at a smaller rate then large businesses

o Will boost net profit, encouraging businesses to expand

o

Will attract offshore investments = boosts in domestic economy = boost in employment

GLOBAL MARKET INFLUENCES

ECONOMIC OUTLOOK

Refers to the projected changes in level of economic growth world wide

Increases in global economic growth can lead to increased demand for products and services –

requiring excess funds. It can also lead to decreased interest rates of funds borrowed internationally –

providing higher levels of net profit and lower risk

AVAILABILITY OF FUNDS

The ease which a business can access funds internationally

GFC (2008-09) had major impact on the availability of funds causing higher interest rates and more

cautious lending

INTEREST RATES

Traditionally, Aus. Interest rates tend to be higher than other countries

Aus. Businesses can be tempted to borrow sources of finance from overseas

o However, exchange rates/fluctuations can often outweigh advantage of lower interest rates


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PROCESSES OF FINANCIAL MANAGEMENT

PLANNING AND IMPLEMENTING

FINANCIAL NEEDS

Financial information must be collected and analysed to forecast trending financial needs

o Business must then also ensure it manages its financial resources accordingly

BUDGETS

A budget is a quantitative plan for providing financial direction to a business

o It provides a framework for decision making

o It acts as a control mechanism to compare planned results with actual results

o Has a degree of flexibility to respond to the changing nature of the business context

3 types of budgets: o Operating budgets: relate to expenses of the main business activities

o Project budgets: capital expenditure and R&D

o Financial budgets: collaboration of operation and project budgets to estimate and predict

forecasts of funding required in the future

RECORD SYSTEM

A record system refers to the processes and practices that business uses to record financial info

o Businesses must consider how they record info hard copy or digitally

Digital tech have made systems more efficient to record and analyse

o

Human error must be minimized to produce accurate and reliable financial reports

Can be ensured by auditing reports and employing a double entry system

By recording all items twice, errors can be found by variance in balance

o Business must also consider the confidentiality of info and ensure securities are in place

o Management information systems (MIS) are also a consideration for large businesses

Allows managers from different functions to gain access to info according to needs

The need for accurate/reliable financial reports are because management bases most decisions on it

FINANCIAL RISKS

Business must be proactive to be aware of future threats to finances

o Insurance can be taken out to protect the business against unexpected costs/loss of profits

o Risk of a business being unable to cover financial obligation - leads to bankruptcy

To minimize risk, adequate perception of risk profile must be undertaken

Further, profits must be sufficient to cover the cost of debt, liquidity must be high

FINANCIAL CONTROLS

Financial controls (such as policies and budgets) must be employed to ensure business objective are

effectively being met due to the risks which can occur; theft, errors in record systems etc.


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DEBT AND EQUITY FINANCE

Businesses must determine a balance between debt and equity finance

Debt Finance Equity Finance

Features

Lenders have first claim onrecovered finance in the

incident of liquidation

Shareholders have residual

claim on assets

Debt must be paid by periodic

repayments Equity has no maturity date

Interest payments are tax

deductible No interest payments exist

Lenders require a lower rate of

return

Shareholders require higher

rate of return

Debt providers have no voting

rights

Equity holders have voting

rights

Advantages

Readily available

No interest payments -

cheaper source of finance

Tax deductions available on

interest payments

Low gearing (use resources of

the owner – not external

source of finance)

Less risk for the business and

owners

Disadvantages

Increased risk due to principal

+ interest charges that must be

repaid

Lower profits-returns for the

original owner

Collateral required by the

lender as security

Owner loses complete control

of decision making

Lenders are payed first in casesof liquidation

Lower profits-returns for theoriginal owner

MATCHING THE TERMS AND SOURCE OF FINANCE TO BUSINESS PURPOSE

Matching principle: involves using appropriate finance for the intended use of finance

o Current assets fund current liabilities

o Non-current assets fund non-current liabilities

Various things influence the source of finance a business uses:

o Terms of finance

o Cost of each source of funding

o Structure of the business

o Flexibility of the source

o Availability of finance

o Level of control maintained by the business


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MONITORING AND CONTROLLING

Accounting info must be monitored and regularly reviewed to ensure its consistent

o This is essential since managers base decision making process on such information

CASH FLOW STATEMENT

Cash flow monitoring is essential for a bus

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