Business Studies in Action: HSC Course 3rd edition
Chapter summaries
Topic 2: Financial planning and management
Chapter 8 Effective financial management

Working capital is the funds available for the short-term financial commitments
of a business.

Working capital management is determining the best mix of current assets and
current liabilities needed to achieve the business’s goals.
Working capital = current assets – current liabilities

Current assets are assets that a business can expect to convert into cash within
the accounting period. They usually include cash, accounts receivable, inventories
and short-term investments.

Control of current assets:
Current asset
Control method
Cash
-
cash flow budget
Accounts receivable
-
credit policy
-
monitor debtors
-
factoring
-
regular stocktakes
-
just-in-time
Inventories

Current liabilities are liabilities that a business must settle within the current
accounting period. They usually include overdraft, accounts payable and
short-term loans.
Business Studies in Action: HSC Course 3rd ed. Chapman, Norris, Devenish and Merritt. Chapter summary Page 1

Control of current liabilities:
Current liability
Control method
-
monitor creditors
-
holding back payment - stretching
-
early payment discounts
Loans
-
capital budgeting – compare return and risk
Overdrafts
-
regular payments
-
monitor budgets and bank charges
Accounts payable


Strategies for managing (improving) working capital:
-
Leasing: ‘frees up’ cash and no upfront fees.
-
Factoring: sale of accounts receivable generates immediate cash inflow.
-
Sale and lease back: cash is obtained from asset sales.
Cash flow management is the movement of cash in and out of a business over a
period of time.

Cash flow statements show the movement of cash receipts and cash payments. In
preparing a statement of cash flows, the activities of a business are generally
divided into three categories:
1. Operating flows: Sales revenue and operating expenses related to the
business’s main activity.
2. Investment flows: purchase and sale of non-current assets.
3. Financing flows: borrowing, debt and equity, of the business.

Many businesses use bank overdrafts to cover temporary cash shortfalls.

Cash flow management strategies:
-
Distribute payments throughout the year to avoid cash shortfalls.
-
Discount for early payment to minimise late payment and bad debts.
Business Studies in Action: HSC Course 3rd ed. Chapman, Norris, Devenish and Merritt. Chapter summary Page 2

Effective profitability management requires control of both the business’s costs
and its revenue.

Profit is the difference between costs and revenue.

Cost-control measures:
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Fixed and variable costs – identify and account for expenses.
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Cost centres – managers accountable for their business unit expenses.
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Expense minimisation – expenses budgets assist in cost control.

Revenue is the income earned from the main activity of a business.

Revenue-control measures:

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Sales objectives – set to generate maximum revenue.
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Sales mix – review each product’s profit margin contribution.
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Pricing policy – balance market share with profitability.
Strategies to assist ethical practices:
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Independently checked audited accounts. (An audit is an independent
check of the accuracy of financial records and accounting procedures.)
-
Code of ethics and internal controls minimises misuse of funds.
-
Australian Securities and Investment Commission (ASIC) monitors
business practices to ensure compliance with the Corporations Law.

Unethical practices:
-
Creative accounting – inappropriate cut-off periods can create a false
financial position.
-
Corporate raiders – manipulate share price.
-
Asset stripping – sell assets after takeover.
Business Studies in Action: HSC Course 3rd ed. Chapman, Norris, Devenish and Merritt. Chapter summary Page 3