A CONCISE REVISION OF HSC BUSINESS STUDIES

EDUCATIONAL RESOURCES4U

A CONCISE

REVISION OF

HSC

BUSINESS

STUDIES

EDUCATIONAL RESOURCES 4 U

5 Sixth AvenueBerrara NSW 2540

Emailer4u@live.com.au

First published 2008

Copyright 2008 EDUCATIONAL RESOURCES 4 U

CopyrightThe material in this book is copyright. However, the publisher grants permission for copies of this material to be made by purchasers of the site license for use within and by staff and students of the purchasing school only.

A Concise Revision of HSC Business Studies

Illustrator:Michael LloydWriter: Stephen LloydEditor:Jessica Lloyd

The publisher wishes to acknowledge Rush Software and their Crossword Wizard program.

A CONCISE REVISION OF HSC BUSINESS STUDIES

The purpose of this book is to present Business Studies students with a simple outline of the HSC course. It is not intended to induce higher order thinking or subliminal learning. Its just about telling you what you probably should know before you sit for your HSC, or other major tasks.

By no means is this meant to be a comprehensive guide. It cuts the syllabus to the bone and expresses my interpretations of many of the complex concepts and terms from this document in a way that I hope is a bit easier for most students to understand.

So, how to make it interesting?

Starting on page one of a textbook and working your way through it is a great cure for insomnia. How many times have you read a page of text only to have it go in one eye and out the other? You know that youve read it, but hey, you were really thinking about that party on the weekend, or what a looker that new exchange student is.

I think the best way to keep up your interest as long as possible is to give you stuff in small doses. Not too many big words (although good vocab is essential to do your best in all subjects) and some simple tasks after each bit of review. Remember, most students view an 8 page extended response as an impossible task in about 50 minutes in their HSC. But, if you break it down into half page paragraphs that you write in about five minutes, youre up to 5 pages! I know thats not 8 like I mentioned, but its probably more than youve been presenting on a regular basis in tasks. As an HSC marker in the past I can vouch for the fact that its disheartening to open up an examination booklet and find that the kid has managed a page and a half of stuff that could have been written by anyone who has never studied Business Studies in their life.

So, the idea behind this book is to give you the skeleton of this course in a concise form to help you prepare for the tests ahead. As you work through the tasks youll see that Ive basically followed the Students learn about components of the syllabus in chronological order. Of course, you need case studies to add to your knowledge. Besides whatever case studies you do in class, Id recommend reading the business section of a newspaper or watching business shows on TV that are often on early Sunday. Yeah, I know, zzzz time. You can always record them for later reference! Try to stay up with whats happening in the real world, especially near exam time. Referencing a current story always impresses HSC markers.

HSC TOPIC 1: BUSINESS MANAGEMENT AND CHANGE

Sheet 1The Nature of Management

So what is this thing called management?

Management is getting things done. Each day you manage to get yourself to school, complete classwork then do homework before making yourself ready for the next day.Management in business is about getting things done for the firm: setting then meeting targets, quotas, goals and/or objectives. Business management is about dealing with the various internal and external stakeholders that affect a firm in a way that optimizes the wishes of owners.

Effective management is critical to the long-run success for a business. Plenty of firms can survive with poor management. Many will fail. Without effective management, no firm will reach its potential and maximize profits.

The syllabus refers directly to three roles of management: Interpersonal roles dealing with people inside and outside the business. Informational roles collecting, reviewing and dissemination of information. Decisional roles making choices between alternatives after evaluating options.

The syllabus also refers to a swag of skills. You probably wont remember them all, but remember there are only three roles and lots of skills. How to remember that? Well, one way is to remember that skills is a longer word than roles. Or, think of the three Rs. (Its important to develop little tricks like this to help remember all the stuff you need in all your subjects.) Anyhow, the skills are pretty straightforward: People skills dealing effectively with people. Strategic thinking being able to see where the firm will be in 3-5 years. Vision Knowing where youd like the firm to be in its maturity phase. Flexibility and adaptability to change staying out of any ruts that develop. Self-managing recognize that now and then you need to look at yourself in an objective way to see if youre still heading in the right direction. Teamwork being able to rely on others to do their share with confidence. Complex problem solving and decision-making using things like decision trees, break-even analysis and forecasts to choose the best alternative. Ethical and high personal standards doing the right thing because it is the right thing, not just because the law says you have to.

Managers have responsibilities to stakeholders. Stakeholders are just people or bodies that have an interest in the firm. Internal stakeholders are those that the firm has some direct influence over: owners/shareholders, management, and employees. External stakeholders are beyond the firms control: competitors, customers, suppliers, creditors, government, society as whole, and even future generations.

Because of the great variety of stakeholders, conflicts of interests will naturally arise. Customers want products at the best quality for the cheapest prices. This would conflict with the interest of shareholders who want the best dividend return for their investment. Employees want to earn a fair share of the companys earnings for their work, but pay rises put pressure on prices and/or profits. The cheapest production method may, for example, include dumping waste in an environmentally unfriendly way, thereby jeopardizing future generations. Management becomes responsible for reconciling these conflicts. Increasingly, management is being expected to take an ethical approach to such resolutions. Profit maximization in the short term has become less important than good corporate citizenship. That is, do the right thing and you can stay in business for longer!

Okay, thats it for sheet 1 The Nature of Management.

Learn anything? I guess well find out soon enough. Flip over for your first lot of review exercises. Good luck and remember you can do them more than once if it doesnt go too well the first time. Thats kind of what study is about.

Sheet 1The Nature of Management Review Tasks

1. What does management mean in business?

2 marks

2. What are the two most likely outcomes for businesses that dont have effective management?

2 marks

3. Match these terms to their corresponding definitions:

Terms: management, roles, skills, decisional role, informational role, interpersonal role,ethics, stakeholders, internal, external.

a. That part of the business that management has control over. b. There are three of these that managers must play. c. Making a choice between alternative courses of action. d. Those who take responsibility for a firms outcomes. e. Stakeholders outside the control of a business. f. A large range of abilities managers need. g. Addressing a press conference to explain why a business has decided to make a takeover bid for a competitor. h. People and bodies that have an interest in a firm. i. Sitting down with union officials to negotiate a new Workplace Agreement for the employees of a firm. j. Doing the right thing because it is the right thing to do.

How did you go?/14

Look over for the answers, and then give yourself a mark out of 14. Anything under 10 and Id suggest you come back to this again some time in the future. Remember, no point going over stuff you know. You need to re-revise the stuff you dont know!

Sheet 1The Nature of Management Review Tasks - Answers

1. What does management mean in business?

Management in business is about getting things done for the firm. It is about meeting targets, goals and objectives of the firm. (Make sure you have at least 2 sentences or points if the value of the question is two marks. This makes it easier for the marker to give you 2/2. Obviously the same applies if the question is of greater value. There is no point writing too much in short answers. Youll need the time for extended responses.)

2 marks

2. What are the two most likely outcomes for businesses that dont have effective management?

Firms with poor management are most likely to fail in the long run. Even if they survive, they will not reach their potential in terms of profits or market share.

2 marks

3. Match these terms to their corresponding definitions:

Terms: management, roles, skills, decisional role, informational role, interpersonal role,ethics, stakeholders, internal, external.

a. That part of the business that management has control over. internalb. There are three of these that managers must play. rolesc. Making a choice between alternative courses of action. decisional roled. Those who take responsibility for a firms outcomes. managemente. Stakeholders outside the control of a business. externalf. A large range of abilities managers need. skillsg. Addressing a press conference to explain why a business has decided to make a takeover bid for a competitor. informational roleh. People and bodies that have an interest in a firm. stakeholdersi. Sitting down with union officials to negotiate a new Workplace Agreement for the employees of a firm. interpersonal rolej. Doing the right thing because it is the right thing to do. ethics

HSC TOPIC 1: BUSINESS MANAGEMENT AND CHANGE

Sheet 2 Management Theories

The syllabus effectively introduces five different management theories. They reflect the evolution of business management as a field of study that has developed as the world moved from the Industrial Revolution to today.

Classical-Scientific Theory was the first attempt to rationalize the management process. Based largely on Taylorism, it sought a best way to do things by breaking down the production process into simple steps and then choosing the best workers to complete each task. Thus management involved planning how to best do a task, organizing the resources in the most efficient manner and then controlling production by closely supervising workers so that targets were met. You need to remember, when this theory was first introduced the idea of an assembly line style of production was new and revolutionary. Large-scale factories were only just starting to appear and the notion of division of labour was new.Probably the best example of this was in Henry Fords new car factory. While rivals had teams assemble cars from the ground up a bit at a time, Henry had the extraordinary idea of putting the chassis on a slowly moving production line and have workers divided into stations where they did the one task over and over again. So one worker would put in the gearbox, another the engine, another the steering etc, etc. By repeating their task over and over they would increase their productivity. You need only look on todays roads to see that Henrys idea worked. In these factories there was a pyramid-like hierarchy of organisation. At the top was Henry, who passed on what to do to various managers, who passed on what to do to section heads, who passed on what to do to worker supervisors, who told workers what to do and watched that they did this properly. Henry, like most other bosses in these times, employed an autocratic leadership style. This meant he was the King of Ford and you did as you were told, probably best illustrated by his famous statement, They can have the cars in any colour, so long as it is black.Whilst this theory is now very old, it is still a useful basis for workplaces that have many young staff who work in mass-production type businesses. Im sure you Mcknow what I Mcmean. Its main drawback is that its focused on production of goods. In todays business world most workers are employed in the service sector, where simple division of labour doesnt work effectively. Behavioural Theory grew as managers looked at ways of trying to boost productivity by recognizing that workers had needs beyond their pay each week. In the medical world the notions of psychology and psychiatry were just beginning to recognize that peoples actions were often reactions to how they thought and felt. Behavioural theory was built around findings by behaviouralists like Mayo, Maslow and Hertzberg.This theory sees management as leading workers by inspiring them to do better, this best achieved by motivating them with both monetary and non-monetary benefits and ensuring that communications are kept open and move in both directions. This theory was vastly different to the autocratic, hierarchical approach advocated by the Classical theory. Behavioural theory slashed the middle out of the pyramid, creating a flatter organisational structure to improve the speed of communications. It encouraged workers to participate more by emphasising teamwork. It might seem quaint, but the idea of a suggestion box that allowed workers to put forward ideas on improvements was once a revolutionary idea! Just imagine Henry Ford listening to a wheel fitter who thought they knew how to do the job better than Henry!Managers who use this theory employ a more participative leadership style. They encourage workers to put forward their ideas before making decisions. This gives workers some ownership of decisions, thus increasing their desire to see them succeed. Indeed, some managers even follow democratic processes allowing workers to vote on alternative courses of action.The major advantage of this theory is that it creates more satisfied workers. A business best form of sustainable competitive advantage is a happy workforce. Behavioural theory tries to maximize worker satisfaction. Its major drawback is that it is time consuming. You need to get to know your workers and what they want. The chances of them all wanting the same thing is zero, so you need to pay individual attention to the desires of each. In smaller firms this is possible, but when businesses grow it becomes more difficult.

Political Theory examines the sources of power and influence within an organisation. It recognizes that different groups have different agendas, and sees management as negotiating and bargaining between these groups to achieve goals. For instance, workers are often represented by unions, whereas the firm may belong to a trade association. The trade association might well be pushing for offshore expansion to take advantage of reduced costs. The unions will obviously disagree, as workers jobs will be threatened. Management has to negotiate with both groups to strive for the best outcome.

In Political theory the organisational structure is often viewed in terms of coalitions. This relates to negotiating with various groups in a manner such that an agreement can be made which leads to forward movement. As with politics in general, the stakeholder will tend to focus on what they can get out of the deal. A union might agree to the move offshore if the firm is able to guarantee that workers on another site will not meet the same fate.The Political theory has the advantage of recognizing that power within organisations is real and must be acknowledged and dealt with. Its major hurdle is that power brokers can, and often do, make decisions that enhance their power, rather than benefit the firm.

Systems Theory is not really a discreet theory at all, but rather an approach that recognizes that a business is made up of many different parts, each having an impact on the other. A Quality Management System is one that recognizes the interdependence of business functions such as production, finance, employment relations and marketing. This Systems approach will document processes and procedures and ensure that continuous improvements to the system are sought. Thus management is more about adapting the organisational structure to the circumstances. With the onset of globalization, even small firms have joined the world market. This has meant that they have had to adapt their businesses to the requirements of exporting.The major advantages of a Systems approach are that the extensive documentation allows new employees to know how to perform. It also means that when a decision is made in one area, its impact is known by all others. Theres nothing worse when Marketing have a media blitz promoting a sale and no-one has told Production that theyre going to need extra stock.

Contingency Theory. Okay, given all of the above, why would we need another theory? Well.. the best laid plans and all that. All managers recognize (or should) that despite their best intentions, things are going to go wrong. So this theory or approach is about being ready when the proverbial hits the fan. Again its about adapting activities to circumstances, but in a more reactive way. You hope your sporting identity whos about to launch your new product wont break his leg on the weekend, but if it happens you need a contingency plan, or backup.With Contingency theory youre recognizing that things will go wrong and you try your best to be prepared. So you might have a semi-famous person on staff who can step up if required in the above example. The drawback for this theory is you never know exactly whats going to hit the fan, or how hard.

Sheet 2 Management Theories Review Tasks

1. Why should a present-day manager have a working knowledge of the various management theories?

3 marks

2.Describe two common organisational structures found in businesses.

2 marks

3.Analyse the following statements and then indicate whether they are true or false.

a. Political Management Theory is something that managers should always consider, no matter which theory or approach that they decide to use.b. One of the main advantages of a hierarchical organisational structure is the rapid communications between workers on the floor and management.c. Participative leadership style involves management and workers meeting to discuss and vote on goals for the firm.d. Most modern managers would use a Systems approach because it allows them to draw on the best aspects of all other theories.e. Flattening organisational structures has the advantage of improving communications but it does cut career paths.f. Rupert Murdoch is an illustration of how even today some CEOs believe that autocratic leadership is the best model.g. Behaviouralists believe that workers need close supervision and clear directions on how to best complete their tasks.h. Contingency theory means that managers will always be prepared for any eventuality that may arise to disrupt production.i. The Classical-Scientific Theory was good in the old days, but it has no application for modern firms.j. By taking a stakeholder view managers are more likely to make decisions for the overall benefit of a firm.

Sheet 2 Management Theories Review Tasks - Answers

1. Why should a present day manager have a working knowledge of the various management theories?

No matter the approach taken modern managers should know about Classical/Scientific, Behavioural and Political theories so that they can draw on the best aspects of each when they develop a Systems approach to their firms. All have their own advantages, which will help achieve goals for firms.(In your answer you should refer to the names of the theories. This shows the examiner your syllabus knowledge and should bring more marks than general comments)3 marks

2.Describe two common organisational structures found in businesses.The Classical theory supports a hierarchical structure, with steps of management appearing as in a pyramid. The more modern Behavioural theory believes that a flat organisational structure allows for more rapid communication as the middle of the pyramid is cut away.2 marks

3.Analyse the following statements and then indicate whether they are true or false.

a. Political Management Theory is something that managers should always consider, no matter which theory or approach that they decide to use.trueb. One of the main advantages of a hierarchical organisational structure is the rapid communications between workers on the floor and management.falsec. Participative leadership style involves management and workers meeting to discuss and vote on goals for the firm.falsed. Most modern managers would use a Systems approach because it allows them to draw on the best aspects of all other theories.truee. Flattening organisational structures has the advantage of improving communications but it does cut career paths.truef. Rupert Murdoch is an illustration of how even today some CEOs believe that autocratic leadership is the best model.trueg. Behaviouralists believe that workers need close supervision and clear directions on how to best complete their tasks.falseh. Contingency theory means that managers will always be prepared for any eventuality that may arise to disrupt production.falsei. The Classical-Scientific Theory was good in the old days, but it has no application for modern firms.falsej. By taking a stakeholder view managers are more likely to make decisions for the overall benefit of a firm.false

HSC TOPIC 1: BUSINESS MANAGEMENT AND CHANGE

Sheet 3 Managing Change

Why change? Things are going okay at the firm, so why should we change?Its a bit like yesterdays lunch. It was okay then, might be okay for today and even tomorrow, but it just wont do for next week. Change is inevitable.The syllabus outlines various nature and sources of change, along with some structural responses to change. These include:

External Influences that explain the changing nature of markets:a. Economic influences, such as upswings and downswings associated with the cycle as economies move from booms to busts (recessions) and vice versa.b. Financial influences, such as increasing or decreasing interest rates that will tend to encourage or discourage spending.c. Geographic influences, which often impact Australia significantly as we are prone to drought, flood and fires.d. Social influences, which are reflected by the diversity of products on the Australian market now that we have embraced a multicultural approach.e. Legal influences are changes that have been forced on business by legislation, usually for the protection of consumers.f. Political influences arise as government implements policies that they feel are for the good of the population, such as discouraging smoking.g. Technological developments mean that firms must strive to use the latest means to maintain their productivity over competitors.

Internal Influences, which are those within the control of the firm and are often effects of accelerating technology, such as:a. e-commerce the extensive use of EFTPOS and web-based sales.b. New systems and procedures many firms ensure that they meet ASA or ISO standards in their operations.c. New business cultures firms are encouraged to scan the business environment to seek out new, better ways to run their operations.

Structural responses to change are ways that you reorganise your firm to deal with change. Many firms outsource (get outside contractors/consultants) to do specialized work like accounting and marketing. Flattening structures will cut the layers of management, but add to the span of control for managers that remain. Sometimes firms will form strategic alliances, where they join forces for a special project. Developing networks, perhaps by joining guilds, franchises or trading associations can also help businesses deal with change.

Why not change? Despite the overwhelming reasons outlined above, some firms dont or wont change. Reasons for resistance to change fall into four categories according to the syllabus. These are:

a. Financial Costs changes can be expensive: paying for the purchase or lease of new equipment; redundancy payouts to workers who have been downsized (another way to say that their jobs are no longer there); retraining costs associated with new equipment or procedures; and any costs associated with the reorganizing of plant and equipment. For some firms (particularly those near the end of the business life cycle), these costs may outweigh the benefits gained from change. For others, they just provide an excuse to avoid change.b. Inertia of managers and/or owners. People become comfortable doing things in certain ways. Change, particularly as you get older, is not something many look forward to. Managers and owners may get in a rut and so they may view change as an unnecessary interruption to their routines.c. Cultural Incompatibility mergers and takeovers between businesses bring together diverse ideologies and goals. Sometimes these just dont match up and so prove to be incompatible. This is particularly true in our globalised world. What works in Japan may not be transferable to a more casual culture like Australias.d. Staffing employees are familiar with making changes, but most dont like the losses of career paths and promotional opportunities that are associated with flattening of organisational structures, a common change. New technologies will often mean machines do tasks previously done by people. Robots completing welding tasks mean that workers have become deskilled, simply providing maintenance rather than doing the welding themselves. Often older workers resist having to learn new skills. Im sure that many of you are familiar with cries from your parents about computers.

Once the decision is made to make a change, the next step is managing the change effectively. The syllabus identifies four components in this process:

1. Identifying the need for change. Change in itself is not desirable. Management needs to scan the business environment constantly and recognize when, how and what changes need to be made. This should be done in consultation with employees wherever possible.2. Setting achievable goals. Radical change is always more difficult to implement than minor change. The Japanese notion called Kaizen, or continuous improvements, is based on the idea that change should be made up of many small steps and that workers should be consulted about ways to improve their productivity. Whatever approach is taken, it is important for management to set goals that can be achieved. Such goals will usually have quantitative (number) and temporal (time) aspects, for example, to increase output by 10% in 6 months.3. Creating a culture of change. As previously identified there are many reasons for resistance to change. Management can help overcome such resistance by encouraging a teamwork approach. This can be achieved by keeping employees in the loop when making changes. This can be done simply by way of brief updates at meetings where workers opinions are sought, or on a large scale such as weekend conferences where brainstorming sessions are held and major new business plans are developed. To assist management in these actions a change agent might well be outsourced. These are consultants who have experience in bringing changes to businesses. They are able to reduce resistance by using a range of techniques that they have developed with other firms.4. Change Models. Kurt Lewin was a famous psychologist who may be referred to as the father of change agents. He outlined two models: Force-field Analysis Managers need to examine the forces driving a change and compare them to restraining forces. Once these have been identified, the manager needs to either boost the driving forces and/or reduce the restraining forces to implement change. Unfreeze - change refreeze Model. This three step model involves the following actions at each stage:a. Unfreeze Prepare the firm for change by outlining reasons and benefits to employees and any other stakeholders resisting change.b. Change - Implement the changes by providing new technologies, resources and training for staff.c. Refreeze Reinforce the new direction for the firm by positively rewarding staff and other stakeholders.

Sheet 3 Managing Change- Review Tasks

Use the following terms to complete the cloze passage below. Each word is used only once, but there are more terms than spaces.

Terms: inertia, structural, effectively, Financial, alliances, incompatibility, change, flat, e-commerce, politicians, career, agent, role, economic, redundancy, cultures, franchises, dynamic, interest, expect, outsourcing, goals, weather, External, multicultural, systems, legal, analysis, refreeze, technological, need, stakeholder, accelerating, implemented.

Managing _ _ _ _ _ _ has become an integral skill for modern day managers. The business environment is a very _ _ _ _ _ _ _ one and if a firm is to survive in the long run its management must recognize the need to _ _ _ _ _ _, plan for and implement change.Change can come from a variety of sources. _ _ _ _ _ _ _ _ influences are numerous and include _ _ _ _ _ _ _ _ factors such as upswings and recessions. In recent years a major financial influence has been _ _ _ _ _ _ _ _ rates. Australias unreliable _ _ _ _ _ _ _ is a geographic influence and our _ _ _ _ _ _ _ _ _ _ _ _ _ society has led to a variety of social influences. Our complex _ _ _ _ _ system and increasing desire for control through legislation by _ _ _ _ _ _ _ _ _ _ _ are other major influences. Finally, _ _ _ _ _ _ _ _ _ _ _ _ _ developments are ever-changing, influencing the way businesses operate.Internal influences reflect the effects of _ _ _ _ _ _ _ _ _ _ _ _ technology. New _ _ _ _ _ _ _ and procedures must be implemented to deal with aspects like _-_ _ _ _ _ _ _ _ and internet selling. New business _ _ _ _ _ _ _ _ such as hyper-businesses have become common.In dealing with change, businesses have employed a variety of _ _ _ _ _ _ _ _ _ _ responses. Staff has been downsized, with increasing use of _ _ _ _ _ _ _ _ _ _ _. Management hierarchies have had the middle slashed to create _ _ _ _ structures and past rivals have joined to form strategic _ _ _ _ _ _ _ _ _. Networks such as _ _ _ _ _ _ _ _ _ _ have blossomed.Change is resisted for a variety of reasons. _ _ _ _ _ _ _ _ _ costs include purchase price of new equipment, making _ _ _ _ _ _ _ _ _ _ payouts, retraining costs and expenses arising from changes to plant layout. Many older managers and owners suffer from _ _ _ _ _ _ _, being stuck in a routine that has worked for many years. Some mergers and/or takeovers suffer from cultural _ _ _ _ _ _ _ _ _ _ _ _ _ _ _, especially when involving transnationals. Finally, staff may resist change if it means deskilling, retraining or loss of _ _ _ _ _ _ paths.Managing change _ _ _ _ _ _ _ _ _ _ _ basically involves three steps. Firstly, managers need to identify the _ _ _ _ for change. Then they have to set achievable _ _ _ _ _. Finally they need to create a culture for change so that change can be _ _ _ _ _ _ _ _ _ _ _. In doing so they may well outsource a change _ _ _ _ _ who helps with the whole process. These experts may well use one of Lewins change models; the Force-field _ _ _ _ _ _ _ _ model and/or the unfreeze-change-_ _ _ _ _ _ _ _ model.

Sheet 3 Managing Change- Review Tasks Answers

Use the following terms to complete the cloze passage below. Each word is used only once, but there are more terms than spaces.

Terms: inertia, structural, effectively, Financial, alliances, incompatibility, change, flat, e-commerce, politicians, career, agent, role, economic, redundancy, cultures, franchises, dynamic, interest, expect, outsourcing, goals, weather, External, multicultural, systems, legal, analysis, refreeze, technological, need, stakeholder, accelerating, implemented.

Managing change has become an integral skill for modern day managers. The business environment is a very dynamic one and if a firm is to survive in the long run its management must recognize the need to expect, plan for and implement change.Change can come from a variety of sources. External influences are numerous and include economic factors such as upswings and recessions. In recent years a major financial influence has been interest rates. Australias unreliable weather is a geographic influence and our multicultural society has led to a variety of social influences. Our complex legal system and increasing desire for control through legislation by politicians are other major influences. Finally, technological developments are ever-changing, influencing the way businesses operate.Internal influences reflect the effects of accelerating technology. New systems and procedures must be implemented to deal with aspects like e-commerce and internet selling. New business cultures such as hyper-businesses have become common.In dealing with change, businesses have employed a variety of structural responses. Staff has been downsized, with increasing use of outsourcing. Management hierarchies have had the middle slashed to create flat structures and past rivals have joined to form strategic alliances. Networks such as franchises have blossomed.Change is resisted for a variety of reasons. Financial costs include purchase price of new equipment, making redundancy payouts, retraining costs and expenses arising from changes to plant layout. Many older managers and owners suffer from inertia, being stuck in a routine that has worked for many years. Some mergers and/or takeovers suffer from cultural incompatibility, especially when involving transnationals. Finally, staff may resist change if it means deskilling, retraining or loss of career paths.Managing change effectively basically involves three steps. Firstly, managers need to identify the need for change. Then they have to set achievable goals. Finally they need to create a culture for change so that change can be implemented. In doing so they may well outsource a change agent who helps with the whole process. These experts may well use one of Lewins change models; the Force-field analysis model and/or the unfreeze-change-refreeze model.

HSC TOPIC 1: BUSINESS MANAGEMENT AND CHANGE

Sheet 4Change and Social Responsibility

Businesses are increasingly being expected to examine the social implications of their activities. Managers seek to develop good corporate citizenship by building their firms reputation in the minds of consumers.The syllabus outlines five aspects associated with change and social responsibility:

1. Ecological sustainability Management should seek production methods that minimize their impact on the environment and preserve resources for future generations. The move away from plastic shopping bags is a simple example of this. Use of renewable resources such as plantation timber and solar energy for electricity are ways of maintaining our current lifestyles without compromising future generations.2. Quality of working life One of the major thrusts in implementing change has been downsizing employee numbers. This is particularly evident when flattening the organisational structure. Middle management is usually cut, resulting in a greater span of control for those managers that remain. This leads to increased workloads and many view this as a reduction in the quality of their working life. Employees at the workface are also adversely affected when numbers are cut, making customers wait longer for service. They also fear for their long-term job prospects when they see fellow workers made redundant.On a positive note, management is much more inclined to develop family friendly employment strategies to boost the quality of working life. Job sharing, maternity/paternity provisions and childcare facilities are all methods by which managers are able to show employees that they care about them.3. Technology Computerisation of databases means that vast amounts of information about individuals are more readily available to those with access. Firms need to act responsibly and establish procedures that ensure the privacy of individuals is not compromised.4. Globalisation In our globalised world managers need to accept some responsibility in maintaining and developing cultural diversity. By providing a range of products that reflect local cultural differences, rather than mass-producing homogeneous goods, businesses can help to promote the kind of variety that makes our world more interesting.5. E-commerce As more and more trade occurs via the internet and through other e-commerce technologies, businesses must ensure their customers details are protected. Safety precautions such as encryption of credit card numbers demonstrate social responsibility by businesses in this area.

Sheet 4Change and Social Responsibility Review tasks

About time for a bit of a writing task. Remember how I said that for those of you who struggle to get enough length into your responses, it is a good technique to think of a long response as being several short bits joined together. The question below should ideally be answered in about seven short paragraphs: an introduction (that may only be a sentence or two), a paragraph for each of the five aspects discussed on the previous page (you can use numbered points), and a conclusion. Have a go!

Outline how and why management can demonstrate social responsibility when implementing change in their business activities.

10 marks

Sheet 4Change and Social Responsibility Review tasks - Answers

Outline how and why management can demonstrate social responsibility when implementing change in their business activities.

A few things to remember when writing short or long responses in Business Studies: Try to keep your sentences brief Use terminology from the syllabus Underline relevant terminology or points (but dont overdo it) Use dot points if appropriate (especially if youre running out of time or if you are writing a business report) Use plenty of paragraphs. If youre not sure when to start a new paragraph, as a general rule of thumb start one after about three sentences. Avoid using personal examples like In my aunt Ednas shop. Use case studies covered in class or from your own research.

A sample answer to the above question might go something like:

Management demonstrates social responsibility so that they and their firm are seen as good corporate citizens. This should improve their long-term survival rate. They achieve this through means such as:

1. Ecological sustainability. This involves using resources that can be sustained by future generations eg., plantation timber or solar energy.2. Quality of working life. By providing employees with family friendly programs such as maternity/paternity leave and child care facilities firms are able to create a happier and more productive workforce.3. Technology. Precautions must be made to ensure that customer information held on databases is protected. Only those with a real need for access should be able to see such information.4. Globalisation. When operating in different cultures businesses need to be aware of cultural diversity and promote this wherever possible.5. E-Commerce. Firms need to develop security mechanisms like encryption devices to ensure that customers purchasing over the internet or using EFTPOS will not have their financial details divulged to hackers.

If a business is able to achieve all of the above they will gain the trust of their customers. This should help long-term success as well as improving profits.

MULTIPLE CHOICE REVIEW Topic One

1.Business management can best be described as activities that

(A)meet the goals and objectives of the firm.(B)involve organising staff and allocating resources.(C)create strategic and tactical plans for the future.(D)all of the above.

2.Possessing vision, being able to complete complex problem-solving and having adaptability to change are all

(A)roles of management.(B)skills of management.(C)functions of management.(D)functions of stakeholders.

3.An example of an internal stakeholder would be

(A)employees.(B)creditors.(C)government.(D)society as a whole.

4.Chad regularly meets with the subordinates under his span of control to discuss their training requirements. The management role Chad is fulfilling is an

(A)interpersonal role.(B)informational role.(C)decisional role.(D)ethical role.

5.The CEO of Triffids Ltd has had extensive management training and draws on various aspects of most theories. He believes in adapting management and organisational approach to circumstances and so is following

(A)classical-scientific management theory.(B)behavioural management theory.(C)political management theory.(D)systems/contingency management theory.

6.Farmers Friend Ltd has experienced a severe downturn in sales in recent years as customers have struggled with the drought. This is an example of

(A)an internal influence of geographic nature.(B)an external influence of geographic nature.(C)an internal influence of economic nature.(D)an external influence of financial nature.

7.Meryl has called a meeting of major shareholders to outline a takeover bid for a rival firm. This is an example of management fulfilling:

(A)an interpersonal role.(B)an informational role.(C)a decisional role.(D)an ethical role.

8.A common structural response to change in modern business is to

(A)reduce span of control and increase hierarchies.(B)reduce span of control and flatten hierarchies.(C)increase span of control and increase hierarchies.(D)increase span of control and flatten hierarchies.

9.Kurt Lewin proposed a change model that involved either increasing the forces driving change and/or reducing the forces resisting change. This is called

(A)force-field analysis.(B)Lewins unfreeze/change/refreeze model.(C)classical-scientific management theory.(D)structural response to change through the use of a change agent.

10.Nic believes in taking the stakeholder view. He sees management as negotiating and bargaining and always keeps a close check on those with power and influence within the firm. Nic is using

(A)classical-scientific management theory.(B)behavioural management theory.(C)political management theory.(D)systems management theory.11.Just Go toilet supplies introduced EFTPOS for its customers in an attempt to boost sales. The source of this change is

(A)an internal influence linked to e-commerce.(B)an external influence linked to e-commerce.(C)a government requirement under the Trade Practices Act.(D)an example of structural change within the organisation.

12.The notion that managers resist change because they are comfortable with current systems and procedures is best known as

(A)outsourcing.(B)ecological sustainability.(C)autocratic leadership.(D)inertia.

13.Fayood has been brought in to assist employees and management implement much needed change at Stuck-in-a-Rut Industries. Fayood is best described as a

(A)change agent.(B)change networker.(C)change model.(D)change management theory.

14.McFoods Mega Food Barns have decided to abandon their traditional menu and include local delicacies in an attempt to crack the Japanese market. This change is demonstrating social responsibility via

(A)ecological sustainability.(B)managing cultural diversity.(C)e-commerce.(D)technology.

15.Gemma likes to get to know her employees. As their boss she takes an active interest in their views on decision making in the firm. Gemma believes in

(A)classical-scientific management theory.(B)behavioural management theory.(C)political management theory.(D)systems management theory.

16.The general manager of ASEX Pty Ltd has used a series of consultant reports to help choose between alternatives for a new product. This is an example of:

(A)an interpersonal role.(B)an informational role.(C)a decisional role.(D)an ethical role.

17.Jessica is assisting in negotiations between employees of the firm and a government agency that is attempting to implement unwanted new safety regulations. This is an example of a manager trying to reconcile conflicting interests between

(A)two internal stakeholders.(B)two external stakeholders.(C)an internal and an external stakeholder.(D)an internal and an external shareholder.

18.Staff is likely to resist change because of

(A)the cost of new equipment.(B)the need for participative leadership.(C)the increased division of labour.(D)the loss of career prospects.

19.One financial cost that may lead to resistance to change is

(A)loss of promotional opportunities.(B)cultural incompatibility of mergers.(C)redundancy payouts.(D)de-skilling of the workforce.

20.Fast Foods Ltd employs young staff who perform repetitive tasks. The management theory most likely to be used in this situation is

(A)classical-scientific theory.(B)behavioural theory.(C)political theory.(D)force-field theory.

MULTIPLE CHOICE REVIEW Topic One Answers

1. d2. b3. a4. a5. d6. b7. b8. d9. a10. c11. a12. d13. a14. b15. b16. c17. c18. d19. c20. a

HSC TOPIC 2: FINANCIAL PLANNING AND MANAGEMENT

Sheet 1The Role of Financial Management

Strategic plans are those made in the medium to long term (3-5 years). The role of financial management in such plans is to ensure that necessary funds are available when needed at the cheapest possible price.

The syllabus identifies five objectives of financial management:1. Liquidity ensuring the short-term ability of a firm to meet debts by keeping a close eye on current assets and current liabilities.2. Profitability most firms strive to boost profits by maximizing the difference between revenues gained and costs associated with running a business to provide owners with the best return possible for their investment.3. Efficiency - relates to minimizing expenses and ensuring that debtors (those who buy from you on credit) pay up in a suitable timeframe.4. Growth most firms set targets in relation to growth in sales, turnover and/or profits.5. Return on Capital shareholders/owners seek optimal returns for the money they have invested in a business (capital). Low or negative returns will place the firm in long-term jeopardy (not to mention jobs of managers!).

The syllabus also identifies nine aspects of the planning cycle:1. Addressing present financial position managers need to conduct a fiscal situation analysis to examine the current condition of the firms finances.2. Determining financial elements of the business plan managers need to examine the needs for funds that arise from the future plans of the firm.3. Developing budgets estimates must be made for areas such as labour hours, raw materials and marketing.4. Cash Flows examine cash inflows and outflows in an attempt to anticipate shortfalls and oversupplies so that they can be evened out.5. Financial Reports such as Revenue Statements and Balance Sheets are legal requirements and provide a basis for future planning.6. Interpretation of such records usually involves comparisons between previous years and industry averages.7. Maintaining records systems has become a much more simple process with computer-based systems such as MYOB (Mind Your Own Business).8. Planning Financial Controls records and systems need to be reviewed both internally and externally through means such as audits.9. Minimising financial risks and losses has become much more complex since globalisation has opened up problems such as foreign exchange dealing.

Sheet 1The Role of Financial Management Review Tasks

Okay, sometimes revision is hard because there is too much to remember. This is probably one of those occasions, so Ill make it easier for you.

1. How many of the five objectives of financial management can you remember? See if you can finish these off:

a. L _ _ _ _ _ _ _ _b. P _ _ _ _ _ _ _ _ _ _ _ _c. E _ _ _ _ _ _ _ _ _d. G _ _ _ _ _e. R _ _ _ _ _ on C _ _ _ _ _ _

2. If you thought that was hard, what about the nine aspects of the planning cycle? Best of luck:

a. Addressing the present f _ _ _ _ _ _ _ _ p_ _ _ _ _ _ _b. Determining financial elements of the b _ _ _ _ _ _ _ p _ _ _c. Developing b _ _ _ _ _ _d. C _ _ _ F _ _ _ _e. Financial R _ _ _ _ _ _f. I _ _ _ _ _ _ _ _ _ _ _ _ _g. Maintaining record s _ _ _ _ _ _h. Planning financial c _ _ _ _ _ _ _i. M _ _ _ _ _ _ _ _ _ financial r _ _ _ _ and l _ _ _ _ _

3. Well, if you got through those okay this should be a breeze. Answer true or false:

a. Financial management involves only strategic planning.b. A firms long-term financial viability is called liquidity.c. The difference between a firms revenue and costs is its profit.d. One measure of a firms efficiency is how quickly it recovers debts.e. A common measure for a firms growth is its increase in owners.f. Return on capital is often calculated as a percentage.g. A balance sheet is frequently used for cash flow analysis.h. Computer programs have made account keeping a harder task.i. An audit is an examination of a firms financial records.j. Trading overseas increases financial risks for firms.

Sheet 1The Role of Financial Management Review Tasks - Answers

1. How many of the five objectives of financial management can you remember? See if you can finish these off:

a. Liquidityb. Profitabilityc. Efficiencyd. Growthe. Return on Capital

2. If you thought that was hard, what about the nine aspects of the planning cycle? Best of luck:

a. Addressing the present financial positionb. Determining financial elements of the business planc. Developing budgetsd. Cash Flows e. Financial Recordsf. Interpretationg. Maintaining record systemsh. Planning financial controlsi. Minimising financial risks and losses

3. Well, if you got through those okay this should be a breeze. Answer true or false:

a. Financial management involves only strategic planning.Fb. A firms long-term financial viability is called liquidity.Fc. The difference between a firms revenue and costs is its profit.Td. One measure of a firms efficiency is how quickly it recovers debts.Te. A common measure for a firms growth is its increase in owners.Ff. Return on capital is often calculated as a percentage.Tg. A balance sheet is frequently used for cash flow analysis.Fh. Computer programs have made account keeping a harder task.Fi. An audit is an examination of a firms financial records.Tj. Trading overseas increases financial risks for firms.T

HSC TOPIC 2: FINANCIAL PLANNING AND MANAGEMENT

Sheet 2Financial markets relevant to business financial needs

Businesses need access to funds and the syllabus refers to seven major participants in the financial markets that provide this money. They are:

1. Banks the traditional source of funds. Within most banks there is a division called the trading bank, especially established to help business.2. Finance Companies provide funds for riskier ventures, but charge much higher interest rates than banks.3. Insurance Companies invest policy payments in businesses to make a return to boost their overall funds.4. Merchant Banks as the name implies, banks established especially to assist firms. They link investors with businesses in need of funds, often via debentures.5. Superannuation/Mutual Funds a major source of funds since the government introduced compulsory superannuation for all employees. They invest in much the same way as insurance companies, with a view to gain returns for their members.6. Companies as businesses grow, one way they can diversify is to invest in other firms. This provides them with variety whilst allowing them to stay focused on their own prime function.7. Reserve Bank of Australia the Commonwealth governments bank. Not a bank as such, but is important as it leads trends in interest rates through its sale of bonds and establishes a base rate that most lenders follow, up or down.

As firms grow, some choose to gain funds by becoming public companies. This involves them issuing a prospectus via the Australian Stock Exchange (ASX). The firm advertises for investors to take up shares in their business. This is the primary market component of the ASX, a once-only event when a company becomes a public entity. (The more well known secondary market of the ASX is the one you see on the news all the time when people are buying and selling shares in companies like BHP.)

The cost of borrowing money is interest. In recent years rates of interest have been creeping up and this has made borrowing a more and more expensive option for firms. In Australia the major influence on interest rates is the Reserve Bank. They are particularly keen to keep inflation down. To do this they will increase interest rates to dampen both consumer and business spending. (At least thats the theory.) Overseas influences have become more important since globalisation and the deregulation of the financial sector. Money market operators can shift millions by simply pressing a button on their computer. So if interest rates are more attractive in, say, the USA, money will flow out of Australia. Less money here will tend to force rates up as borrowers compete for the remaining funds. This can thwart the desires of the Reserve Bank.

Sheet 2Financial markets relevant to business financial needs- Review Tasks

1. Why should managers know about the relevant financial markets available to businesses?

2 marks2. Explain how the Australian Stock Exchange acts as a primary market and how this assists firms seeking funds for expansion.

2 marks3. A bit of fun for a change? Why not, you need to relax and who knows, you might learn a bit of terminology at the same time. See if you can find 20 terms below.

superannuation

sabseinapmocpc

esdiversifyasn

crdecilbupredo

ooecnanifttfei

ntbondsbianmbt

dsghijacroejea

aeonmnitirlknl

rvpqkpstcrsttu

ynysaeahxwvuug

aiznrlaprimere

betefnlautumer

cstntreservesE

dnifecnarusniD

iegnahcxekcots

Sheet 2Financial markets relevant to business financial needs- Review TasksAnswers

1. Why should managers know about the relevant financial markets available to businesses?

Managers need to have funds ready for a business when they are required. By knowing

major participants in the financial markets, they are better able to access the type and

amount of funds that are needed at the best possible price.

2 marks

2. Explain how the Australian Stock Exchange acts as a primary market and how this assists firms seeking funds for expansion.

The primary market of the ASX is where businesses list themselves as public companies.

This process allows firms to sell shares to the public at a par value, often $1. The funds

raised in this way are then available to the public company to use for its expansion.

2 marks

3. A bit of fun for a change? Why not, you need to relax and who knows, you might learn a bit of terminology at the same time. See if you can find 20 terms below.

The terms were:

100

Participants Banks Finance Insurance Merchant Superannuation Mutual Companies Reserve Stock exchange Interest rates Debentures Diversify Investors Bonds Inflation Deregulation Secondary Public Prime

HSC TOPIC 2: FINANCIAL PLANNING AND MANAGEMENT

Sheet 3Management of Funds

Funds for business use have two basis sources, internal and external, and for these two areas there are a variety of sub-types listed in the syllabus. They are:

Internal as the name implies funds that come from inside the firm. They are also referred to as equity sources. Two types are:

Owners Equity Also referred to as Capital, this consists of money that the owners/shareholders put into the business from their own savings or funds. Retained Profits Sometimes rather than use outside money, businesses will plough back the profits as the business grows.

External money that comes into the firm from outside the owners or profits. These are generally called debt sources. Types include:

Short term borrowing Includes an Overdraft (the ability to write cheques for more than you have in your account, within agreed limits by the lender) and Bank Bills (bank guaranteed IOUs between you and others). Long term borrowing Includes mortgages (loans where an asset, usually land and buildings, is used as collateral) and debentures (effectively, loans from the general public, usually organised via a merchant bank or finance company).

Other listed sources that may be short or long term are:

Leasing involves renting rather than buying expensive assets, usually with an option to buy the product at the end of the lease. Factoring involves selling off your credit customers to another. Retailers such as Harvey Norman do this by providing in-house credit issued by a linked credit provider. Venture Capital is money put in to high risk/high return type businesses by established companies. Grants governments at all levels provide financial assistance to businesses that meet their stringent criteria.

Whichever of the above is accessed, it is important for the finance manager to try to match the terms of the funds to the source that is chosen. It would be foolish for a firm to initiate a mortgage or bring in extra owners for a short-term requirement such as a monthly cash shortfall due to equipment breakdown. An overdraft would be more appropriate for this. Such financial considerations are a major part of the job of a finance manager.

Another major consideration for managers is the balance between debt and equity financing. This is often referred as gearing and/or leverage. A highly geared firm is one that has high levels of debt finance compared to equity. (This can be seen by comparing liabilities with owners equity in the balance sheet.)How high is too high?This is best determined by looking at industry averages. If most firms have a gearing of say 2:1 and your firm is running at 4:1, its probably too high.

The major cost of debt financing is the interest that you have to pay on the loans. This will reduce a firms net profit, but might not be quite as bad as it first appears because they pay less tax. The major cost of equity finance is that the more owners that there are, the wider the profits have to be spread. Taking on more owners cant easily be reversed, and it opens the door for loss of control by the original owners.

The major benefit of debt financing is that once you have cleared the debt, you get to keep all the extra profits that the expansion has (hopefully) led to. As previously stated, there are also tax benefits associated with borrowing as interest charge reduces taxable net profits. The major benefit of equity finance is that it is free. You get a cash injection that allows expansion without having to pay interest. If its a small business it may also mean that an opportunity to share the workload has opened up.

Both alternatives have risks associated with them. Debt finance has led to many businesses being forced to wind up when a downturn has reduced profits to a level where interest repayments cant be met. Too often businesses borrow in good times at low rates, only to find it impossible to repay if rates rise and/or a recession hits. Equity finance, particularly through public share float, opens the door for takeover. How often have you heard of Aussie icons being bought out by foreign companies, such as the takeover of Arnotts? Also, by increasing the number of owners, dividends become diluted, making the return on investment less attractive.

Sheet 3Management of Funds Review Tasks

1. What steps should a manager take to ensure that they match the terms and sources of finance to business purpose and structure?

3 marks

2. What is meant by gearing? Why do managers mix the form of financing that they use for business expansion?

6 marks

3. Match the following terms to their corresponding definitions.

Terms:owners equity, retained profits, overdraft, bank bills, mortgage, debentures, leasing, factoring, venture capital, grants.

a.Investments in high risk/high return firms. b.A short term bank loan based on a cheque account.c.Capital put into a firm by shareholders.d.Funds provided to assist firms through the government.e.A long-term loan backed by collateral such as land.f.Money held back from dividends to fund expansion.g.Long-term loans to businesses by investors.h.Sale of debtors to a third party.i.Short term IOUs with bank backing.j.Renting of assets rather than purchasing.

Sheet 3Management of Funds Review Tasks - Answers

1. What steps should a manager take to ensure that they match the terms and sources of finance to business purpose and structure?

Managers first need to determine the firms requirements for finance in the future. Then

they should use short-term borrowings such as overdrafts or bank bills, or internal funds

like retained profits for small items. For larger projects long-term external sources like a

mortgage or debentures, or even extra internal owners equity should be considered.

3 marks

2. What is meant by gearing? Why do managers mix the form of financing that they use for business expansion?

Gearing or leverage is usually expressed as the ratio between a firms level of debt

compared to its Owners Equity.

Managers can access either debt or equity sources of finance when the need for funds

arises. They tend to use short-term debt financing like an overdraft for everyday

needs like paying suppliers if there are insufficient retained profits to cover this.

For more significant projects they will compare the costs of debt sources on loans

like mortgages or debentures, with internal sources such as seeking increased funds

by increasing Owners Equity. The best alternative for the long term will be chosen.

6 marks

3. Match the following terms to their corresponding definitions.

Terms:owners equity, retained profits, overdraft, bank bills, mortgage, debentures, leasing, factoring, venture capital, grants.

a.Investments in high risk/high return firms.venture capitalb.A short-term bank loan based on a cheque account.overdraftc.Capital put into a firm by shareholders.owners equityd.Funds provided to assist firms through the government.grantse.A long-term loan backed by collateral such as land.mortgagef.Money held back from dividends to fund expansion.retained profitsg.Long-term loans to businesses by investors.debenturesh.Sale of debtors to a third party.factoringi.Short term IOUs with bank backing.bank billsj.Renting of assets rather than purchasing.leasing

HSC TOPIC 2: FINANCIAL PLANNING AND MANAGEMENT

Sheet 4Using financial information

The accounting framework is built around the process of double entry bookkeeping. This means that for every financial transaction in a business two amounts are written down so that the relationship remains balanced. This has led to the famous accounting equation known by all bookkeepers and accountants:

ASSETS = LIABILITIES + OWNERS EQUITY

Assets are things that a business owns, liabilities what it owes to outsiders, whilst Owners Equity represents what is left owing to the owners/shareholders. This information is put together in a Balance Sheet.Other important terms you need to understand when using financial information includes expenses (recurring costs for a firm), income or revenue (money made, usually through sales), and profits (the difference between income and expenses). These terms are found mainly in another important account called the Revenue Statement (also known as the Profit and Loss account or the Income Statement) that has its own equation:

Sales Cost of Goods Sold = Gross Profit Expenses = Net Profit Such accounts have a general format. Have a look at the one below:

Revenue Statement of M I Wealthy for the 12 months ending 30/6/06Sales1 000 000

-Cost of Goods Sold 400 000

Opening Stock60 000

+ Purchases410 000

- Closing Stock70 000

=Gross Profit600 000

-Expenses350 000

Wages130 000

Motor Vehicle expenses20 000

Rent50 000

Interest on loan50 000

Insurance30 000

Marketing70 000

=Net Profit250 000

The Revenue Statement is done first because the Net Profit that is worked out at the end of the account is used in the Balance Sheet. Typically Balance Sheets look like:

Balance Sheet of M I Wealthy as at 30/6/06Current Assets150 000Current Liabilities100 000

Closing stock70 000Overdraft30 000

Debtors50 000Creditors60 000

Cash at bank30 000Wages owing10 000

Non-Current Assets850 000NonCurrent Liabilities500 000

Machinery450 000Bank Loan500000

Office Equipment220 000

Motor Vehicles180 000Owners Equity900 000

Capital750000

Intangible Assets500 000+ Net Profit250000

Goodwill300 000- Drawings100000

Patent200 000

15000001500000

So what does it all mean?Well, for a start you may well see accounts like these in section 2 of your exams. The more familiar you are with them, the better youll be prepared to answer questions on them such as those involving financial ratio analysis. The syllabus lists:

Liquidity, which examines the short-term position of the business through the Current ratio = Current Assets : Current Liabilities. From the Balance Sheet above this is = 150 000 : 100 000 or 1.5: 1, a good position. Solvency, examines the long-term financial position of the firm through the Debt to Equity ratio = Liabilities : Owners Equity. This is called gearing or leverage and from the above = 600000 : 900000 or 2:3, another strong point. Profitability can be measured using three ratios, (usually expressed as percentages). From the Revenue Statement we can calculate the:

Gross Profit ratio = Gross Profit / Sales = 600000/1000000 = 60% Net Profit ratio = Net Profit / Sales = 250000/1000000 = 25%And from the Balance Sheet we can find the Return on Owners Equity Return on Owners Equity = Net Profit/Capital = 250000/750000 = 33% Efficiency is measured using two ratios, one from each account.

Expense ratio = Expenses/Sales = 350000/1000000 = 35% Accounts receivable turnover ratio = Sales/Accounts receivable (debtors) = 1 000 000/50000 = 20. Now divide this onto 365 (days in the year). So 365/20 = 18.25 (days to collect debts). As raw figures these ratios and percentages have some meaning but they are best used in a comparative way. That is, look at this firms figures from this year with other figures over time, or through industry averages from similar firms or against some common standard.

Whats all that you say? Dont worry. If you get a question in the exam it will have figures there for you to make comparisons. Remember, information given in questions is usually there for a purpose. Make sure you use it effectively. About the only other thing to compare it to is current interest rates. If a business has a Return on Owners Equity of say 5% and you know that you can get 7% just by investing in the bank down the road, risk free and with no effort, the firm isnt going too well.

There are a few limitations of financial reports noted in the syllabus:

Historical Costs Accountants usually write down how much an item cost when it was purchased. If it depreciates they will write down its value, because that is good for tax purposes. However, if it appreciates they are unlikely to write it up unless the firm is actually wanting to look good for, say, a prospective purchaser or public float. Value of Intangibles You may have noticed in the Balance Sheet a sub-heading called Intangible Assets. These are assets whose value is based on how much people are prepared to pay for them, rather than some tangible figure like cost of production plus markup. The most common intangible asset is Goodwill. This is basically the reputation value of a business. If it is a popular firm with customers, goodwill will be high. However, estimating its value is a tricky task. When purchasing a business you need to be wary if this figure is too high. How high is too high? Again, there is no definitive answer, but if goodwill, as a percentage of total assets, makes up more than the return on Owners Equity, be careful. The other intangible listed is a patent. This is a right to a process, design or trademark. You can just imagine how much the secret formula for Coke is worth. Did you know that there are only two people at any one time who have it? The CEO and his deputy, and they are never allowed on the same plane at once. (Isnt business trivia exciting?).

Sheet 4Using financial information Review Task

Dale has contacted you, as her financial consultant, to write her a report in regards to a business that she is considering buying. She could only get the following information for you to use to help you prepare the report:

Capital = $500 000Sales = $250 000Current Liabilities = $40 000Gross Profit = $150 000Debtors = $25 000Long Term Assets = $500 000Long Term Liabilities = $260 000Net Profit = $50 000Current Assets = $20 000Goodwill = $200 000

In your report ensure that you provide Dale with a complete ratio analysis and an opinion, based on the data, as to whether the price of $1 million is a fair one.

10 marks

Sheet 4Using financial information Review Task- Answers

Dale has contacted you, as her financial consultant, to write her a report in regards to a business that she is considering buying. She could only get the following information for you to use to help you prepare the report:

Capital = $500 000Sales = $250 000Current Liabilities = $40 000Gross Profit = $150 000Debtors = $25 000Long Term Assets = $500 000Long Term Liabilities = $260 000Net Profit = $50 000Current Assets = $20 000Goodwill = $200 000

In your report ensure that you provide Dale with a complete ratio analysis and an opinion, based on the data, as to whether the price of $1 million is a fair one.

Dear Dale,

Thanks for the opportunity to work with you again. Based on the data you have

given me I have been able to develop the following information that you may find useful:

The business profitability can be seen by the following ratios:

Gross Profit ratio = 150000/250000 = 60% (industry average = 40%)

Net Profit ratio = 50000/250000 = 20% (industry average = 25%)

Return on Owners Equity = 50000/500000 = 10% (industry average = 12%)

These figures seem to indicate that the firm is currently spending too much on expenses.

If you can cut these, the good Gross Profit levels should improve the Net Profit situation.

Following on from this the efficiency ratios are:

Expense ratio = 100000/250000 = 40% (industry average 20%)

(You should have found the $100000 by subtracting net profit from gross profit)

Accounts receivable turnover ratio = 250000/25000 = 10; 365/10 = 36.5 days

(industry average 28 days)

As previously stated, expenses are too high. The accounts receivable turnover ratio also

shows that the firm is too slow in collecting debts.

The liquidity of the firm is another minor concern as the industry average is 1:1.5

Current Ratio = Current Assets : Current Liabilities = 20000/40000 = 1:2

The gearing of the firm shows its solvency or long term viability. This firms

Debt : Equity ratio = 300000 : 500000 = 1 : 1.66 (industry average 1 : 1.3)

So this firm is a low geared one, which is a positive point in your considerations. With total

assets of $720 000 the asking price would seem too high, especially as the intangible asset

of Goodwill has already been included at $200 000. Return on investment would also be low

(50000/1000000=5%) but the opportunity does exist to boost net profit by cutting expenses.

I think that the business has prospects, but is overpriced. Try an offer around $700 000.

Please dont hesitate to contact me if you require further assistance.

Regards, your name.

HSC TOPIC 2: FINANCIAL PLANNING AND MANAGEMENT

Sheet 5Effective working capital (liquidity) management

The Working Capital ratio, also known as the Current ratio, is expressed as:

Current Assets : Current Liabilities

This ratio reflects a firms liquidity, or short-term ability to meet debts. This situation can change from day to day, but a business must ensure that it doesnt maintain an imbalance in this ratio on a continuous basis. Many firms have been forced to close down because creditors have gained court orders enforcing payments that could not be made.

Management is responsible for control of both current assets and current liabilities. They can control the current asset, cash, by ensuring that there is not too much or too little in the bank. When surpluses arise, they can move their cash into investment accounts, even in the short term, or use it to clear other debts. When shortfalls in cash arise, overdraft arrangements can be negotiated with banks to tide the firm over. Leasing is another strategy that reduces cash requirements. By renting rather than purchasing equipment, firms can use cash for other purposes. In some more extreme circumstances, firms can use the strategy of sale and lease back. If cash needs are high a firm might sell its property and then lease it back to cash up.Receivables, owed by debtors, are moneys owing mainly from credit sales. If the level of debtors is too high, firms need to look to their credit policy. A good strategy is to reduce the repayment period, say from 28 days to 14. Another method is factoring. This involves selling off your debtors to a third party, the factor, who buys the debts from the firm at a discounted price.Inventories, or stock, need to be available on customer demand. Many firms use the just-in-time method of stock to control this asset. By establishing reliable suppliers stocks can be minimized, but still satisfy customer demand.

Control of current liabilities includes minimizing overdrafts. Any excess cash should be used to clear this debt as soon as possible. Overdraft and creditors (those you owe money to, usually for stock purchases) can also be minimized by effective stock control. Just-in-time, or even just-your-customer stock control keeps these payables down. Loans in the short-term may need to be changed into medium to long-term ones if they are causing liquidity problems. Im sure you have all heard about consolidating your loans and rolling loans in with your mortgage. Care must be taken to match the term of the loan with the need for the cash. No point paying a loan over 10-15 years if you can clear it in 3-5.

Sheet 5Effective working capital (liquidity) management Review Tasks

1. Match the following terms to their corresponding definition below.

Terms: working capital ratio, liquidity, receivables, inventories, assets, liabilities, payables, loans, overdrafts, current ratio.

a. Stock held by a business.b. Recurrent loans based on a cheque account.c. Comparing current assets to current liabilities.d. Money owing to a firm, usually by debtors.e. Another name for the working capital ratio.f. Borrowings from a credit provider.g. Ability of a firm to meet short-term debts.h. Items of value a business owns.i. Money owing by a firm, usually to creditors.j. Various types of debts of a firm.

2. For each situation below outline a strategy for managing working capital.

a.After a recent sale Johns Bros. has a cash surplus of $78 000.

b. Smith and Jenkins Ltd have a slow return rate for debtors, leading to high levels for this receivable.

a. Frank and Earnest Pty Ltd have too much cash tied up in stock on hand.

b. Wright and Wong Ltd have had their overdraft at its limit for the past six months and so havent been able to use it for its intended purpose.

e. Tim and Mikes Gameshop is overflowing with stock and suppliers are seeking payment or else threatening to halt supplies.

f. Sheryl used a short-term personal loan to pay for half of her business. While the business is going okay, shes having trouble getting enough extra cash each week to cover these loan repayments.

Sheet 5Effective working capital (liquidity) management Review Tasks - Answers

1. Match the following terms to their corresponding definition below.

Terms: working capital ratio, liquidity, receivables, inventories, assets, liabilities, payables, loans, overdrafts, current ratio.

a.Stock held by a business.inventoriesb.Recurrent loans based on a cheque account.overdraftsc.Comparing current assets to current liabilities.working capital ratiod.Money owing to a firm, usually from debtors.receivablese.Another name for the working capital ratio.current ratiof.Borrowings from a credit provider.loansg.Ability of a firm to meet short-term debts.liquidityh.Items of value a business owns.assetsi.Money owing by a firm, usually to creditors.payablesj.Various types of debts of a firm.liabilities

2. For each situation below outline a strategy for managing working capital.

a.After a recent sale Johns Bros. has a cash surplus of $78 000.This should firstly be used to pay any overdraft, creditors or short-term loans (payables).

If there is any left it could be invested in the short-term money market.

b. Smith and Jenkins Ltd have a slow return rate for debtors, leading to high levels for this receivable.They need to look to their credit policy. They could reduce the credit period, say from

28 to 14 days and/or give discounts for early payments or consider factoring.

c. Frank and Earnest Pty Ltd have too much cash tied up in stock on hand.To reduce stock levels they should implement a just-in-time inventory strategy. This would

mean that there is stock delivered on a more regular basis, rather than keeping too much.

d. Wright and Wong Ltd have had their overdraft at its limit for the past six months and so havent been able to use it for its intended purpose.They need to get some long-term finance, like extending their mortgage, to allow them to

access their overdraft. Reducing expenses should also decrease cash needs.

e. Tim and Mikes Gameshop is overflowing with stock and suppliers are seeking payment or else threatening to halt supplies.

Creditors can be reduced by using a just-in-time stock control strategy. This will cut stocks

on the shelves and save the Gameshop from threats from this liquidity problem.

f. Sheryl used a short-term personal loan to pay for half of her business. While the business is going okay, shes having trouble getting enough extra cash each week to cover these loan repayments. Sheryl should seek to change this loan to a long-term liability. She could extend a mortgage,

if she has one, or see a merchant bank or finance company for another alternative.

HSC TOPIC 2: FINANCIAL PLANNING AND MANAGEMENT

Sheet 5Effective financial planning

The syllabus outlines two areas in effective financial planning:

Effective Cash Flow management

A cash flow statement usually shows monthly movements of cash in a firm. It starts with a beginning balance, adds inflows, subtracts outflows and gives a final balance.

MarchAprilMayJuneJulyAugust

Opening balance$12003200220070004000-2000

Cash inflow120001300014800110001000013000

Cash outflow100001400010000140001600010000

Closing balance3200220070004000-20001000

It can be seen from the above that the closing balance from one month becomes the opening balance for the next. In July the firm had a shortfall in cash due to higher than normal outflows.

Two cash flow management strategies are listed in the syllabus:

a. Distribution of payments If a major cost occurs in one month, say insurance, a firm should negotiate with the provider to spread the payment over the year.b. Discounts for early payments To boost cash inflow, giving credit customers a discount for early repayment of debts is a useful strategy.

Effective Profitability management.

Profit is derived by subtracting expenses from revenues. To manage these, the syllabus lists the following strategies:a. Cost Control Fixed costs such as rent may be reduced by finding a cheaper location. Variable costs like stock can be reduced by seeking newer, cheaper suppliers. Establishing cost centres within a firm to minimize each sections costs can be effective as awareness is raised about the concern. Expense minimization can range from simple things like photocopying on both sides of the paper to more complex strategies like outsourcing consultants after downsizing employees.b. Revenue Controls To boost revenues a firm will try to increase sales. Setting sales objectives, such as targets or quotas for salespeople is one method used. The sales mix can also be altered, so that more emphasis is placed on high-selling stock. Pricing policy can also be used, e.g. slow moving stock can be discounted during a sale to boost revenue.

Sheet 5Effective financial planning Review Tasks

1. Complete the following Cash Flow Statement by filling in the blanks. MarchAprilMayJuneJulyAugust

Opening balance$100070004000

Cash inflow10000210001500010000

Cash outflow70001800019000600020000

Closing balance700040002000

In which months was there a positive cash flow?In which months was there a negative cash flow?

What is the most common strategy used by firms to manage negative cash flows?

2.Match the following terms to their corresponding definitions.

Terms:revenue controls, sales objectives, sales mix, pricing policy, cost control, fixed costs, variable costs, cost centres, expense minimization, effective profitability management.

a.Costs that do not change with the level of production.b.Setting of targets or quotas for salespeople.c.Managing cost and revenue controls.d.Sections in a firm that check on expenditure on expenses.e.Overall methods used to reduce costs for a business.f.Strategies used to boost income for a firm.g.Costs that change with the level of production.h.Changing the emphasis on items for sale by a firm.i.Saving costs by cutting on expenses.j.Adjusting the amount charged for products to boost funds.

Sheet 5Effective financial planning Review Tasks Answers

1. Complete the following Cash Flow Statement by filling in the blanks. MarchAprilMayJuneJulyAugust

Opening balance$1000400012000700040008000

Cash inflow100002100015000160001000014000

Cash outflow7000180002000019000600020000

Closing balance4000120007000400080002000

In which months was there a positive cash flow?March, April and JulyIn which months was there a negative cash flow?May, June and AugustWhat is the most common strategy used by firms to manage negative cash flows?

Most firms establish an overdraft facility with their local bank to tide them over when they

have a lack of funds in the short run. This normally operates on their cheque account.

2.Match the following terms to their corresponding definitions.

Terms:revenue controls, sales objectives, sales mix, pricing policy, cost control, fixed costs, variable costs, cost centres, expense minimization, effective profitability management.

a.Costs that do not change with the level of production.fixed costsb.Setting of targets or quotas for salespeople.sales objectivesc.Managing cost and revenue controls.effective profitability managementd.Sections in a firm that check on expenditure on expenses.cost centrese.Overall methods used to reduce costs for a business.cost controlf.Strategies used to boost income for a firm.revenue controlsg.Costs that change with the level of production.variable costsh.Changing the emphasis on items for sale by a firm.sales mixi.Saving costs by cutting on expenses.expense minimizationj.Adjusting the amount charged for products to boost funds. pricing policy

HSC TOPIC 2: FINANCIAL PLANNING AND MANAGEMENT

Sheet 6Ethical and legal aspects

The syllabus outlines several ethical and legal aspects. They are:

1. Audited Accounts An audit is a check into the accuracy and reliability of a firms accounting records. Internal auditing processes are usually in place, but an external audit provides for independent analysis of a business finances.2. Inappropriate cut off periods Accounts need to be done on a regular basis and the introduction of the GST and Business Activity Statements (BAS) by the Australian Tax Office has overcome problems in this area.3. Misuse of funds Fraud and embezzlement are real problems for firms. Too often an accountant has too much faith put in them. When temptation becomes overwhelming, the money disappears. Regular, independent auditing helps.4. Australian Securities and Investment Commission Or ASIC as it is better known (its okay for you to use well-known acronyms like ASIC in answers. It saves time and the examiners arent all stupid!) is the corporate watchdog or the business police in Australia. They pursue businesses and directors/owners who do the wrong thing. Probably their most famous case was chasing Christopher Skase. You can visit their website for more information.5. Corporate raiders are companies that see when the share price for a business is at an artificially low price and take advantage of this situation by buying controlling interests in the firm. Frequently they will then break up the business and sell off the assets. This is a process known as asset stripping. It is legal, but not very ethical. If youve seen the movie, Pretty Woman, this is what Richard Gere does for a living and is one of the moral dilemmas raised in the movie.

Okay, its been a long chapter, so Im going to let you off. No revision tasks for sheet 6. (Too short to think anything up!) Did I hear someone say hooray!?

MULTIPLE CHOICE REVIEW Topic 2

1.The objectives of financial management include

(A)liquidity, profitability, efficiency and honesty.(B)liquidity, profitability, growth and honesty.(C)liquidity, profitability, efficiency and honesty.(D)liquidity, profitability, efficiency and growth.

2.The sale of a firms debts to a third party is known as

(A)factoring.(B)leasing.(C)mortgage.(D)overdrafting.

3.The accounting equation is correctly expressed as

(A)Assets + Liabilities = Owners Equity.(B) Assets = Liabilities = Owners Equity.(C) Assets = Liabilities + Owners Equity.(D) Assets + Liabilities - Owners Equity.

4.The ability of a business to meet long-term debt is referred to as its

(A)liquidity.(B)solvency.(C)profitability.(D)efficiency.

5.An intangible asset that must be closely examined by prospective purchasers of a business is

(A)debtors.(B)creditors.(C)drawings.(D)goodwill.

6.When a business goes public by listing on the stock exchange for the first time it does so through the ASXs

(A)product market.(B)primary market.(C)secondary market.(D)tertiary market.

7.The bank responsible for monetary stability and interest rate control in Australia is the

(A)Reserve Bank.(B)Commonwealth Bank.(C)Australian Securities and Investment Commission.(D)Merchant Bank Guild of Australia.

8.A financial statement that shows revenues and expenses to calculate Net Profit is

(A)a Cash Flow Statement.(B)the Balance Sheet.(C)a Revenue Statement.(D)the Revenue Sheet.

9.The rate of return on owners equity is a measure of a business

(A)liquidity.(B)solvency.(C)profitability.(D)efficiency.

10.An effective strategy for managing excess stock is

(A)just-in-time.(B)factoring.(C)leasing.(D)sale and lease back.

11.When interest rates in the USA rise, the likely impact in Australia will be

(A)an inflow of funds into Australia, so rates would rise.(B)an inflow of funds into Australia, so rates would drop.(C)an outflow of funds from Australia, so rates would drop.(D)an outflow of funds from Australia, so rates would rise.

12.A long-term loan based on collateral by way of real estate: