HSC/VCE-style study notes on the finance function: financial objectives, sources of finance, the three financial statements and the ratios used to analyse them. Works through the current ratio, debt-to-equity ratio, gross profit ratio, net profit ratio and return on equity using one fictional company's figures, then covers cash flow, working capital and profitability management strategies. Finishes with a self-check with answers.
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Curriculum: NSW Syllabus (NESA). We show specific outcome codes only where they have been verified against the official curriculum document.
Completed: Finance: Ratios, Cash Flow and Financial Strategies
Year 12 students (typically ages 17–18) working on finance. It is pitched at level 3 · challenge.
This is a study guide, so there is no separate answer sheet; the 'Check yourself' questions include answers.
About 30 minutes. Short, regular sessions work best: two or three a week beats one long one.
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Try Financial Ratios Practice.
Year 12 · Business Studies · Finance
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Financial management is the planning and monitoring of a business's financial resources so that it can achieve its goals. The five financial objectives are profitability (earning more revenue than expenses), growth (increasing size, sales or market share), efficiency (using resources to produce the most output for the least cost), liquidity (having enough cash or near-cash assets to pay short-term debts as they fall due) and solvency (being able to meet long-term debts). These objectives can conflict: rapid growth financed by borrowing can threaten solvency, and holding lots of cash for liquidity reduces profitability because idle cash earns little. Managers also balance short-term and long-term goals.
| Source of finance | Type | Examples | Main trade-off |
|---|---|---|---|
| Internal | Owner's equity and retained profits | Profits reinvested instead of paid out as dividends | No interest and no loss of control, but limited by how much profit is made |
| External debt: short term | Must be repaid within 12 months | Bank overdraft, commercial bills, factoring (selling accounts receivable at a discount) | Flexible but usually higher interest |
| External debt: long term | Repaid over more than 12 months | Mortgage, debentures, unsecured notes, leasing | Interest is tax-deductible and ownership is kept, but repayments are compulsory and raise gearing |
| External equity | Funds from owners or new investors | Ordinary shares (new issue, rights issue, placement, share purchase plan), private equity | No repayment obligation, but ownership and profits are shared and dividends are expected |
Three financial statements are used to monitor performance. The cash flow statement records cash receipts and payments over a period, grouped into operating, investing and financing activities, and shows whether the business can pay its bills. The income statement (profit and loss) shows revenue, cost of goods sold (COGS), gross profit, expenses and net profit over a period. The balance sheet shows assets, liabilities and owner's equity at a point in time, and always balances: Assets = Liabilities + Owner's equity.
| Item | Amount |
|---|---|
| Sales revenue | $1,200,000 |
| Cost of goods sold | $720,000 |
| Gross profit | $480,000 |
| Expenses | $360,000 |
| Net profit | $120,000 |
| Current assets | $240,000 |
| Current liabilities | $150,000 |
| Total liabilities | $420,000 |
| Owner's equity | $600,000 |
Calculating the five key ratios
The accounts receivable turnover ratio measures how quickly credit customers pay: credit sales ÷ average accounts receivable. If Harbourline's sales were all on credit and average receivables were $100,000, turnover = 1,200,000 ÷ 100,000 = 12 times per year, which is 365 ÷ 12 ≈ 30 days on average to collect. Ratios are only useful with a benchmark: compare with previous years (trend), with competitors or industry averages, or with budgets. Financial statements also have limitations: they can be affected by normalised earnings, capitalising expenses, valuing assets, timing issues and debt repayments, and they do not capture non-financial factors such as staff morale or brand strength.
| Area | Strategies |
|---|---|
| Cash flow management | Cash flow statements and forecasts; distribution of payments across the month; discounts for early payment; factoring receivables |
| Working capital management | Control current assets (cash, receivables, inventories) and current liabilities (payables, loans, overdrafts); leasing instead of buying; sale and lease-back of assets to free cash |
| Profitability management | Cost controls (fixed and variable costs, cost centres, expense minimisation) and revenue controls (marketing objectives such as pricing, sales mix) |
| Global financial management | Managing exchange rates, interest rates, methods of international payment (payment in advance, letter of credit, clean payment, bill of exchange), hedging and derivatives |
Answers: 1. Solvency (long-term); liquidity (short-term). 2. 90,000 ÷ 60,000 = 1.5:1. 3. 500,000 ÷ 400,000 = 1.25:1 (125%); the business is highly geared, with more debt than equity, so it is exposed to interest rate rises. 4. Gross profit = 200,000; 200,000 ÷ 500,000 × 100 = 40%. 5. Net profit ratio = 45,000 ÷ 500,000 × 100 = 9%; return on equity = 45,000 ÷ 300,000 × 100 = 15%. 6. Factoring (or offering discounts for early payment).
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Exam-style practice in calculating and interpreting the financial ratios used in senior Business Studies: current ratio, debt-to-equity…
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