Topic 2: Financial Planning and Management

Case Studies: QANTAS

The role of financial planning
Objectives Q has all these objectives, sets strategic goals to achieve them, etc
Planning cycle Q does it, and expand on each step of the cycle, bullshit it
Main steps Q uses:
Assessing the current financial position by collecting financial data
Using the info to frame a business plan
Preparing financial reports
Interpreting financial reports by comparing actual to forecast results
Adjusting financial controls to minimise financial risk and losses

Financial markets relevant to financial needs

Q participates in financial markets as a public company
Uses banks, financial and insurance companies
Uses the ASX privatised in 1995, released shares
Is very influenced by both domestic and overseas influences:
Economic downturn less tickets being bought
Govt policy influences safety regulations, flight paths, etc
Foreign govt cheaper airlines due to less safety laws/taxes, flight paths
World events September 11 bombings,

Management of funds
Sources of funds
Q uses internal sources of funds:
Owners equity selling shares
Retained profits self explanatory
External sources:
Not too much short term borrowing, but still some
Long term borrowing for purchase of new planes, etc
Used to receive subsidiaries from the govt before privatisation
Probably allowed trade credit, may use it

Financial considerations
Q ensures that it takes into consideration things like the term and source of finance,
repayment, etc

Comparison of debt and equity

Q generally has more debt than equity, highly geared

Using financial information

Accounting framework
Financial statements
Revenue statement (2008):
Net profit $969.7 million
Total sales and operating revenue - $16191.9 million
Total expenditure - $14817.6 million
Balance sheet (2008):
Current assets - $5616.2 million
Non current assets - $14083.9 million
Total assets - $19700.1 million
Current liabilities - $7603.9 million
Non current liabilities - $6361.3 million
Total liabilities - $13965.2 million
Net assets - $5734.9 million
Equity - $5734.9 million

Financial ratios
Liquidity
Current ratio (2008) - 0.74:1
Solvency
Qantas' gearing is measured using a complicated method, which all airlines use
It is 75%
Profitability
Gross profit ratio
Net profit ratio 6%
ROE ratio 17%
Efficiency
Expense ratio 92%
Accounts receivable turnover ratio
Inventory turnover ratio

Comparative ratio analysis

Q compares the ratios against past performance and other businesses, however, they
must be careful when comparing against businesses who are still govt subsidised.
It is then split into liquidity, solvency, profitability, efficiency
Liquidity
2007 0.8:1, 2006 0.91:1, 2005 0.74:1
Like other airlines Q operates on a negative working capital position, so the liquidity
is actually alright

Solvency
2008 75%, 2007 69%, 2006 79%
Airlines are capital intensive and therefore are highly geared
Profitability
Airlines operate on very low profit margins, and it is cyclical
Profit is important to shareholders and long term creditors
Efficiency
Compared with air NZ 92%
And Singapore airlines 87%

Effective working capital management

Current assets - Q does it
Current liabilities Q does it
Strategies:
Leasing more aircraft, buildings and plant and equipment, freed cash that can be used
elsewhere
Considering sale and lease back for some terminals that it owns

Effective financial planning

Cash flow management
Maintains cash flow statements
Uses distribution of payments, discounts for early payments

Effective profitability management

Cost controls:
Achieved the 5 year cost reduction target of $3 billion in June 2008
Using cost centres
Expense minimisation, eg outsourcing, fuel conservation, restructuring
catering
Revenue controls:
Revenue increase by 7.5% in 2007/8
Setting clear sales objectives and report systems
Raising airfares
Getting revenue from other sources (sales mix)

Ethical and legal aspects

Ethical behaviour is safeguarded by:
Audits, ASIC regulations, ASX rule,