2. influences on financial management Flashcards
1
Q
What is internal finance?
A
- Funds generated from inside the business
- Profits retained for future expansion and growth
2
Q
What are retained profits?
A
- Profits are not distributed
- Instead kept in business as cheap and accessible source of finance for future activities
- Enables business to reduce dependency on external sources (increasing debt) - solvency
3
Q
What is external finance?
A
- Funds provided by sources outside of business
- Including banks, other finance institutions, government, suppliers or financial intermediaries.
4
Q
What are the types of external sources of finance?
A
- Debt finance
- Equity finance
5
Q
What is debt finance?
A
- Finance provided from external sources through creditors or lenders
- Business relies on outside sources rather than owners finance business
6
Q
What are the advantages of debt finance?
A
- Readily available funds on short notice
- Increased funds = increased earnings = increasing profits
- Interest payments = tax deductible
- Flexible payment periods are available
Existing ownership of business maintained.
7
Q
What are the disadvantages of debt finance?
A
- Increased risk because interest has to be paid on top of principal
- Increase in interest rate or bank and government charges
- Security required by business
- Regular payments required
- Lenders have first claim on money if business ends in bankruptcy
Expensive to service debt - interest rate
8
Q
What are the types of debt finance?
A
- Short term borrowing
- Long term borrowing
9
Q
What are the types of short term borrowing?
A
- Overdraft
- Commercial bills
- Factoring
10
Q
What is short term borrowing?
A
- Provided by financial institutions through overdrafts, commercial bills and bank loan.
- Used to finance temporary shortages in cash flow or finance for working capital
- Funds repaid within 12 months
- Current liabilities on balance sheet
11
Q
What is overdraft?
A
When bank allowed business or individual to overdraw account up to an agreed limit and time, to help overcome temporary cash shortfall.
12
Q
What are the advantages of overdraft?
A
- Assist with short-term liquidity problems
- Lower interest rates than other borrowing forms.
- No regular payment schedule - pay back when able to
- can be used to pay accounts payable
- maintain liquidity
13
Q
What are commercial bills?
A
- primarily short term loans issues by financial institutions for larger amounts
- Borrower receives sum immediately and promises to repay money with interest in future
- Full amount does not have to be repaid until end of term
14
Q
What are advantages of commercial bills?
A
- Flexible regarding interest and repayment period
- Secured against the business’s assets
- Rolled over until borrower has funds to repay full loan
15
Q
What is factoring?
A
- Raising cash flow by selling accounts receivable to a factoring company at a discount
- Enables business to immediately raise funds by selling accounts receivable at a discount to a factoring business
- Receives up to 90% of amount in 48hours from factoring company
16
Q
What are the advantages of factoring?
A
- Business improve its cash flow and gearing through immediate access to funds
- Doesn’t have to worry about collect of accounts of costs in the process
17
Q
What are the disadvantages of factoring?
A
- Greater risk that other sources of short term borrowing - likelihood of unpaid debts
- Relatively expensive source of finance - business is responsible for unpaid debts
18
Q
What is long term borrowing?
A
- Funds borrowed for periods longer than 12 months
- Used to purchase major assets which serve as security on the loan
- Common source of financing
- Recorded as non-current liabilities
19
Q
What are the types of long term borrowing?
A
- Mortgage
- Debentures
- Unsecured notes
- Leasing
20
Q
What is a mortgage?
A
- Loan secured by the property of the business
- Mortgaged property cannot be sold or used as security for further borrowing until mortgage is repaird
- Used to finance property purchases
Repaid with interest through regular payments
21
Q
What are debentures?
A
- Issued by a company for a fixed rate of interest and for a fixed period of time
- Way to raise funds from non- banking institutions instead of financial institutions
- Promise made by company to repay money lent
22
Q
What is the process associated with debentures?
A
- Investor lends money to company
- In return, company issues a debenture + promise to make regular interest payments for a defined term
- Repay the loan at certain date in future.
23
Q
What are unsecured notes?
A
- Loan from non bank financial institutions for set period of time
- Not secured against business’ assets - present risk to investors
24
Q
What are advantages and disadvantages of unsecured notes?
A
- Adv - Not secured against assets
- Disadv - Because not secured against assets = higher interest rate
25
What is leasing
- Long term source of borrowing
- Payment of money for use of equipment owned by another party
26
Advantages of leasing?
- Enables enterprise to borrow funds and use equipment with large capital outlay
- Costs and benefits of asset transferred from lessor to lessee
- Assists business with cash flow- leasing payments are spread out over years; saving burden of one off significant payment.
- Lower establishing leases costs than other financing
- Leased assets enabled business to better borrow funds
- Long term financing without reducing control of ownership
- Permits 100% financing of assets
- Repayments are fixed - cash flow can be easily monitored
- Lease payments are tax deduction
Payment includes maintenance insurance and finance costs
27
Disadvantages of leasing?
impact profit
impact liquidity because it is not your asset so it will increase current liabilities but not assets
28
What is equity finance and equity?
INVESTING
Equity finance - funds contributed by the business owners - capital or reinvesting profit.
Equity - external source of funds, finance raised by company through inviting new owners.
- Alternative to debt funding
- Still external finance
29
What are the types of equity as a source of external finance?
1. Ordinary shares
2. private equity.
30
What are the advantages of equity finance?
1. Does not have to be repaid unless owner leaves business.
2. Cheaper than other sources - no interest payments.
3. Retain control over how finance is used.
4. Use owners resources without external sources - less debt.
5. Less risk for business and owner.
31
What are the disadvantages of equity finance?
1. Expectations from owner/shareholder on ROI.
2. Long and expensive process to obtain funds.
3. Extensive documentation (prospectus) required.
4. Ownership is diluted - more shareholders = more owners = less control to current owners.
32
What are ordinary shares?
Most commonly traded shares in Australia. Individuals become part owners of a publicly listed company and receive payments - dividends.
- only a source of finance for the business when sold on the primary market for the first time.
33
What are the types of ordinary shares?
1. New issue
2. rights issue
3. placements
4. share purchase plans.
34
What are new issue ordinary shares?
Issuing and selling business shares for the first time on ASX. Requires a prospectus.
- Sell through an IPO - initial price offering - sold for the first time
35
What are rights issue ordinary shares?
Giving existing shareholders the privilege to buy new shares in the company at a discount.
36
What are placements as ordinary shares?
Proportion of shares that are given at a discounted value to specific shareholders/investors. Creating new shares in return for capital - issuing to selected investors at discounts.
37
What are share purchase plans as ordinary shares?
Offering existing shareholders to buy more shares without brokerage fees and/or at a discounted value without a prospectus.
38
What is private equity?
Money invested in a private company not listed on the ASX. Aims to raise capital to finance future expansion/investment of the business.
39
What is a form of private equity?
Venture Capitalism - Capitalist takes big risk by investing in a company and expects good returns.
40
What are financial institutions?
Collect funds and invest them in financial assets. Provide financial services and focus on dealing with financial transactions such as investments, loans and deposits.
41
What are the types of financial institutions?
1. Banks
2. Investment banks
3. Finance companies
4. Life insurance companies
5. Superannuation funds
6. Unit trusts
7. Australian Securities Exchange.
42
influence of financial institutions on financial management of businesses
1. sourcing debt and equity finance
2. providing advice, support and skilled expertise through assistance
43
What are banks?
- Major operator in financial market.
- Most important source of funds for business. - Offer a range of financial products and services.
- main source of finance for small business
- provide debt and equity finance
44
how can banks influence a business' financial management
- level of interest rates on loans will influence a business' financial decisions
(high interest rate = less likely to take out large loan)
services provided can help business help small businesses effectively manage their finances to improve their profitability and grow.
45
What are some examples of products and services provided by banks?
- Offering credit cards
- Cheques
- Overdrafts
- Insurance
- Investment and savings account
- Lending money through personal and business loans
- Mortgages.
46
What are traditional banking services provided by banks?
Internet banking, ATMs, Financial advice.
47
What are some non-traditional banking services provided by banks?
Business banking, Trading in financial markets, Stockbroking, Insurance, Funds management.
48
How does a bank make profit?
1. Bank receives savings as deposits from individuals, businesses and governments.
2. Banks use money to make investments and loans to borrowers.
3. Bank accepts money at lower interest rate and lends money at higher interest rate.
49
What are investment banks?
- Provide services in borrowing and lending to the business sector.
- Provide a variety of loans for businesses.
CUSTOMISED TO THE REQUIREMENTS OF LARGE CORPORATIONS
- offer both ST and LT loans
50
how can investment banks influence a businesses financial management
- provide advaice to businesses who want large growth opportunities - MERGERS AND ACQUISITIONS
- looking into the advantages and disadvantages of the M&A
- invests the business' funds in other areas
51
What are the functions of investment banks?
- Trade in money, securities and financial futures
* Arrange long term finance for company expansion
* Provide working capital
- Arrange project finance
- Advise clients on foreign exchange cover
- Advise on mergers and takeovers
- Provide portfolio investment management services
- Underwrite corporate and semi-government issues of securities
- Operate unit trusts
* Arrange overseas finance.
52
What are finance companies?
- Non-bank financial intermediaries which specialize in smaller commercial finance.
- Provide assistance and support to access finance from other sources.
- find best loan
53
How do finance companies raise money?
Through debentures for fixed term and carry fixed rate of interest.
54
What are finance companies entitled to?
Lenders have security of priority over firms assets in event of liquidation. Can sell the assets of the business to recover the initial loan if the business fails.
PROVIDE ACCESS TO MONEY - SOURCE OF FUNDS
55
What are life insurance companies?
Non-bank financial intermediaries who provide cover and a lump sum payment in event of death.
56
What is the agreement between policy holders and insurers in life insurance companies?
Policy holders pay regular premiums. Insurers guarantee to pay the designated beneficiary a sum of money upon death of the insured person.
57
What do life insurance companies provide to businesses?
- Equity and loans by collecting insurance premiums, which they invest.
- Premiums collected are invested in financial assets to build reserves.
58
What is superannuation?
- Scheme set up by federal government
- requiring all employers to make a financial contribution to a fund that will provide benefits to employees when they retire.
- at 11.5%
59
how can superannuation affect business' financial management
- need to factor the superannuation amount into their finances
- it is an additional cost which the business needs to manage
- business can go to a superannuation fund and get them to invest in them
- can provide access to equity finance which business can use to grow and expand
60
What are employers required to do under superannuation?
Make superannuation contributions for all employees aged between 18 and 69 who are paid more than $450 before tax in a calendar month. Pay an amount equal to 9.5 percent of their employee’s salary.
61
What do superannuation funds do with money received from contributions?
Invest into different things (e.g., company shares, property, managed funds) so members will earn investment returns on money.
62
What are unit trusts?
Take funds from a large number of small investors and invest them in specific types of financial assets.
63
how can unit trusts infleucne business' financial management
source of finance for a business to acess
invest in a mutual fund (increasing money through returns)
or access unit trusts as a source of equity finance
64
Where can unit trusts invest the money?
Any mixture of cash, Australian or international shares, fixed interest securities or property, Gold, silver, oil or gas.
65
What is the Australian Securities Exchange?
Primary stock exchange group in Australia. Market where shares are bought and sold.
66
What are the functions of the Australian Securities Exchange?
1. Market operator
2. clearing house and payments system facilitator
3. Oversees compliance with operating rules
4. Promotes standards of corporate governance among Australia's listed companies.
67
What are the products and services offered by the ASX?
Shares, Futures, Exchange traded options, Warrants, Contracts for difference, Exchange traded funds, Real estate investment trusts, Listed investment companies, Interest rate securities.
68
How does the ASX act as a primary market?
It enables a company to raise new capital through the issue of shares and through receipt of proceeds from sales of securities.
69
How does the ASX act as a secondary market?
Where pre-owned or second-hand securities (e.g., shares) are traded between investors. These transactions do not increase the number of financial assets.
70
How does the government influence a business' financial management decisions?
Through economic policies and legislation.
- regulates what companies can and cannot do and can impose penalties for non-compliance.
can impose regulations to ensure consistency and fairness in business environment.
- business fails to comply = sanctions imposed
71
how do compliance costs influence the financial management of business?
- costs associated with following regulations and rules
- increased expenses = decreased profitability
- consider it in their budgeting
- impact liquidity = less cash (current assets) readily available
- impact growth - less funds allocated, or need to be reallocated for expansion
- need to source more money to follow rules - influence gearing
72
What is the Australian Securities and Investments Commission (ASIC)?
* independent statutory commission accountable to the Commonwealth parliament
* enforces and administers the Corporations Act 2001.
73
what are monetary and fiscal policies and what is their impact on businesses?
monetary policies - decisions about level of interest rates (RBA)
- decrease interest rates = increasing borrowing of money by business to invest in business so it can grow
- increase interest rates = decreased profitability
fiscal policies - the budget
- how the government spends their money
74
What is the role of ASIC?
Protects consumers in areas of investments, life and general insurance, superannuation, and banking (except lending) in Australia.
75
What is the aim of the Australian Securities and Investments Commission?
To assist in reducing fraud and unfair practices in financial markets and financial products, ensure companies adhere to the law, and collect information about companies for public access.
76
What are the powers of the Australian Securities and Investments Commission?
To enforce the Corporations Act, investigate breaches of law, and determine appropriate remedies, which can include imprisonment or monetary penalties.
77
What is company taxation?
A tax that every incorporated Australian business is required to pay on profits, approximately 27.5% - 30%, paid before profits are distributed to shareholders as dividends.
78
what is a case study for external - debt - short term finance - overdraft?
MCDONALDS
- have an accessible overdraft facility for 4 billion
- have not used it yet
79
What are the global influences on financial management?
Economic outlook, availability of funds, interest rates.
80
How has globalisation influenced the financial sector of businesses?
Created more interdependence between economies and their business (and financial) sector which relies on trade for expansion and increased profits.
81
What is the global economic outlook as a global market influence?
Refers to the projected changes to the level of economic growth throughout the world.
82
How can a positive global economic outlook impact the financial decisions of a business?
Increasing demand for products and decrease in interest rates on internationally borrowed funds.
83
How did the COVID-19 pandemic impact global economies?
Australia suffered deepest economic contractions since Great Depression, costed Australia at least $170 billion, world economy is facing a five-year financial hit of between $25 trillion.
84
What is the availability of funds as a global market influence?
Ease with which a business can access funds for borrowing on the international financial markets.
85
What is the international finance markets made of?
Range of institutions, companies and governments which are prepared to lend money to individuals, companies or governments who need to raise capital. Various conditions and rates apply based primarily on risk, demand and supply, domestic economic conditions.
86
What was the impact of the deregulation of the Australian financial system in 1970's and 80's on availability of funds?
Australian economy became more integrated with global financial system, Australians are free to borrow and invest in financial assets overseas, foreigners can do same in Australia, increases availability of funds to businesses.
87
How has the global financial crisis of 2008-09 and COVID 19 impacted availability of funds?
Global financial crisis made access to credit a big challenge for businesses; COVID 19 had a negative impact on availability of funds, reluctance of banks to lend money.
88
What are interest rates as a global market influence?
Cost of borrowing money; higher level of risk involved in lending to business equals higher interest rate.
they change often depending on economic activity - it will impact how easily a business can source funds from overseas
89
Why may Australian businesses borrow finance from an overseas source, but why could it be risky?
Gain advantage of lower interest rates, but risk includes exchange rate movements which could eliminate advantage of cheaper overseas interest rates.
90
What was the impact of the global economic crash? GFC
- Significant decline in global consumer demand - affected supply and revenue
- Availability of funds = reduced - banks less willing to lend money due to increased risk
- High interest rates
- Government response - greater regulation on business activities
