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BUS 12 > Chapter 10: Influences on financial management > Flashcards

Chapter 10: Influences on financial management Flashcards

1
Q

what are the five main influences on financial management

A
  • internal sources of finance
  • external sources of finance
  • global market influences
  • financial institutions
  • influences of gov
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2
Q

what are the main sources of finance during the etsablishment phase

A

owners and or shareholders usually contribute to the majority of funds, as banks and other financial institutions are less inclined to lend to new buses due to high lvl of risk

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3
Q

it is important to match the purpsoe of funds and the structure of the bus with the right source of funds. which sources of funds is most appropriate will be influenced by factors such as:

A
  • the purpose for which the funds are applied - eg short term purposes should not be funded by long term loans
  • the bus’s current lvl of gearing - eg a bus that already has significant amt of debt should not borrow
  • the size of the bus - eg many sources of finance for large is not suitable for small
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3
Q

what is owners’ equity

A

funds invested into the bus by existing owners (can also be by new owners/shareholders but they are external sources of finance and owner’s equity also become external source of finance)

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4
Q

identify the internal sources of finance

A
  • owners’ equity
  • retained profits
  • sale of assets
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4
Q

what are retained profits

A

net profit of a bus not paid out in dividends to shareholders - kept in bus as an accessible source of finance to fund future expenditures
- most common source of internal finance

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5
Q

what are sales of assets

A

projects can also be funded through the sale of unproductive or surplus assets such as buildings, plant and equip

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6
Q

what two groups can you split external sources of finance

A

debt borrowed from outside the bus and equity where the bus raises capital by selling shares to new owners (equity funds by existing owners are considered internal)

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7
Q

what is short term borrowing used for

A

short term finance is used toprovide working capital or cover temporary shortages in cash flow due to lower inflows or higher outflows
- generally repaid within 12 months
- recorded on balance sheet as current liabilities

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8
Q

identify the different types of short-term borrowing

A
  • bank overdrafts
  • commercial bills
  • factoring
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9
Q

what are overdrafts and their disadv and adv

A
  • overdrafts allow a bus to overdraw its acc up to an agreed limit (ie the ability to withdraw money from bank acc past negative balance)
  • interest rates on overdrafts typically lower than other forms of borrowing
  • allow greater flexibility to assist with short term vash flow or liquidity problems
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10
Q

what are commercial bills and their conditions

A

loans to bus issued by institutions other than banks - eg merchant or investment bank
- usually over $100k
- more suitable for large buses
- repaid with interest

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11
Q

what is factoring and its conditions

A

selling a bus’s accounts receivable (money owed to a bus) at a discount to a factoring company for immediate cash
- improves liquidity as bus receives cash fast (even tho current ratio appears worse cos accs receivable falls by more than cash increases)
- factoring arrangements may be without recourse (the company assumes the risk of any debts remaining unpaid) or with recourse (the bus agrees to buy back any bad debts from the factoring company)
-has become a much more common and widely accepted as a legitimate source of short term finance

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12
Q

what is long term financing

A

long term financing is mainly used to purchase assets such as real estate, plant and equipment
- long term debts extend over 12 months
- recorded as non-current liabilities on the balance sheet

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13
Q

idnetify the different types of long term borrowing

A
  • mortgages
  • debentures
  • unsecured notes
  • leasing
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14
Q

what are mortgages and their conditions

A

mortgages are used to finance major purchases, such as premises or machinery
- if buses are unable to repay then the mortgage acts as a security
- bank can repossess the asset if the borrower defaults on repayments
- repaid with interest thru regular repayments over an agreed period of time

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15
Q

what are debentures and its conditions

A

debentures are sold by large buses to investors to raise capital
- ie investors purchase a debenture (lend money to a bus) in exchange for regular fixed interest payments during the term of the debenture and repayment of full amt upon expiry of the debenture
(in short its a bond but for buses and investors)
- since debentures usually secured against a company’s assets, itds the first to recover their investment when the bus becomes insolvent

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16
Q

what are unsecured notes and its conditions

A

like debentures, sold by buses to raise capital, however, unlike deben and commercial bills, they are not secured by any assets of the business issuing the note
- can be short term form of debt even tho in the long term borrwoing section of the syllabus
- buses pay higher rate of interest bcos they present more risk to investors

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17
Q

what is leasing

A

leasing involves payment for the use of equipment (plant, machinery, etc) that is owned by another party

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18
Q

what are the two main types of leases

A
  • operating leases - for shorter periods and only renting it
  • financial leases - for longer periods of time, often up to the life of the asset and eventual purchase of the asset
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19
Q

what are the adv of leasing

A
  • it enables a bus to borrow funds and use an asset without a large capital outlay
  • assist with cash flow, since payments are spread out over long periods of time
  • makes upgrading to newer equipment simpler and more cost effective
  • easier to establish than a large loan
  • leasing some assets leave a bus in a better position to borrow funds in the future
  • repayments are fixed, so they do not fluctuate like interest rate on loans
  • lease payments are a tax deducation
  • payments usually include maintenance and insurance costs
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20
Q

how do buses raises finance through equity

A

issuing ordinary shares or private equity

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21
Q

what are the adv and disadv of issuing shares for buses

A
  • adv: involves fewer risks than debt financing
  • disadv: increasing the number of owenrs, thus diluting the original owners’ shates of the bus, resulting in a smaller share of profits and reduced conrol
  • when shares sold on the secondary market, buses do not gain or lose equity
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22
Q

ordinary shares can be issued a number of ways (all new shares, but offered to different groups):

A
  • new issues
  • rights issues
  • placement
  • share purchase plans (SPPs)
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23
what are new issues
- shares that are being issued and sold for the first time on a public market (ie. shares being sold on the ASX by a public company) - sometimes referred to as primary shares of new offerings - when a company is first floated (ie when they become public), their first issue of shares to the public is called an initial public offering (IPO) (new issues issued via IPO)
24
what si rights issues and its conditions
the offer to existing shareholders to buy additional shares in the same company - allows shareholders to maintain their proportion of ownership - rights issued via a predetermined ratio based on shareholder's current proportion - the new shares available at a discount to the current market price
25
what are placements (external sources of finance - equity)
placements are issuing shares directly from a company to outside investors without making a public offering - speedy acquisition of funds - money usually for taking over another bus, expanding bus or to improve gearing - to protect existing shareholders, placements are limited to 15% of bus's total market value
26
what are share purchase plans (SPPs) (external sources of finance - equity)
SPPs allow companies to issue up to $30k in new shares to each existing shareholder without prospectus or paying brokerage fees - can also be offered at discount to current market price, raising capital quickly and cheaply
27
what is private equity
priv equity refers to money invested in private companies not listed on ASX usually by inviting new partner to purchase shares in the bus and become part-owner
28
if priv buses are unable to raise req'd funds using priv equity, what other strats can they use
- leveraged buyout (LBO) - bus borrows heavily to purchase another bus with a lot of growth potential to repay the loan u used to purchase it - venture capital - financial support provided to risky bus projects with potentially hgih returns (venture capitalist usually becomes shareholder) - growth capital - differs form venture, investor puts up funds for share of ownership
29
describe the role banks
the main providers of finance to buses - banks market share have decreased over the last 40 years due to financial deregulation (easing of laws, increasing competition by allowing foreign banks to participate in aus financial market
30
what are the financisl products of bank
- overdrafts - credit cards - short and long term loans - mortgages
31
desrcibe the role of investemnt banks (merchant banks)
- specialise in banking for med to large buses - buses can also make investments and get advice on forex and mergers and takovers
32
what are the financial products of investment banks
commercial bills, loans, private equity
33
describe the role of finance companies
- make loans to buses - provide lease finance - some specialise in financing - provide quicker access to funds and tend to have less strict criteria than other creditors - typically charge higher interest rates
34
what are the financial products of finance companies
loans, credit cards, leasing, factoring
35
what is the role of superannuation funds
- super funds invest the contributions of members in shares and loans, providing a large amount of finance for buses - source of long term finance for buses
36
what are the financial products of superannuation funds
equity capital, long term loans
37
what is the role of insurance companies
- cover for damages or losses in return for payment of premiums - to spread exposure to risk and generate returns on funds, they invest those premiums in other buses
38
what are the financial products of insurance companies
equity capital and long term loans
39
what is the role of unit trusts (aka mutual funds)
- similar to super funds: pool funds from investors into a large no# of investments - each investor is able to earn much larger returns
40
what are the financial products of unit tursts
mortgages, share market funds
41
can buses source finance through the ASX
while not a direct investor or lender to the bus, the ASX is an important source of funds for public companies
42
what si the primary market
the primary market enables a company to raise new capital through the issue of shares (securities), whereby those investors become part-owners
43
why is the primary market especially important
- launch pad for buses that want to raise capital by selling shares publicly for the first time through IPO (float) - capital raising through the primary market encourages eco growth, employment and wealth creation by facilitating flow of funds from investors to bsues
44
what are secondary markets
where existing shares are traded (exchanged) b/w buyers nd sellers - does not directly generate funds for the bus - the demand for shares on the secondary market determine the share price (and any new shares sold by the bus would raise a greater amt of equity finance)
45
what are the two most important gov influences on financial management
- the Aus Securities nd investments commission (ASIC) - company taxation
46
what is ASIC and their role (duty)
- main gov agency responsible for monitoring aus's financial sector - role is to administer and enforce company and financial sevrices laws to protect aus consumers - offers protection in invetments, insurance, super and banking thru the enforcement of its own regulations as well as a few laws
47
what is the aim of asic (goal)
- assist in reducing fraud and unfair practices in financial markets and financial products - issues licenses to buses that operate in financial markets and ensures that all companies adhere to the law and collects info abt companies and makes it available to the public
48
what will ASIC do if a bus breaches laws
- ASIC will investigate the matter and determine an appropriate remedy - remedies may rnage from monetary penalties to imprisonment
49
what are the tax rates for diff buses
- from 2001: the aus company tax rate was a flat 30% menaing all incorporated bus (priv and public) were taxed this regardless of their size and profits - form 2015: the rate was progressively reduced for smaller companies (annual turnover less than $50 mill)
50
what is the influence of company tax on a bus
- company tax is paid before profits are distributed to shareholders as dividends (sound financial management is req'd to ensure a bus has adequate financial resources available when their tax obligations due) - these obligations iniclude GST collected on behalf of gov
51
what was the effect of aus' tax reform
improved aus' international compeitiveness substantially, aming aus more attractive place for overseas individuals and buses to invest their funds --> steady eco growth and rising standard of living
52
what are the global makret influences on the financial management of buses
global and domestic eco outlook, the availability of funds, interest rates and globalisation (dramatic increases in movements in G&S (trade) and capital)
53
define the global economic outlook and its influences on buses
the global economic outlook refers to the projected changes to the level of eco growth throughout the world - due to the impacts fo globalisation and economic interdependence, the eco outlook in aus is strongly influenced by global economic projections - the global economic uotlook will therefore impact ont he financial decisions of aus buses
54
if the global economic outlook is positive, what can buses expect
- increasing demand for G&S: buses need to increase production to meet demand & finance need to provide funds to expand the bus, purchase new plant and equip, employ or retrain staff - more favourable conditions for borrowing funds (or raising equity): buses keen to borrow enablign them to increase output, and investors will be more likely to provide funds in anticipation of higher revenue for buses
55
if the global eco outlook is negative, what can the bus expect
- decreasing demand for G&S: buses will look to decrease production and reduce costs in anticipation of lower demand and lower revenue, finance function has to idnetify all possible cost savings - less favourable conditions for borrowing - buses looking to borrow to upgrade facilities or cover expenses in times of falling revenue will find financial inst more reluctant to provide funds due to the lvl of risk
56
define the availability of funds
refers to the ease with which a bus can access funds for borrowing in internationa and domestic financial markets (made up of financial inst, companies and govs prepared to lend money)
57
what are the conditions and interest rates applied on loans based on
- the lvl of risk involved - demand and supply - domestic economic conditions
58
when do govs have to reduce the availability of funds and create a more challenging lending environment for buses
govs reduce money supply to combat high inflation by increasing the rates of interest
59
what are interest rates
refer to the amt charged, expressed as a % of the amt borrowed, by lenders to borrowers (creditors to debtors) - ie the cost of borrowing money - high interest rates may also reflect limited availability of funds for lending in the eco
60
what are the risks of borrwoing funds form overseas
- largely unpredictable movements in ER - any adverse currency fluctuation (ie decline in aus dolar relative to currency of lender result in bus having to pay more) - the opp is also possible but in long term borrwoing overseas may end up costing more

BUS 12 (8 decks)

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