Finance #1 Flashcards
What is financial management?
The planning and monitoring of a business’s financial resources to achieve financial objectives.
the strategic plan is how long
Long-term
What are the five finance objectives?
Profitability, Growth, Efficiency, Liquidity and Solvency
efficiency
The ability to achieve maximum profit with the lowest possible level of assets through managing assets and minimising costs
liquidity
The extent to which a business can meet its financial commitments in the short-term
short-term
Less than 12 months
solvency
The extent to which a business can meet its financial commitments in the long-term
growth
The ability of a business to increase its size in the longer term.
profitability
The excess of revenue or income over expenses or costs.
how does finance have interdependence with the other business functions
marketing, operations and hr rely on the financial managers to allocate adequate funds. operations create funds for finance, marketing promotes the products that will create more funds, and hr manages the staff that works in these areas.
how does finance have interdependence with the other business functions
marketing, operations and hr rely on the financial managers to allocate adequate funds. operations create funds for finance, marketing promotes the products that will create more funds, and hr manages the staff that works in these areas.
internal finance
the funds that are generated from inside the business
external finance
funds provided by sources outside the business
debt finance
the borrowing from external sources to fund the business
retained profits
what is the industry average
earnings or profits that aren’t distributed but kept in the business for future activities
Australia: 50% of profits on average are retained to be reinvested
what are the short term borrowings within debt finance
overdraft, commercial bills, factoring
overdraft
how does this help with liquidity
the bank allows someone to overdraw their account for an agreed limit to help overcome a temporary cash shortfall
it provides a short-term solution to any unconventional moments in business success, such as seasonal decreases in sales
commercial bills
why is this low risk
short-term loans for larger amounts (over $100,000) for between 30-180 days
these loans are usually secured AGAINST THE BUSINESS’S ASSETS and are generally rolled over until the borrower has the funds to repay the loan in full
factoring
within factoring companies, what is ‘without recourse’
'with recourse'
why does this have more risk
selling accounts receivable for a discounted price to specific firm
transfer complete responsibility for non-collection to the factoring company
the bad debts will still be a responsibility of the business
the likelihood of unpaid debts, relatively expensive for debts that remain unpaid because commission is paid on the debt
what are the long term borrowings within debt finance
mortgage, debentures, unsecured note, leasing,
mortgage
loan secured by the property of the borrower that can’t be sold or used as security for further borrowing until the loan has been repaid, with interest through regular payments over an agreed period of time
debentures
a loan where investors lend money in exchange for a FIXED INTEREST FOR A SPECIFIC TIME,
in doing this they offer security to the lender and to get this loan the company must have a prospectus, stating all performance of the company
unsecured notes
why does it attract a higher rate of interest than a secured note
a loan from investors for a set period that is not secured against the business’s assets used to generate funds such as share repurchases and acquisitions
Because they pose the most risk to investors as it isn’t secured against the business’s assets
leasing
the payment of money for the use of equipment that is owned by another party
what are the advantages of leasing
assists cash flow of a business - as a result of the leasing payments being spread out over several years, saving the burden of a one-time cash payment
costs of establishing leases may be lower
long-term financing without reducing control of ownership
businesses may be in a better place to borrow funds
act as a tax deduction
what is a disadvantage of leasing
the interest charges may be higher than for other forms of borrowing
equity finance
an external source of funds raised by the company through inviting new owners
what are the forms of equity finance
ordinary shares, private equity
characteristics of ordinary shares
most commonly traded shares
publicly listed company
individuals get payments in the form of dividends
unit trust
funds from a large number of small investors that is invested into an array of financial assets.
what does ASIC administer and enforce
the corporations act 2001
what is the tax rate for small businesses with a turnover less than $10 million
27.5%
what is the tax rate for all other companies that are not small business entities
30%
global economic outlook
the projected changes to the level of economic growth throughout the world
what are some results of there being a positive global economic outlook
increasing demand for products and services
decrease in the interest rates on funds borrowed internationally
