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Business Studies: HSC 2021 > Finance > Flashcards

Finance Flashcards

1
Q

What are the objectives of financial management?

A
  • profitability
  • growth
  • efficiency
  • liquidity
  • solvency
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2
Q

What is profitability, and why is it important?

A
  • The ability to maximise profits
  • Benefits owners and shareholders in the short-term
  • Ensures long-term sustainability
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3
Q

What is growth, and why is it important?

A
  • Ability to increase the size of the business

- Ensures future sustainability

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4
Q

What is Efficiency?

A

Minimise cost and maximise profit by managing assets effectively

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5
Q

What is Liquidity?

A

The extent to which a business can meet its short-term financial commitments

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6
Q

What is Solvency?

A

The extent to which a business can meet its long-term financial commitments

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7
Q

Why can there be conflict between short-term and long-term financial objectives?

A
  • Conflict with stakeholders; long-term growth often occurs at the cost of short-term profit and can require the use of capital investment
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8
Q

What is the interdependence between Finance and Marketing?

A
  • Marketing generates sales > gains finance

- Finance funds marketing campaigns

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9
Q

What is the interdependence with Finance and Operations?

A
  • Operations uses efficiency to minimise costs

- Finance funds new equipment to ensure efficiency

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10
Q

What is the internal source of finance

A

Retained profits

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11
Q

What is Retained Profits?

A

Money kept in the business by the owners and reinvested back into the business

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12
Q

What are the Advantages and Disadvantages of Retained Profits?

A

+ Do not have to pay interest

- Could have invested elsewhere > earned higher profit

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13
Q

What are the external sources of finance

A
  • Debt (short-term and long-term)

- Equity (ordinary shares and private equity)

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14
Q

What are the short-term sources of debt finance?

A
  • Overdraft
  • Commercial Bills
  • Factoring
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15
Q

What are the long-term sources of debt finance?

A
  • mortgage
  • debentures
  • unsecured notes
  • leasing
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16
Q

What is an overdraft and where is it classified as a source of finance?

A
  • external > debt > short-term

- The bank allows an overdraw of an account up to an agreed limit and for a specified time

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17
Q

What are the Advantages and Disadvantages of an overdraft?

A

+ available at short notice
+ assist with short-term liquidity problems
- high and variable interest rates
- Only small amounts and repaid in short amount of time

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18
Q

What are commercial bills and where is it classified as a source of finance?

A
  • external > debt > short-term

- Loans issued by institutions for large amounts ($100 000+) for a period of between 90-180 days

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19
Q

What are the Advantages and Disadvantages of Commercial Bills?

A

+ Interest rates cheaper than other options
+ Immediate access to a larger amount of money
- Usually secured against assets

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20
Q

What is factoring and where is it classified as a source of finance?

A
  • external > debt > short-term

- Selling of accounts receivable for a discounted price to a finance or debt collector company

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21
Q

What are the Advantages and Disadvantages of Factoring?

A

+ Save time and money in chasing up customers
+ Receive up to 90% of accounts receivables quickly
- The full amount owed will not be received

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22
Q

What is a mortgage and where is it classified as a source of finance?

A
  • external > debt > long term

- Loan secured by the property of the borrower (business) used to finance property purchase

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23
Q

What are the Advantages and Disadvantages of a mortgage?

A

+ Access to large amounts of money repaid over an agreed period of time
- Large sums of interest charged

24
Q

What is a debenture and where is it classified as a source of finance?

A
  • external > debt > long-term

- long-term investment from other business > used to raise funds from investor instead of financial institution

25
Q

What are the Advantages and Disadvantages of a debenture?

A

+ Access to large amounts of money

  • fixed interest rates over fixed time; relies on a steady cash flow.
  • secured to assets
26
Q

What are unsecured notes and where is it classified as a source of finance?

A
  • external > debt > long-term

- A loan for a set period of time but is not backed by any collateral or assets.

27
Q

What are the Advantages and Disadvantages of unsecured notes?

A

+ No security required

- Higher interest rate

28
Q

What are the types of ordinary shares in equity financing?

A
  • new issues
  • rights issues
  • placements
  • share purchasing plans
29
Q

What are new issues and where is it classified as a source of finance?

A
  • external > equity > ordinary shares

- Initial Public Offering (IPO), issued through a prospectus

30
Q

What are the Advantages and Disadvantages of new issues?

A

+ If successful, gets the largest amount of funds

  • Less ownership; profits shared with more owners
  • Shareholder risk - the investment may be lost if the business fails
31
Q

What are rights issues and where is it classified as a source of finance?

A
  • external > equity > ordinary shares

- Privilege given to existing shareholder to buy new shares in same company (After IPO)

32
Q

What are the Advantages and Disadvantages of rights issues?

A

+ Cheaper and faster than the IPO
+ Easier to obtain finance from shareholders who already know the business model
- Less possible buyers

33
Q

What are placements and where is it classified as a source of finance?

A
  • external > equity > ordinary shares

- shares offered privately to specific major investors > not general public

34
Q

What are the Advantages and Disadvantages of placements?

A

+ Can prevent hostile takeovers from occurring
+ Cheaper and faster than the IPO
- May not raise as much money as an IPO

35
Q

What are share purchase plans and where is it classified as a source of finance?

A
  • external > equity > ordinary shares

- offer to existing shareholders to buy more shares without brokerage fees and possibly at a lower price

36
Q

What are the Advantages and Disadvantages of share purchase plans?

A

+ quick and cheap

- Probably at a lower price than offering new shares

37
Q

What is private equity and where is it classified as a source of finance?

A
  • external > equity > private equity

- Money invested in a private company by other businesses or individuals not listed on ASX

38
Q

What are the Advantages and Disadvantages of private equity?

A

+ investor may have good ideas for the business

- Original owners lose a lot of control

39
Q

What are the financial institutions?

A
  • Banks
  • Investment Banks
  • Finance Companies
  • Life Insurance Companies
  • Superannuation Funds
  • Union Trusts
  • Australian Securities Exchange (ASX)
40
Q

What are Banks?

A
  • The largest provider of funds and financial services to businesses
  • They receive savings as deposits and in turn make investments and loans to borrowers.
41
Q

What are Investment Banks?

A

Financial institutions that provide a wide variety of loans and can customise loans to suit a business’s specific needs.

42
Q

What are Finance Companies?

A
  • Non-bank financial intermediaries that offer loans to a business
  • Major providers of lease finance to businesses
43
Q

What are Life Insurance Companies

A

Provide cash payouts to the family of someone in event of their death. They use regular premiums to invest in financial assets.

44
Q

What are Superannuation Funds?

A

financial institution that invests the money from superannuation contributions into company shares, property and managed funds

45
Q

What are Union Trusts?

A

Financial institutions that pool together deposits from a number of people and can then invest the large amount into businesses in order to make a profit.

46
Q

What is the Australian Securities Exchange (ASX)

A

Where shares are bought and sold

47
Q

What are the two influences of government?

A
  • Australian Securities and Investments Commission (ASIC)

- Australian Taxation Office (ATO) and company taxation

48
Q

What is Australian Securities and Investments Commission (ASIC)

A
  • enforces the coorperation act 2001
  • assists in reducing fraud and unfair practices in financial markets
  • ensures information about the company is made public (financial reports)
  • can enforce, investigate and impose monetory fines and imprisonment
49
Q

What is the Australian Taxation Office (ATO) and company taxation?

A
  • all business are required to pay tax on all profits at a flat rate of 30% (or 25% for small businesses)
  • the ATO manages tax and superannuation systems
  • results in higher wages, more jobs, more competitiveness and more attractive investment
50
Q

What are the Global Market Influences

A
  • economic outlook
  • availability of funds
  • interest rates
51
Q

What is Economic Outlook?

A

what economists believe about the future of spending globally > negative outlook means less spending on products/services. Can impact a businesses plans for rate of production

52
Q

What is availability of funds?

A

ease in which a business can access funds in the international financial markets (based on risk, demand and supply, and domestic global conditions)

53
Q

What are interest rates?

A

The cost of borrowing money. The higher level of risk involved in lending to a business the higher the interest rates > can impact where a business sources its finance (may source from countries with lower interest rates)

54
Q

What is leasing and where is it classified as a source of finance?

A
  • external > debt > long-term

- Payment for use of equipment for a period of time

55
Q

What are the Advantages and Disadvantages of leasing?

A

+ access to equipment without large payment

- overtime cost will be higher than upfront price

Business Studies: HSC 2021 (1 decks)

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