Finance Flashcards
What are the objectives of financial management?
- profitability
- growth
- efficiency
- liquidity
- solvency
What is profitability, and why is it important?
- The ability to maximise profits
- Benefits owners and shareholders in the short-term
- Ensures long-term sustainability
What is growth, and why is it important?
- Ability to increase the size of the business
- Ensures future sustainability
What is Efficiency?
Minimise cost and maximise profit by managing assets effectively
What is Liquidity?
The extent to which a business can meet its short-term financial commitments
What is Solvency?
The extent to which a business can meet its long-term financial commitments
Why can there be conflict between short-term and long-term financial objectives?
- Conflict with stakeholders; long-term growth often occurs at the cost of short-term profit and can require the use of capital investment
What is the interdependence between Finance and Marketing?
- Marketing generates sales > gains finance
- Finance funds marketing campaigns
What is the interdependence with Finance and Operations?
- Operations uses efficiency to minimise costs
- Finance funds new equipment to ensure efficiency
What is the internal source of finance
Retained profits
What is Retained Profits?
Money kept in the business by the owners and reinvested back into the business
What are the Advantages and Disadvantages of Retained Profits?
+ Do not have to pay interest
- Could have invested elsewhere > earned higher profit
What are the external sources of finance
- Debt (short-term and long-term)
- Equity (ordinary shares and private equity)
What are the short-term sources of debt finance?
- Overdraft
- Commercial Bills
- Factoring
What are the long-term sources of debt finance?
- mortgage
- debentures
- unsecured notes
- leasing
What is an overdraft and where is it classified as a source of finance?
- external > debt > short-term
- The bank allows an overdraw of an account up to an agreed limit and for a specified time
What are the Advantages and Disadvantages of an overdraft?
+ 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
What are commercial bills and where is it classified as a source of finance?
- external > debt > short-term
- Loans issued by institutions for large amounts ($100 000+) for a period of between 90-180 days
What are the Advantages and Disadvantages of Commercial Bills?
+ Interest rates cheaper than other options
+ Immediate access to a larger amount of money
- Usually secured against assets
What is factoring and where is it classified as a source of finance?
- external > debt > short-term
- Selling of accounts receivable for a discounted price to a finance or debt collector company
What are the Advantages and Disadvantages of Factoring?
+ Save time and money in chasing up customers
+ Receive up to 90% of accounts receivables quickly
- The full amount owed will not be received
What is a mortgage and where is it classified as a source of finance?
- external > debt > long term
- Loan secured by the property of the borrower (business) used to finance property purchase
What are the Advantages and Disadvantages of a mortgage?
+ Access to large amounts of money repaid over an agreed period of time
- Large sums of interest charged
What is a debenture and where is it classified as a source of finance?
- external > debt > long-term
- long-term investment from other business > used to raise funds from investor instead of financial institution
What are the Advantages and Disadvantages of a debenture?
+ Access to large amounts of money
- fixed interest rates over fixed time; relies on a steady cash flow.
- secured to assets
What are unsecured notes and where is it classified as a source of finance?
- external > debt > long-term
- A loan for a set period of time but is not backed by any collateral or assets.
What are the Advantages and Disadvantages of unsecured notes?
+ No security required
- Higher interest rate
What are the types of ordinary shares in equity financing?
- new issues
- rights issues
- placements
- share purchasing plans
What are new issues and where is it classified as a source of finance?
- external > equity > ordinary shares
- Initial Public Offering (IPO), issued through a prospectus
What are the Advantages and Disadvantages of new issues?
+ 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
What are rights issues and where is it classified as a source of finance?
- external > equity > ordinary shares
- Privilege given to existing shareholder to buy new shares in same company (After IPO)
What are the Advantages and Disadvantages of rights issues?
+ Cheaper and faster than the IPO
+ Easier to obtain finance from shareholders who already know the business model
- Less possible buyers
What are placements and where is it classified as a source of finance?
- external > equity > ordinary shares
- shares offered privately to specific major investors > not general public
What are the Advantages and Disadvantages of placements?
+ Can prevent hostile takeovers from occurring
+ Cheaper and faster than the IPO
- May not raise as much money as an IPO
What are share purchase plans and where is it classified as a source of finance?
- external > equity > ordinary shares
- offer to existing shareholders to buy more shares without brokerage fees and possibly at a lower price
What are the Advantages and Disadvantages of share purchase plans?
+ quick and cheap
- Probably at a lower price than offering new shares
What is private equity and where is it classified as a source of finance?
- external > equity > private equity
- Money invested in a private company by other businesses or individuals not listed on ASX
What are the Advantages and Disadvantages of private equity?
+ investor may have good ideas for the business
- Original owners lose a lot of control
What are the financial institutions?
- Banks
- Investment Banks
- Finance Companies
- Life Insurance Companies
- Superannuation Funds
- Union Trusts
- Australian Securities Exchange (ASX)
What are Banks?
- The largest provider of funds and financial services to businesses
- They receive savings as deposits and in turn make investments and loans to borrowers.
What are Investment Banks?
Financial institutions that provide a wide variety of loans and can customise loans to suit a business’s specific needs.
What are Finance Companies?
- Non-bank financial intermediaries that offer loans to a business
- Major providers of lease finance to businesses
What are Life Insurance Companies
Provide cash payouts to the family of someone in event of their death. They use regular premiums to invest in financial assets.
What are Superannuation Funds?
financial institution that invests the money from superannuation contributions into company shares, property and managed funds
What are Union Trusts?
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.
What is the Australian Securities Exchange (ASX)
Where shares are bought and sold
What are the two influences of government?
- Australian Securities and Investments Commission (ASIC)
- Australian Taxation Office (ATO) and company taxation
What is Australian Securities and Investments Commission (ASIC)
- 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
What is the Australian Taxation Office (ATO) and company taxation?
- 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
What are the Global Market Influences
- economic outlook
- availability of funds
- interest rates
What is Economic Outlook?
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
What is availability of funds?
ease in which a business can access funds in the international financial markets (based on risk, demand and supply, and domestic global conditions)
What are interest rates?
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)
What is leasing and where is it classified as a source of finance?
- external > debt > long-term
- Payment for use of equipment for a period of time
What are the Advantages and Disadvantages of leasing?
+ access to equipment without large payment
- overtime cost will be higher than upfront price
