Finance Flashcards
strategic role of financial management
is concerned with planning, monitoring and controlling the allocation of the business’s finances to achieve its goals and objectives, and ultimately profit maximisation.
strategic plan
a plan that encompasses the strategies that a business will use to achieve its long-term goals
financial resources
those resources in a business that have a monetary or money value
profitability
the excess of revenue or income over expenses or costs
growth
the ability of the business to increase its size in the longer term
efficiency
the ability of a business to minimise its costs and manage its assets so that maximum profit is achieved with the lowest possible level of assets
liquidity
the extent to which a business can meet its financial commitments in the short term (less than 12 months)
solvency
the extent to which the business can meet its financial commitments in the longer term (more than 12 months)
gearing
the proportion of debt (external finance) and the proportion of equity (internal finance) that is used to finance the activities of a business. Gearing ratios determine the firm’s solvency.
interdependence
the mutual dependence that the key business functions have on one another
financial decision making
requires relevant information to be identified, collected and analysed to determine an appropriate course of action
internal finance
funds generated from inside the business; for example, profits can be retained to finance expansion
external finance
funds provided by sources outside the business, including banks, other financial institutions, government, suppliers or financial intermediaries
debt finance
relates to the short-term and long-term borrowing from external sources by a business
overdraft
when a bank allows a business or individual to overdraw their account up to an agreed limit and for a specified time, to help overcome a temporary cash shortfall
factoring
the selling of accounts receivable for a discounted price to a finance or factoring company
mortgage
a loan secured by the property of the borrower (business)
debenture
a promise issued by a company to repay a loan for a fixed rate of interest and for a fixed period of time
unsecured note
a loan from investors for a set period of time. Unsecured notes are not secured against the business’s assets
leasing
the payment of money for the use of equipment that is owned by another party
equity
as an external source of funds, refers to the finance raised by a company through inviting new owners
dividend
a distribution of a company’s profits (either yearly or half-yearly) to shareholders, calculated as a number of cents per share
financial institutions
financial institutions collect funds and invest them in financial assets. They provide financial services and focus on dealing with financial transactions such as investments, loans and deposits
banks
receive savings as deposits from individuals, governments + businesses and in turn make investments + loans to borrowers
investment banks
provide services in both borrowing and lending to the business sector
finance companies
non-bank institutions that specialise in smaller commercial finance. Funds are raised through debentures (not deposits)
superannuation
a scheme set up by the federal government, which requires all employers to make a financial contribution to a fund that will provide benefits to an employee when they retire
life insurance companies
provide cover and a lump sum payment in the event of death
unit trusts
take funds from a large number of small investors and invest them in
specific types of financial assets
Australian Securities Exchange (ASX)
the primary stock exchange group in Australia
primary market
deals with the new issue of debt instruments by the borrower of funds
secondary market
deals with the purchase and sale of existing securities
global economic outlook
the projected changes to the level of economic growth throughout the world
availability of funds
refers to the ease with which a business can access funds (for borrowing) on the international financial markets
interest rates
the cost of borrowing money
budget
a financial document used to estimate future revenue and expenses over a period of time
operating budgets
relate to the main activities of a business and may include budgets relating to sales, production, raw materials, direct labour, expenses and cost of goods sold
project budgets
relate to capital expenditure, and research and development
financial budgets
relate to financial data of a business and include the budgeted income statement, balance sheet and cash flows
record systems
the mechanism employed by a business to ensure that data are recorded and the information provided is accurate, reliable, efficient and accessible
financial risk
the possibility of financial loss to businesses
financial controls
the procedures, policies and means by which a business monitors and controls the allocation and usage of its resources
debt finance
short-term and long-term borrowing from external sources by a business
equity finance
relates to the internal sources of finance in the business
cash flow statement
a financial statement that indicates the movement of cash receipts and cash payments resulting from transactions over a period of time
income statement
a summary of the income earned and the expenses incurred over a period of trading. It helps users of information see exactly how much money has come into the business as revenue, how much has gone out as expenditure and how much has been derived as profit
cost of goods sold
the value of stock that a business has sold to its customers
gross profit
that part of a business’s profit that represents operation income minus cost of goods sold
net profit
the difference between the gross profit and expenses
expenses
the costs incurred in the process of acquiring or manufacturing a good or service to sell and the costs (direct and indirect) associated with managing all aspects of the sales of that good or service
balance sheet
a summary of a business’s assets and liabilities at a particular point in time, expressed in money terms; represents the net worth of the business
assets
items of value owned by a business
liabilities
items of debt owed to outside parties
owners’ equity
the funds contributed by the owner(s); represents the net worth of the business
accounting equation
a equation that shows the relationship between assets, liabilities and owners’ equity, which forms the basis of the accounting process
analysis
working financial information into significant and acceptable forms that make it more meaningful, and highlighting relationships between different aspects of a business
interpretation
making judgements and decisions using the data gathered from analysis
audit
an independent check of the accuracy of financial records and accounting precedures
cash flow
the movement of cash in and out of a business over a period of time
current assets
assets that a business can expect to convert into cash within 12 months. They usually include cash and accounts receivable
working capital
the funds available for the short-term financial commitments of a business
net working capital
the difference between current assets and current liabilities. It represents those funds that are needed for the day-to-day operations of a business to produce profits and provide cash for short-term liquidity
current liabilities
liabilities that a business must repay within the short term. They usually include overdraft and accounts payable
working capital management
determining the best mix of current assets and current liabilities needed to achieve the objectives of the business
receivables
sums of money due to a business from customers to whom it has supplied goods or services. Receivables are recorded as accounts receivable
payables
sums of money owed by the business to other businesses from whom it has purchased goods and services. Payables are recorded as accounts payable
leasing
the payment of money for the use of equipment that is owned by another party
sale and lease-back
the process of selling an owned asset to a lessor and then leasing the asset back through fixed payments for a specified period of time
profitability management
involves the control of both the business’s costs and its revenue
fixed costs
costs that are not dependent on the level of operating activity in a business. Fixed costs do not change when
the level of activity changes — they must be paid regardless of what happens in the business
variable costs
costs that vary in direct relationship to the levels of operating activity or production in a business. Such costs include labour costs and costs of energy
cost centres
particular areas, departments or sections of a business to which costs can be directly attributed
foreign exchange market (forex or fx)
a market that determines the price of one currency relative to another
foreign exchange rate
the ratio of one currency to another; it tells how much a unit of one currency is worth in terms of another
appreciation
an upward movement of the Australian dollar (or any other currency) against another currency
payment in advance
a payment method that allows the exporter to receive payment and then arrange for the goods to be sent
letter of credit
a document that a buyer can request from their bank that guarantees the payment of goods will be transferred to the seller. The letter of credit is issued by the importer’s bank to the exporter promising to pay them a specified amount once certain conditions have been met.
clean payment
occurs when the exporter ships the goods directly to the importer before payment is received
spot exchange rate
the value of one currency in another currency on a particular day
hedging
the process of minimising the risk of currency fluctuations
derivatives
simple financial instruments that may be used to lessen the exporting risks
associated with currency fluctuations
forward exchange contract
a contract to exchange one currency
for another currency at an agreed exchange rate on a future date, usually after a period of 30, 90 or 180 days
option
something that gives the buyer (option holder) the right, but not the obligation, to buy or sell foreign currency at some time in the future
currency swap
an agreement to exchange currency in the spot market with an agreement to reverse the transaction in the future