FINANCE Flashcards
[role] Strategic role
The strategic role of financial management is to provide the financial resources to allow the implementation of the business’s strategic plan. It ensures that a new business continues to operate, grow and is able to achieve its financial objectives.
[Role] Objectives of financial management
Profitability- the ability of a business to maximise profit. This is achieved by carefully monitoring the business’s revenue and pricing policies, costs and expenses.
Growth- the ability of the business to increase its size in the longer term. Growth ensures that a business is sustainable into the future.
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 ability of a business to pay short-term liabilities using current assets. Therefore the current assets need to be greater than the current liabilities.
Solvency- the extent to which a business can meet its financial commitments in the longer term
[Role] Interdependence with other KBF
Operations- finance is required for inputs, machinery, land, etc. to create value whilst receiving a return on investments.
Marketing- finances are required for advertising to occur which generate sales
HR- finance is important aspect to help human resources achieve its resources. The information finance gathers on earnings, productivity and customer satisfaction provides insights into the staffing and development needs of a business and without this HR cannot do their job effectively.
[Influences] External sources of finance
-debt- short-term borrowing
Debt: short term borrowing
Factoring- selling of a company’s accounts receivable (money that is owed to a business) at a discount to a finance company for immediate cash.
Overdraft- an arrangement between the business and its bank that allows the business to borrow money from the bank at short notice through its cheque or current account.
Commercial bills- are a type of bill of exchange (loan) issued by institutions other than banks.
[Influences] debt- long-term borrowing
Debentures- fixed interest securities issues by a company that will pay a fixed interest rate on the money loaned to the company for a set time period. They are issued by a company for a fixed rate of interest and for a fixed time.
Unsecured notes- are loans made by finance companies and are not secured by any assets, and therefore presents the most risk to the investors in the note (the lender). For this reason it attracts a higher rate of interest than a secured note.
Leasing- short-term operational procedures
Mortgage- loans with a fixed schedule of payments that is repaid over a number of years with interest
[Influences] Equity: ordinary shares
New issues- a security that has been issued and sold for the first time on a public market.
Rights issue- the privilege granted to shareholders to buy new shares in the same company
Placements- allotment of shares, debentures, etc, made directly from the company to investors
Share purchase plans- an offer to existing shareholders in a listed company the opportunity to purchase more shares in that company without brokerage fees. The share can also be offered at a discount to the current market price.
[Influences] Private equity
Private equity refers to securities that are held in companies that are not listed and not publicly traded in the Australian Securities Exchange (ASX). The aim of the private company (like the publically listed companies who sell ordinary shares) is to raise capital to finance future expansion/investment of the business.
[Influences] Financial institutions
BANKS- Accept deposits from the general public and provide funds for loans and, in turn, make investments
INVESTMENT BANKS- Provide specialised advice and services for businesses financial needs. They deal with businesses and governments in raising large amounts of capital by underwriting share issues.
FINANCE COMPANIES- Make loans to consumers and businesses. They raise capital through share issues and funds through debenture issue.
SUPERANNUATION FUNDS- Collect portion of wage to set aside until retirement
LIFE INSURANCE COMPANIES- Customers pay premium to cover risks
UNIT TRUSTS- Take funds from a large amount of small investors
ASX- Exchange shares
[Influences] Government
ASIC- Australian Securities and Investments Commission
ASIC aims to reduce fraud and unfair practises in financial markets and financial products.
COMPANY TAXATION
Companies and corporations in Australia pay company tax on profits. Company tax is paid before profits are distributed.
[Influences] Global market
ECONOMIC OUTLOOK
The projected changes to the level of economic growth throughout the world. It may increase the demand for products/services and the interest rates on funds borrowed internationally.
AVAILABILITY OF FUNDS
Refers to the ease with which a business can access funds on the international financial markets. The availability of funds depends on the risk, demand and supply and the domestic economic conditions.
INTEREST RATES
Interest rate are the cost of borrowing money. The higher level of risk involved in lending to a business, the higher the interest rates.
[Processes] Plan/imp. Financial needs
Financial needs are essential to determine where a business is headed and how it will get there. Important financial information needs to be collected before future plans can be made. A new business will have to determine its start-up costs, e.g. cost of equipment and employees. Once a business has begun operations financial information from balance sheets, incomes statements and cash flow statements need to be analysed to determine if profits can be given to shareholders.
[Processes] Plan/imp. Budgets
Budgets provide information in quantitative terms about requirements to achieve a particular purpose. Budgets are often prepared to predict a range of activities relating to short-term and long-term plans and activities.
[Processes] Plan/imp. Record Systems
Record systems are the mechanisms employed by a business to ensure that data is recorded and the information provided by record systems is accurate, reliable, efficient and accessible.
[Processes] Plan/imp. Financial Risks
These are the risks to a business of being unable to cover its financial obligations, such as the debts that a business incurs through borrowings, both short-term and longer term.
[Processes] Plan/imp. Financial controls
Financial controls are the policies and procedures that ensure that the plans of a business will be achieved in the most efficient way. This enables the manager to determine if the objectives set were achievable or need to be reassessed.
[Processes] Plan/imp. Debt financing
Relates to the short-term and long-term borrowing from external sources by a business. External (debt finance) is a liability as it is owed to sources external to the business.
Advantages:
• Readily available
• Interest payments can be tax deductible
• Increased funds lead to increased earnings and profits
• Loans provide a business with the opportunity to grow
• Profits are not shared with the lender of the loan
Disadvantages:
• Costs to a business-establishment costs and ongoing fees and charges
• Security is required by the business
• Regular payments have to be made
• Increased risk if debt comes from financial institutions because the interest that the bank charges
• Interest rates can vary over the loan period-making it more expensive
• If it is a secured loan, defaulting on the loan may lead to loss of an asset
[Processes] Plan/imp. Equity financing
Related to the internal sources of finance in the business. It is the money lent to the business in exchange for ownership, including start-up capital.
Advantages:
• Remains in the business for an indefinite time
• Does not need to be repaid on a set date
• Safer than debt
• Cheaper that other sources of finance as there is no interest
• There is flexibility in timing of dividend payments
• The debt to equity (gearing/leverage) ratio decreases, lowering the risk to the business
Disadvantages:
• Requires sufficient profits to be made so that the business can continue to operate
• Lower profits and lower returns for the owner
• Equity is hard to obtain and can take time to organise and, therefore, may limit growth
• Not tax deductible
• Central ownership is reduced, causing a loss of control in decision-making
• High demand for dividend payments to shareholders may reduce the level of retained profits
[Processes] Plan/imp. matching the terms and source of finance to business purpose
When a business identifies and plans to meet its financial objective, it is necessary to match the terms of finance with its purpose. This requires a business to consider:
• The terms, flexibility and availability of finance
• The cost of each source of funding- equity and debt
• The structure of the business- small business and public company
[Processes] Limitations of financial reports
DR. VANETICE
DEBT REPAYMENTS
Financial reports can be limited because they do not have the capacity to disclose specific information about debt repayments e.g. how long the business has had or has been recovering the debt.
VALUING ASSETS
The process of estimating the market value of assets or liabilities. Some assets change value over time due to inflation and the market. Therefore it would have been worth less in the past ad would not reflect the true value.
NORMALISED EARNINGS
Earnings on the balance sheet are adjusted to remove unusual or “one-off” events to show the true earnings of the company.
TIMING ISSUES
Financial reports cover activities over a period of time, usually a year. Therefore, the business’s financial position may not be a true representation if the business has experienced financial fluctuations.
CAPITALISING EXPENSES
Process of adding a capital expense to the balance sheet that is regarded as an asset (in that it will add to the value of the company) rather than as an expense.
[Processes] Ethical issues related to financial reports
Businesses have legal and ethical responsibility to provide accurate financial records.
Ethical issues include:
- AUDITS- independent check of accuracy of financial records and accounting procedures.
- RECORD KEEPING
- GST OBLIGATIONS
- REPORTING PRACTISES
- Should not attempt to make a business look more profitable
- Business credit card for personal expenses
[Strategies] Cash flow management
CASH FLOW STATEMENTS
Indicate the movement of cash. Used to show the trends of short-term and long-term cash inflows and outflows.
DISTRIBUTION OF PAYMENTS
By spreading expenses over the whole year there is more equal cash outflow each month rather than one huge outflow one month.
DISCOUNTS FOR EARLY PAYMENT
A business may offer discounts to encourage people to pay their payments early to improve cash flow.
FACTORING
The selling of accounts receivable for a discounted price to a finance company.
[Strategies] Working capital management- CONTROL OF CURRENT ASSETS
Working capital- the funds available for short-term financial commitments of a business.
CONTROL OF CURRENT ASSETS
Cash - It is the most liquid current asset in the business. it is important as it allows the business to be able to pay its debts, loans and accounts in the long-term. Businesses can increase their cash amount by sale and leaseback. However, too much cash can be unproductive.
Accounts receivable - the total money that customers owes to a business. The collection of accounts receivable is important in managing working capital. Managing accounts receivable involves: checking credit rating of prospective customers, sending customers statements monthly and at the same time each month so debentures know when to expect accounts, following up on accounts that are not paid by the due date and putting policies into place for collecting bad debts.
Inventories - the total amount of goods or materials in a store or factory (stock). Inventory controls involves a balance between too much and too little stock. Strategies involved in the management of inventory include: regular and ongoing stocktaking, control systems, use of sales to convert stock into cash.
[Strategies] Working capital managements- CONTROL OF CURRENT LIABILITIES
CONTROL OF CURRENT LIABILITIES
Accounts payable - sums of money owed by the business to its suppliers. Some strategies include payment on time, taking advantage of early payment discounts and maintain a good credit rating for continuing access to lines of credit provided by suppliers.
Loans - sums of money that are borrowed from financial institutions for the purpose of funding such things as property and equipment. Control of loans involves comparing the cost of the loan to other sources of finance to find the most appropriate and cost effective source.
Overdraft - a relatively cheap and convenient form of short-term borrowing. Businesses may control overdrafts by ensuring that all cash received is promptly deposited in the business's account to reduce the amount owing.
[Strategies] Working capital managements- STRATEGIES
STRATEGIES
Leasing- the hiring of an asset from another person or company. By leasing assets the business maintains more working capital to invest in other assets and opportunities for expansion of the business.
Sale and lease-back - involves selling of assets such as buildings and equipment and leasing them back from the purchaser. This increases a business’s liquidity as the cash that is obtained from the sale is used as working capital.
