Finance - Influences Flashcards
what are the two sources of finance
internal and external
what is the main internal source of finance
retained profits
define retained profits
the portion of the profit left over after all expenses have been paid and shareholders have been paid dividends
benefits of using retained profits as an internal source of finance
- cheap and accessible
disadvantages of using retained profits as an internal source of finance
what are the 2 external sources of finance
debt and equity finance
what are the three types of short term debt
- overdraft
- commercial bills
- factoring
disadvantages of using an overdraft as a short term form of debt financing
- could be charged extra for exceeding overdraft limit
define 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
advantages of using an overdraft as a short term form of debt financing
- costs for an overdraft are minimal
- no regular repayment period period - owners can pay back the money when they are able to
define commercial bill
primarily short term loans issued by financial institutions for larger amounts (usually over $100 000 for a period of generally between 30 to 180 days - borrower receives the sum immediately and promised to repay the money with interest at a future time; that is, the full amount doesn’t have to be repaid until the end of a term
advantages of using a commercial bill as a short term form of debt financing
- full amount doesn’t have to repaid until the end of a term
- flexible interest
- flexible repayment period
disadvantages of using a commercial as a short term form of debt financing
define factoring
the selling of accounts receivable for a discounted price to a finance or factoring company
a factoring company may offer its services
- “without recourse” means that the business transfers responsibility for non collection to the factoring company
- “with recourse” means that bad debts will still be responsibility of the business
advantages of using factoring as a short term form of debt financing
- quick access to funds
- may improve cash flow and gearing
disadvantages of using a factoring as a short term form of debt financing
- involves greater risks than other sources of short term finance because of the likelihood of unpaid debts
- more expensive source of short term finance
what are the 4 main types of long term debt
mortgage, debentures, unsecured notes, leasing
define mortgage
a loan secured by the property of the borrower (business) - property that is mortgaged cannot be sold or used as security for further borrowing until the mortgage is repaid
what are the advantages of using a mortgage as a long term source of debt financing
- regular repayments
what are the disadvantages of using a mortgage as a long term source of debt financing
- interest piles up as mortgages are usually paid over a period of at least 30 years
define debenture
a promise issued by a company to repay a loan for a fixed rate of interest and for a fixed period of time - an investor lends money to a company and in return the company issues a debenture with a promise to make regular interest repayments for a defined term and then repay the loan at a particular date in the future
what are the advantages of using debentures as a long term source of debt financing
- fixed rate of interest -> the amount of profit made by a company has no effect on the rate of interest
what are the disadvantages of using debentures as a long term source of debt financing
- secured against the business’ assets
- no flexibility in their obligation to make interest payments on the debenture
define unsecured loan
a loan from investors for a set period of time that ISN’T secured against the businesses’ assets
what are the advantages of using an unsecured loan as a long term source of debt financing
- not secured against business assets
what are the disadvantages of using an unsecured note as a long term source of debt financing
- higher interest rates than other sources of long term debt financing due to higher risk for lenders
define leasing
the payment of money for the use of equipment that is owned by another party
what are the benefits of using leases as a long term source of debt finance
- if some assets are leased, a business may be in a better position to borrow funds
- enables an enterprise to borrow funds and the use the equipment without the large large capital outlaw required
- assists a business with their cash flow - saves the burden of a one off significant cash payment as payments are spread out over several years
- provides long term finance without reducing control of ownership
- tax deduction
- payments usually includes maintenance, insurance and financial costs
what are the disadvantages of using debt financing as a long term source of debt finance
- a long term lease usually can’t be cancelled
- higher interest chargers than other forms of borrowing due to possibility of asset damage
- limited ownership of equipment
define equity (as an EXTERNAL source of finance)
reefers to the finance raised by a company through inviting new owners
what are the 2 main types of equity financing for a business
ordinary shares and private equity
define ordinary shares and identify 4 main types of ordinary shares
ordinary shares refer the public shares sold on the ASX - individuals who purchase ordinary shares become part owners in a publicly listed company
define new issue
refers to a security that has been issued and sold for the first time on a public market eg. ASX
iPOS are the most common new issues
define rights issue
an invitation to existing shareholders to purchase additional shares in the same company - gives existing shareholders securities called rights which with they can purchase new shares at a discount to the market price on a set future date
companies usually issue a rights offering to raise additional funds or to pay down debt - especially if they are unable to borrow more
define placements
involves creating new shares in return for capital and issuing them to selected investors at a discount to the market price of the company shares
additional shares are offered at a discount to their current trading price to special institutions or investors who are able to invest a large sum of money - intended to persuade specific investors to invest in the company
define share purchase plans
refers to an offer to existing shareholders in a listed company to purchase newly issued shares in that company without brokerage fees - usually offered at a discount to the current market price
define private equity
money invested in a private company not listed on the ASX
what are the 4 main influences on financial management
- sources of finance (internal and external)
- financial institutions
- influence of government
- global market influences
what are 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
what is the role and influence of banks as a financial institution
- most important source of funds for a business
- banks are referred to as ‘Authorised deposit taking institutions’ (ADIS)
- offer a wide range of financial products such as credit cards, cheques, overdrafts, insurance and saving accounts, lending money and mortgages
- Apart from traditional banking services (ATM, internet banking) they also provide business banking, trading in financial markets, stockbroking, insurance and funds management
- Banks receive savings as deposits from individuals, businesses and governments, and, in turn, make investments and loans to borrowers
- Accepts deposits (savings) at a interest rate and loans at a higher interest rate
EXAMPLES: Commonwealth Bank, Westpac, NAB
what is the role and influence of investment banks as a financial institution
- similar to a regular bank but provides borrowing and lending services to the business sector
- can customise loans to suit the specific needs of a business
- may impose conditions when providing loans eg. may require some equity in the business borrowing the funds
roles include:
- Arranging long term finance for company expansion
- Provide working capital
- Arrange project finance
-Advise or mergers and takeovers
- Underwrite corporate and semi govt issues of securities
- Arrange overseas finance
EXAMPLE:
Macquarie bank
what is the role and influence of finance companies as a financial institution
- non bank intermediaries that specialise in smaller commercial finance
- offer a range of secured and unsecured loans to businesses - mainly provide short term and medium term loans to businesses through consumer hire
- typically have higher interest rates than banks
- major provider of lease finance to businesses and some specialise in factoring
- Raise money through share issues (debentures) - debentures are for a fixed term and carry a fixed rate of interest - lenders have the security of priority over the firm’s assets in the event of liquidation
- Can provide businesses with quick access to funds although the interest rate will usually be higher
what is the role and influence of life insurance companies as a financial institution
- have funds available through receipts of insurance premiums
to provide both equity and loans to the corporate sector - Non bank financial intermediaries who provide cover and a lump sum payment in the event of death
what is the role and influence of superannuation funds as a financial institution
- 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
- Superannuation funds invest the money received from superannuation contributions in many things, such as company shares, property and managed funds - they do this so that their members will earn investment returns on the money
what is the role and influence of unit trusts/ mutual funds as a financial institution
- are funds that fund managers run on behalf of
investors for a fee - formed under a trust deed and is controlled/managed by a trustee
- offered to the public for investment and the money from the sales of the unit is then pooled and invested in financial assets by the trustee
4 main types of unit trusts include:
- property trust
- equity trusts
- mortgage trusts
- fixed interest trusts
what is the role and influence of the ASX as a financial institution
- primary stock exchange group in Australia which acts a primary market, enabling companies to raise new capital through the issue of shares
- also operates as a secondary market where pre owned securities can be traded -> Transactions in this market do not increase the total amount of financial assets — the secondary market increases the liquidity of financial assets and, therefore, influences the primary market for securities
what are the 2 influences of government on financial management
- The Australian securities and investments commission (ASIC)
- company tax
what does ASIC stand for
The Australian securities and investments commission
what is the role of ASIC
- An independent statutory commission accountable to the cth parliament
- Aim of ASIC is to assist in reducing fraud and unfair practises in financial markets and financial products
how does ASIC influence financial management
- Enforces and administers the corporations act 2001 and protects consumers in the areas of investments, life and general insurance, superannuation and banking (except lending)
- Asic can investigate breaches of the law and determine an appropriate remedy depending on the seriousness of the misconducts eg. imprisonment or monetary penalties
what is company tax
- tax that a company pays before profits are distributed to shareholders
- the AUS, the full company tax rate is 30%
- govt plans to reduce the rate as it would invite foreign investment, create new jobs and higher economic growth
how does company tax influence financial management
- All incorporated businesses must pay tax on profits which is levied at a flat rate depending on the business - 27.5% or 30% of net profit
- To be eligible for the lower company tax rate, a company has to have a turnover of less than $50M
what are the three main global market influences
- global economic outlook
- availability of funds
- interest rates
what is the global economic outlook and how does it influence a businesses financial management
- Refers to the projected changes to the level of economic change throughout the world
- Whether the outlook is positive or negative will impact all financial decisions of a business
what is the availability of funds and how does it influence a businesses financial management
- Refers to the ease with which a business can access funds (for borrowing) on the international financial markets
- The international financial markets are made up of a range of institutions companies and governments that are prepared to lend money to individuals, companies or govts who may need to raise capital
- Various conditions and rates apply which are primarily based on: risk, s&d, domestic economic conditions
- Banks are increasingly reluctant to lend money which has impacted on small businesses
what are interest rates and how does it impact a businesses financial management
- the cost of borrowing money
- The higher level of risk involved in lending to a business, the higher the interest rates
- A business that plans to either relocate offshore or expand domestic production facilities to increase direct exporting will normally need to raise finance to undertale these activities
- Aus interest rates are usually higher than other countries (say japan or the us) so aus businesses may be tempted to borrow necessary finance from an overseas source to gain advantage of the lower interest rates - risk is now exchange rate movements
