Finance: Influences on Financial Management Flashcards
what are the two internal sources of finance
retained profits
owners equity
what are retained profits
net profit that isnt paid to shareholders(as dividends)
these funds are reinvested into the business
what is owners equity
funds invested into the business by owners
for large businesses, this is achieved by issuing shares of the business or sale of assets
what are advantages of using owners equity and retained profits
- not indebted to a lender
- no interest
- unlimited access to funds that are available
what are disadvantages of using owners equity and retained profits
- owners may potentially dissolve funds
- required careful budgeting and planning
what are the two ways of externally sourcing finance
debt
equity
how can equity be raised
ordinary shares
private shares
is equity or debt financing more risky
debt
define bank overdraft
overdraw of an account up to a pre-determined amount of time
high interest
define commercial bills + characteristics
issued by institutions other than banks for over $100 000 between 90-180
- highly liquid
- guaranteed paymetn
define factoring
selling accounts receivable at a discounted price to a factoring company
last resort
define mortgage
loan for a property
define debentures
finance companies investing in a business for a fixed rate and period
define unsecured notes (bonds)
loan for a set period of time without collateral or assets
high interest rate
define leasing
payment of money for use of equipment owned by a third party
define operating leases
assets leased for short periods, and business doesn’t gain ownership of good at end of lease
maintenance is carried out by owner
may be cancelled at any time
define financial leases
lessor purchases asset on behalf of lessee.
leased for life, fixed payments
is similar to a loan
what are the 6 financial institutions
banks
investment banks
finance companies
superannuation funds
life insurance companies
unit trusts
Australian Securities Exchange (ASX)
what are banks
Largest provider of funds and financial services.
Receive savings as deposits and makes investments and loans to borrowers.
what are investment banks
Mostly available to the corporate sector. Arrange long term finance, project finance, and overseas finance. provide working capital, and portfolio investment services. Advise on mergers and takeovers. not for individuals/large companies.
what are finance companies
specialise in smaller commercial finance. Mainly provide short-term and medium-term loans (personal and secured). major providers of lease finance. Some specialise in factoring or cash flow financing.
what are life insurance companies
Policyholders pay regular premiums in return for the insurer to pay the beneficiary a sum of money upon death of the insured person (often an employee). Provide both equity adn loans to the corporate sector which provide funds for investment.
what are superannuation funds
Invest money received from contributions in company shares, property and managed funds. This provides capital for companies and also earns invest returns for superannuation contributers.
what are unit trusts
Take funds from a large number of small investors and invest them in specific types of financial assets.
what is the ASX
acts as a primary market- enables companies to raise capital through issue of shares.
secondary market- deals with purchase and sale of existing shares.
What are ordinary shares
most common, shareholders receive dividends
what are primary shares
issued for first time on the public market
what are rights issues
privilege given to shareholders to buy new shares within the company
what are placements
shares offered to major investors exclusively
what are share purchase plans
offer to existing shareholders to buy more shares without fees and maybe at a lower price.
what are private shares
Money/shares bought within a company not listed on the ASX.
what is Australian Securities and Investment Commission (ASIC)
.influence of government
independent commission who enforces and administers the corporations Act 2001. Assists in reducing fraud and unfair practices in financial markets and financial products.
what is company taxation
.influence of government
Companies and corporations are taxed at a flat rate of 30%. Company tax is paid before profits are distributed to shareholders as dividends.
what is a global economic outlook
Institutions project changes to the level of economic growth throughout the world.
what is availability of funds
The ease with which business can access funds on the international financial markets.
what are interest rates
the cost of borrowing money. the higher level risk, the higher level of interest rate.
what impact does a positive global economic outlook have on a business
increase in demand for goods and services, which means an increase in production to meet demands, leading to increased sales and profits
what impact does a positive global economic outlook have on borrowing money eg. debt
decrease in interest rates on funds borrowed internationally, meaning a decreased level of risk associated with repayments
what impact does a negative global economic outlook have on a business
decrease in demand for goods and services, which means an decrease in production to meet demands, leading to decreased sales and profits
what impact does a negative global economic outlook have on borrowing money eg. debt
increase in interest rates on funds borrowed internationally, meaning a increased level of risk associated with repayments
if you are borrowing money at high risk…
there will be high interest rates
