IFM - internal and short term borrowings. Flashcards
what can influence financial management
There are many institutions and variables that can impact the financial operations and performance of the business o Sources of finance o Financial institutions o The government o Global market influences
sources of finance
o A business cannot establish itself and thrive without funds to enable it to pursue its activities from the initial set-up through to expansion.
o In the establishment of a business, owners/partners usually contribute funds.
o However, when a business is considering growth in later years, a number of options can be considered.
Sources of funds refers to where the money to run the business comes from, it can be:
internal - from within the business
external - from outside the business
internal
capital from present owners (owners equity)
retained profits
external
short term loan
long term loan
new equity
owners equity
o Ordinary shares
o Short term or long term debt
o Private equity
o Leasing and factoring
internal source of finance
o Internal finance is the sourcing of funds from within the business either from the business owners (oe or capital) or from the outcomes of business activities (retained profits)
owners equity pt 2
o Owners’ equity is the funds contributed by owners or partners to establish and build the business
o It can also be raised through selling off any unproductive assets
retained profits
o Retained profits are earnings from the business which are not distributed, but are kept in the business as a cheap and accessible source of finance for future activities
o Most businesses keep some of their profit in the form of retained earnings.
o In Australian businesses, approximately 50 per cent of profits on average are retained to be reinvested
external source of finance
o Refers to the sourcing of funds outside the business, from sources including banks, other financial institutions, government, suppliers or financial intermediaries
o External finance can be either in the form of debt (both in the short and long term) or equity
short term borrowing
o Short term borrowing is provided by financial institutions through overdrafts, commercial bills and bank loans
o This type of borrowing is used to finance temporary shortages in cash flow or finance for working capital (current assets-current liabilities)
o Short term borrowing generally refers to those funds that will be repaid within 12 months.
bank overdrafts
o Allows a business to dram more out of its account than is available to an agreed limit
o Overdrafts assist business with short-term liquidity problems, for example a seasonal decrease in sales
o Costs for overdrafts are minimal, and interest rates are lower than on other forms of borrowing. As interest rates are usually variable, interest is paid on the daily outstanding balance of the account
commercial bills
o Commercial bills are short term loans issued by financial institutions, for larger amounts (usually over $100 000) for a period of generally between 30 to 180 days
o The borrower receives the sum immediately and promises to repay the full amount with interest at a future time.
o Commercial bills are flexible both in relation to the interest that needs to be paid and the repayment period. These types of loans are usually secured against the business assets
factoring
o Factoring enables a business to raise funds immediately by selling its accounts receivable at a discount to a company that specialises in collecting accounts receivable
o The business will receive up to 90 per cent of the amount of receivables within 48 hours of submitting its involves to the factoring company
o The business does not have to worry about the collection of accounts or the costs involves in this process
