Influences of Financial Management Flashcards
Finance
Businesses require funds to perform many of their business activities
Internal Finance
Funds provided by the owners of the business
Examples of Internal Finance
Owner’s Equity & Retained Profits
Owner’s Equity
The funds contributed by the business owners to establish & build the business
Retained Profits
Using the profits of a business to fund activities or to keep as spare cash for unforeseen circumstances
External Finance
Funds provided outside a business
Examples of External Finance
Banks, Investors, Government
Debt Financing
Obtaining funds through lenders & creditors
Advantages of Debt Financing
Quick Access to Cash
Ownership is retained
Increased Credit Score
Short-term Borrowing
Finance smaller matters such as stock, borrowed for periods less than 12 months
Examples of Short-term borrowing
Bank Overdraft
Commercial Bills
Factoring
Overdraft
withdrawing more money than a business/individual has for a specific time, to overcome a temporary cash shortfall
Commercial Bills
a type of short-term loan that is used for large amounts (+$100,000), that is to be repaid within 30-180 days
Factoring
The selling of accounts receivable for a discounted price to a finance company, in return, the business will receive cash immediately
Long-term Borrowing
Finance larger matters such as equipment and plants, borrowed for periods longer than 12 months
Examples of Long-term borrowing
Mortgage
Debentures
Unsecured Notes
Leasing
Mortgage
A loan secured by the property of the borrower
regular payments over a period of time including principal
Debentures
A promise to repay the money w/ regular interest for a defined term
Unsecured Notes
a loan for a set period of time, not secured by collateral or assets
Leasing
Payment of money for the use of equipment, that is owed by another party
What are the two different types of leasing?
Operating Lease & Financial Lease
What are the Advantages of Leasing?
Tax deductible
Payments incl. maintenance, insurance and financial costs
What are the Disadvantages of Leasing?
Increased interest rate
A business may pay more than what the asset is valued (when not bought outright)
Operating Lease
A contract that allows the use of an asset, but does not pass on the ownership rights to the business using the assets
Financing Lease
A contract where the business is the legal owner of the asset for the duration of the lease
Features of Operating Leases
Short Periods
The owner carries out maintenance
Can be cancelled
(Example: Delivery Vehicles for busier seasons
-> ice-cream trucks)
Features of Financial Leases
The lessor purchases assets for the lessee
Penalties for breaking agreement
Cheaper than operating leases
The lease is usually the life of the asset
Equity Finance
The finance raised by a company issuing shares
Ordinary Shares
Shares that are issued & sold through the Australian Securities/Stock Exchange (ASX)
Dividends
A distribution of a company’s profit to shareholders, calculated as a number of percent per share
What are the four variations of shares?
New issues
Rights issue
Placements
Share purchase plan
New Issue / Initial Public Offering (IPO)
Shares that have been issued and sold for the first time on the public market (ASX)
- also known as primary shares / new offerings
Rights Issue
Privilege granted to shareholders to buy more shares in the same company at a special price
Placements
Allotment of shares that are offered at a special discount to their usual trading value to persuade special institutions and investors
Share Purchase Plan
An offer to existing shareholders in a listed company the opportunity to purchase more sales (max. of $500) in that company WITHOUT fees
Private Equity
The sales of shares to raise finance for a private company, that is not listed in the ASX
Financial Institutes
Sources of finance for businesses
Banks
Main source of funds for businesses in Australia
Investment Banks
Dealing with the business sector -> purchase of stocks in the financial market
Finance Companies
Provide short/medium-term loans to businesses by:
personal loans
secured loans
Life Insurance Companies
Provide cover & lump sum payment in the event of a person’s death in exchange for regular payments
Superannuation Funds
Government scheme where employers have to make a financial contribution towards the retirement funds of their employees
Aged between 18-69 & make +$450/month before tax
Unit Trusts
Funds are taken from a large # of small investors to be invested in financial assets such as property, shares and commodities
Australian Securities Exchange (ASX)
A market where shares are bought and sold in Australia
What are the two markets the ASX operates at?
Primary & Secondary Market
Primary Market (ASX)
Enables companies to raise capital through an initial offering of shares
Secondary Market (ASX)
Where second-hand shares are traded between investors
Australian Securities & Investments Commission (ASIC)
Independent federal government body that regulates and monitors activities to ensure that relevant corporate laws are being followed
Corporation Act 2001
Company Taxation
Tax paid on profits made by private or public companies -> 30% of net profit
Decreased overtime for incentive for economic growth
Global Economic Outlook
The projected changes to the level of economic growth throughout the world
Positive Economic Outlook
Increase in demand for products and services
Decrease in interest rates on funds borrowed
Negative Economic Outlook
Decrease in demand for products and services
Increase in interest rates on funds borrowed
Availability of Funds
The ease with which businesses can access funds from the international financial markets
Interest Rates
The cost of borrowing money
