Influences of Financial Management Flashcards
What are sections of Influnces on financial management
- Internal sources of finance
- External sources of finance
- Financial institutions
- Influences of government
- Global market influences
Who contribute funds in the establsihment stage of a business
Owners and/or shareholders
What are internal sources of finance
Funds generate from inside the business
What is most common source of internal finance
Retained profits
What are external sources of finance
External finance refers to funds provided by sources outside the business, including banks, other financial institutions, government or suppliers
What are two types of external source of finance
Debt and equity
What are two types of debt borrowing
Short-term borrowing and long-term borrowing
What are examples of short-term borrowing
- Overdraft
- Commercial Bills
- Factoring
What are examples of long-term borrowing
- Mortgage
- Debentures
- Unsecured notes
- Leasing
What are two types of equity
Ordinary shares and private equity
What are different types of ordinary shares
- New issues
- Rights issues
- Placements
- Share purchase plan
What is short-term borrowing
Refers to funds that will be repaid within 1-2 years
What is purpose of short-term borrowing
Finance temporary shortages in cash-flow
What is a overdraft
Arrangement between the business and its bank that allows business to overdraw its account to an agreed limit and for a specified time to help overcome a temporary cash shortfall
Whats purpose of overdraft
To improve liquidity
Can overdrat be secured or unsecured
Yes
What are commercial bills
Primarily short-term loans issued by financial institutions (non-bank) for larger amounts (usually over $100,000) for a period of generally between 30 and 180 days
What are commercial bills secured against
The business’s assets
What does ‘rolled over’ mean in relation to commercial bills
When repayment period is extended until borrower has funds to repay the loan in full
What is Factoring
The selling of ‘accounts receivable’ for a discounted price to a finance or factoring company (i.e. a firm that specialises in collecting accounts receivable)
What percentage of accounts receivable is business expected to recieve up front from factoring firm
90%
Why do businesses do factoring
- Improve liquidity
- Minimise risk of debtors not paying accounts
What are two types of factoring
- With recourse
- Without recourse
What is long-term debt borrwoing
Funds borrowed for more than 2 years
Where is long-term borrwoing recorded on balance sheet
Non-current liabilities
Where is short-term borrowing recorded on the balance sheet
Current liabilities
What is purpose of long-term borrowing
To finance major assets such as real estate, plant (factory/office) and equipment and these assets often serve as security on the loan
What is a mortage
This is a loan secured by the property of the borrower (business).
What is purpose of mortage
Used to finance property purchases, such as new premises, a factory or office
What is a debenture
A promise made by a company to repay money that has been lent to the business at a fixed rate of interest for a fixed period of time
What is security of debenture
Company’s assets
What is the person who lends the money to the business called
Creditor
What is a unsecured note
A loan from investors (referred to as the issuer) for a set period of time
What must accompany a debenture
A prospectus
What is a prospectus
Something that tells investor everything they need to know about the business
Why is it called a ‘unsecured’ note
Because loan is not secured against business’s assets
What is interest on unsecured note compared to other sources of long-term borrowing
Higher interest due to lower security
What is leasing
Usually long-term source of borrowing that enables an enterprise to use an asset in return for payments over a set-time period
What are two types of leases
- Financial lease
- Operating leaase
What is a financial lease
Financial lease is for a set period of time and set payments cover interest and eventual purchase of the asset
What is a operating lease
Similar to financial lease but business does not gain ownership of asset at the end of the lease
Who carries out maintennace on asset for a operating lease
The owner or lessor
Can leases be cancelled
- Some leases can be cancelled some can’t
- Agreement on lease will specify this
What is equity as an external source of funds
The finance raised by a company through inviting new owners
What are ordinary shares and features
- The most commonly traded shares in Australia and are traded on the ASX
- The purchase of ordinary shares by individuals means they have become part-owners of a publicly listed company
- In return for their holding in the company, shareholders are paid a dividend (share of the profit calculated as the number of cents per share)
How is value of share determined
By businesses current or future performance
What are new issue shares
A security that has been issued and sold for the first time on a public market
What is a Initial public offering (IPO)
When a company issues shares to the public for the first time
Other words for new issues
Primary offerings and new offerings
What are rights issues
Privilege granted to shareholders to buy new shares in the same company
When does rights issue occur
Occurs after the IPO and provides existing shareholders with the opportunity to purchase more shares
What are placements
Allotment of shares made directly from the company to investors
What does ‘placements’ involve
Additional shares are offered at a discount to their current trading price to special institutions or investors
What are share purchase plans
Offer to existing shareholders in a listed company to purchase more shares in that company without brokerage fees and may also be offered at a discount price
What does share purcahse plans allow companies to do
Issue new shares to current shareholders without issuing a prospectus
What is limit per shareholder for share purchase plans
$15000
What is private equity
The money invested in a (private) company (Pty Ltd) not listed on the Australian Securities Exchange (ASX)
Aim of companies using private equity
(like the publicly listed companies who sell ordinary shares) is to raise capital to finance future expansion/investment of the business
What do financial institutions do
Collect funds and invest them in financial assets such as investments, loans and deposits as well as provide financial services
What are the different financial institutions
- Bank
- Investment banks
- finance companies
- superannuation funds
- llife insurance companies
- trusts
- the asx
How do banks operate
Banks receive savings as deposits from individuals and businesses and in turn make investments and loans to borrowers (the difference in the interest paid to depositors and the interest paid by borrowers is how the banks make money).
Who supervises the banks
The RBA
What financial products do banks offer
- Deposit accounts
- Overdrafts
- Credit cards
- short-/long-term loans
- Mortgages
- Leases
- Services such as advice
What do investment banks do
Provide services in both borrowing and lending primarily to the business sector
What are main fucntions of investment banks
- Private equity activities
- International finance
- Funds management and advisory services (including advice related to mergers and acquisitions)
What are financial products offered by investment banks
- Commercial bills
- Loans
- Private and project equity raising
- Investment funds
- Financial market trading
What are finance companies
Non-bank financial institutions and act primarily as financial intermediaries that specialise in smaller commercial finance
How do finance companies function
Raise capital through share issue or debenture issue to the public and then lends capital to businesses and retains security over the assets of the business to whom they lend money should they default in payment.
What are financial products offered by finance companies
- Loans (short and long term)
- Credit cards
- Leasing
- Factoring
Who oversees finance companies, superannuation funds and life insurance companies
What is superannuation
The financial contributions that individuals and their employers make to a fund for use in retirement
Who contributes to a superannuation funds
Employers on behalf of their employees
How is money in superannuation used
The funds is invested into a range of short- and long-term investments with the aim of maximising a return
What are financial products offered by superannuation funds
- Equity capital
- Debt securities
How do life insurance companies operate in the financial market
Life insurance companies raise capital through insurance premiums they charge customers and they invest this money by providing large amounts of both equity and loan capital to businesses
What are financial products offered by life insurance companies
- Premiums
- Equity capital
How do unit trusts operate
Also known as mutual funds – these take funds from a large number of small investors and invest them in specific types of financial assets e.g. shares, commercial property, government bonds, gold, silver, oil and gas
What are financial products offered by unit trusts
- Mortgage funds
- Cash management trusts
- Share market funds
How does ASX operate as a source of funds
Acts as both a primary and secondary market for the sale shares to the public
What are financial products offered by ASX
- Shares
- Futures
- Options
- Exchange traded funds
- Real estate investment trusts
- Interest rate securities
How does ASX act as a primary market
It enables a company to raise new capital through the issue of shares
How does ASX act as a secondary market
ASX also operates as a secondary market where pre-owned or second-hand shares are traded between investors
In what ways does government influence business
- Legislation
- Monetary policy
- Fiscal policy
- Various Government bodies
How do company taxation laws
Provide that companies (private or public), pay company tax at a flat rate of 30% of net profits (which must be set aside by financial managers and not distributed to shareholders or reinvested in the business to purchase more assets).
What is tax rate for small businesses
27.5%
What is monetary policy
Concerned with the level of interest rates and these are set by the Reserve Bank of Australia (RBA)
In relation to monetary policy what does it mean if RBA sets interest rates low
- Spendning will increase
- Unemployment will decrease
What is fiscal policy
Concerned with taxation (revenue) and government expenditure plans
What does ASIC do
Concerned with taxation (revenue) and government expenditure plans
What are the roles of ASIC
- Maintain facilitate and improve the financial performance of the financial system and entities in it
- Promote investment
- Administer and enforce the law
- Receive and store information and make it available to the public
Are global market influences an part of internal or external business environment
External
What are the three main global market influences
- Economic
- Availabiltiy of funds
- Interest rates
What does global economic outlook refer to
Projected changes to level of economic growth throughout the world
What does positive economic outlook mean
Increasing demand for goods and services and businesses will want to increase production to meet demand and will require funds to purchase equipment, bigger premises etc
IMF world economic outlook April 2020
- As a result of the pandemic, the global economy is projected to contract sharply by –3 percent in 2020, much worse than during the 2008–09 financial crisis
- Global economy is projected to grow by 5.8 percent in 2021 as economic activity normalizes, helped by policy support
What does availiablity of funds refer to
The ease with which a business can access funds (for borrowing) on the international financial markets if they need to expand
What are conditions and rates based upon in relation to availiability of funds
- Risk
- Demand and supply
- domestic economic condition
How is level of interest rate determined
The higher the level of risk involved in lending to a business, the higher the interest rates
What may businesses choose to do if Australia’s interest rates are higher than other countries
Borrow from overseas
What is risk of overseas borrowing
Changing exchange rates
