Influences on Financial Management

Question 1

What are the internal sources of finance

Answer 1

Owners equity - funds contributed by owners to establish and build the business

Retained profits - sourced from money that comes into the business being used towards future business activities

Question 2

what are the two types of external sources of finance

Answer 2

Debt ( short + long )

Equity ( ordinary shares + private equity )

Question 3

what are the types of short term debt

Answer 3

overdraft
commercial bills
factoring
mortgage
debentures
unsecured notes
leasing

Question 4

characteristics of commercial bills

Answer 4

Short-term loans
For larger amounts ( 100,000 + )

Loans are generally rolled over until the borrower has the funds to repay the loan

Question 5

characteristics of factoring

Answer 5

Short-term source of borrowing

Raise funds immediately by selling accounts receivable at a discount

Immediate access to funds = improved cash flow

Question 6

characteristics of overdraft

Answer 6

short -term borrowing
Assist businesses with short-term liquidity problems
Large levels of flexibility

Question 7

what are the long term debt

Answer 7

mortgage
debentures
unsecured notes
leasing

Question 8

define equity

Answer 8

Equity refers to the finance raised by a company through inviting new owners.
Eg. issuing shared to the public through the australia securities exchange ( ASX )

Question 9

what is ordinary shares

Answer 9

Part ownership in the business
Get payments - dividends
Provide a source of finance for that business

Question 10

what is private equity

Answer 10

Money invested in a private company not listed on the ASX

Raise capital to finance future expansion / investment of the business

Question 11

advantages of debt financing

Answer 11

• Funds are readily available and can be acquired at short notice
• Increased funds generally lead to increased earnings and profits
• Interest payments are tax deductible
• Flexible payment periods are availab;e

Question 12

disadvntages of debt financing

Answer 12

• Potential increase in interest rate, bank charges/fees and government charges
• Regular repayments must be made ( + interest )

Question 13

advantages of equity

Answer 13

• Does not have to be repaid unless the owner ( shareholder ) leaves the business
• Cheaper than other sources of finance as there are no interest payments
• Using the owner’s own resources without using other external sources of finance - less debt

Question 14

disadvantages of equity

Answer 14

• Expectations from owner/shareholder on the ROI ( return on investment )
• Long and expensive process to abstain funds
• Ownership is diluted - more shareholders = more owners = less control to current owners

Question 15

List the financial institutions

Answer 15

• banks
• investment banks
• finance companies
• superannuation funds
• life insurance companies
• unit trusts
• australian securities exchange ( ASX )

Question 16

define financial institutions

Answer 16

Financial institutions collect funds and invest them in financial assets. They provide information and services focused around transactions such as; investments, loans and deposits

Question 17

influences of government

Answer 17

• ASICS
• company taxation

Question 18

what is ASICS

Answer 18

• regulates Australia’s financial system to ensure fair, strong and efficient participation
• promotes informed participation by investors and consumers
• enforce and give effect to the law

Question 19

what is the impact of company taxation

Answer 19

increase in tax = lessen the amount of available funds = less funds to participate in R&D + afford expenses
- many businesses seek to obtain and buy stock in countries that apply less tax to utilise to their advantage as they will pay less overall - increase profitability

Question 20

what are the 3 global market influences

Answer 20

• economic outlook
• availability of funds
• interest rates

Question 21

what is economic outlook

Answer 21

The global economic outlook refers specifically to the projected changes to the level of economic growth throughout the world.

• increasing demand for products and services ( purchase more equipment, hire more staff, expand size of business )
• decrease interest rates on funds borrowed internationally ( decrease level of risk associated with risk )

Question 22

what is availability of funds

Answer 22

Availability of funds 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 governments who may need to raise capital

Question 23

what is interest rates

Answer 23

The higher the 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 undertake these activities.

eg. Australian businesses could be tempted to borrow the necessary finance from an overseas source to gain the advantage of lower interest rates