Influences on Financial Management Flashcards
What are the internal sources of finance
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
what are the two types of external sources of finance
Debt ( short + long )
Equity ( ordinary shares + private equity )
what are the types of short term debt
overdraft
commercial bills
factoring
mortgage
debentures
unsecured notes
leasing
characteristics of commercial bills
Short-term loans
For larger amounts ( 100,000 + )
Loans are generally rolled over until the borrower has the funds to repay the loan
characteristics of factoring
Short-term source of borrowing
Raise funds immediately by selling accounts receivable at a discount
Immediate access to funds = improved cash flow
characteristics of overdraft
short -term borrowing
Assist businesses with short-term liquidity problems
Large levels of flexibility
what are the long term debt
mortgage
debentures
unsecured notes
leasing
define equity
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 )
what is ordinary shares
Part ownership in the business
Get payments - dividends
Provide a source of finance for that business
what is private equity
Money invested in a private company not listed on the ASX
Raise capital to finance future expansion / investment of the business
advantages of debt financing
- 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
disadvntages of debt financing
- Potential increase in interest rate, bank charges/fees and government charges
- Regular repayments must be made ( + interest )
advantages of equity
- 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
disadvantages of equity
- 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
List the financial institutions
- banks
- investment banks
- finance companies
- superannuation funds
- life insurance companies
- unit trusts
- australian securities exchange ( ASX )
define financial institutions
Financial institutions collect funds and invest them in financial assets. They provide information and services focused around transactions such as; investments, loans and deposits
influences of government
- ASICS
- company taxation
what is ASICS
- 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
what is the impact of company taxation
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
what are the 3 global market influences
- economic outlook
- availability of funds
- interest rates
what is economic outlook
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 )
what is availability of funds
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
what is interest rates
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
