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 )