Influences on Financial Management Flashcards
What are the three sources of internal finance?
Owner’s Equity
Retained Profit
Sale of an Unwanted or Unproductive Asset
Define retained profit
Net profit that is reinvested into the business
What are the sources of debt finance?
Overdraft
Commercial Bills
Factoring
Mortgages
Debentures
Unsecured notes
Leasing
Define overdraft
A loan arrangement with the bank to draw more money than is in an account, up to a maximum list
When would an overdraft be useful?
An overdraft can provide short term finance for business requirements such as working capital, especially where a business is affected by seasonal fluctuations
Define commercial bill
A written order for a loan amount that is guaranteed by the business’s bank and borrowed from other companies with surplus funds
Usual terms are 30 to 180 days
When would a commercial bill be useful?
Commercial bills are usually for hundreds of thousands of dollars and are used to finance expenses, such as payment to suppliers of materials and wholesale goods
Define factoring
When a business sells its accounts receivable asset to a specialist factoring firm
When would a business engage in factoring?
If it needed to obtain cash reasonably quickly to improve cash flow
Define Mortgage
A long-term loan for which the asset purchased becomes the security
When would a mortgage be useful?
If an entrepreneur wishes to purchase non-current assets such as a factory site or building
Define Debenture
A type of long-term debt finance that a business can acquire by offering a prospectus to the general public on the securities exchange
The loans are for a fixed amount, a fixed time period and at a fixed interest rate
When would a business offer a debenture
The company would have to be large and established
The loans would be used to buy buildings and equipment
Define unsecured note (bond)
A loan that is not secured by the business’s assets, and thus has higher interest rates
Why would a business issue an unsecured note?
They are usually issued by finance companies to gain funds
Define Lease
A contract allowing the use of another person’s asset for a specific period and at a set fee
Why would a business lease?
Leases are favourable because they are usually tax deductible, as they are an expense for the business and therefore included in the income statement
What are the sources of equity finance?
Private Equity
Ordinary Shares
New Issues
Rights Issues
Placements
Share Purchase Plans
Why would a business choose equity over debt financing?
The cost of the finance can be postponed, as shareholders will not need to be paid dividends immediately - and none at all if the business does not profit
Define ordinary shares
These shares provide part-ownership in a public company; shareholders receive dividends as their share of the business’s profits
When does a business receive money for issuing shares?
When they are sold on the new (primary) market
Define rights issue
Issue of shares that is offered at a special price to existing shareholders in proportion to their current shares of ownership in that company
Define placement
An additional share issue that is offered to specific institutions and specific investors to raise up to 15% of the business’s current capital base
Define share purchase plan
Companies can offer up to $15,000 in new shares to each existing shareholder at a discounted price
