Role, influences and processes of finance Flashcards
What can the mismangement of financial resources lead to?
Insufficient cash to pay suppliers
Inadequate capital for expansion
Overstocking of materials
Define financial management
Financial management is the planning and monitoring of a businesses financial resources to enable the business to achieve its financial goals
What are the objectives of financial management?
PLEGS
profitability Liquidity Efficiency Growth Solvency
How is probability another important financial objective of management?
Probibility maximises profits to satisfy owners and shareholders in shorterm but in longterm it refers to sustainability
How is growth important as an objective in financial management?
Growth is the ability to increase ots size in the long term. Financial managers must effectively utilize cost minimisation, increase sales and marketshare for this to happen.
Define efficiency
Efficiency is the ability to minimise costs and manage its assets so that maximum profit is achieved. Financial management myst monitor its assets including inventories cash and receivables
How is liquidity important in financial management?
Liquidity is important as it pays of debt when due. Financial resources must be enough to pay off debts without depleting cash supply. Business may also be able to quickly convert assets to cash.
Define solvency
Solvency indicates whether a business will be able to repay amounts that have been borrowed for investment capital. Solvency can be measured as gearing.
Differentiate between short term and long term goals in financial management
Short term or tacical goals are within 1-2 years
Long term goals are more than 5 years. Series of short term goals are needed to achieve long term goals.
What are the main influences on financial management?
Internal source of finance External source of finance Global market influences Financial institutions Influences of government
What are the two internal sources of finance?
Owners equity - funds contributed by owners or partners to establish and build the business
Retained profits - profits which are kept as an accessible source for future activities
What are the main external sources of finance in debt for short term borrowing?
Bank overdraft
Commercial bills
Factoring
What are the main external sources of finance in debt for long term borrowing?
Mortgage
Debentures
Unsecured notes
Leasing
What are the main internal sources of finance?
Ordinary shares
- new issues
- rights issues
- placements
- share purchase plans
Private equity
Define bank overdraft, commercial bills and factoring
Bank overdraft - when business overdraws its account to an agreed limit. Interest rates are low
Commercial bills - issued by institutions not banks. Larger amounts are given for period of 90-180 days.
Factoring - selling of accounts receivable at a discounted price to a firm that specializes in collectinf accounts receivable. Risk include not being able to receive accounts and only receiving 90% of accounts due.
Define mortgage, debentures, unsecured notes and leasing.
Mortgage is long term borrowing normally secured by the property of business. Normally used to purchase properties. Repaid through regular repayments over agreed period such as 15 years.
Debentures - issued by a conpany for a fixed rate of interest at fixed time. Secured through companys assets.
Unsecured notes - loan for set period with no security for lender. Often higher interest than a secured note.
Leasing - long term borrowing of normally equipment owes by another party.
Operating leases - short periods less than life of the asset. Can be cancelled without penalty.
Financial leases - often for the life of the asset lessor purchases the asset on behalf of the lesse. Repayments are fixed for economic value of asset. There are penalties invovled in cancelling.
What are some advantages to leasing?
Tax deductible
Payments include maintanence insurance and financial costs
Costs of establishing leasing are lower than other methods
Define equity
Equity refers to finance raised by a company by issuing shares to public on ASX. Equity includes private equity and ordinary shares.
What is an ordinary share?
Ordinary shares are shares purchased by individuals in which they become part of the company and receive dividends.
List the different types of financial institutions
Banks
Investment banks
Finance and life insurance companiea
Superannuation funds
Units trust
ASX
Explain the importance and role of banks in financial institutions
Banks are most important source of funds or businesses. Banks recive savings from individuals, business and governments and in turn make investments and loans to borrowers.
Explain the importance and role of investment banks in financial institutions
Invement banks mainly borrow and lend primarily to business sector.
Inestments banks:
- arrange project finance
- provide working capital
- arrange overseas finance
Explain the importance and role of finance companies in financial institutions
Finance companies act as intemediaries in finance markets. They provide loans to business and individuals through consumer hire purchase loan, personal loans and secured loans.
Finance companies raise capital through debentures having security on firms assets
What are the three global marketing influences on finance?
The global market influences in finance include:
Economic outlook
Avaliability of funds
Interest rates
How does the global economic outlook influence finance?
When the economy is positive and economic growth is increasing a business may:
- increase production to meet demand
- decrease borrowing to reduce risk
How does avaliabilty of funds influence finance?
The avaliabilty of funds from international financial markets will have fluctuating interest rates. If interest rates are high this may lead to a high risk in lending. Therefore finance managers may have alternative options such as using factoring instead of borrowing cash.
Finance planning is essential if a business is to achieve its goals. For business to effectively do this it must implement a planning cycle. List the steps of the finance planning cycle.
Determining financial needs Developing budgets Maintaining record systems Identifying financial risks Establishing financial controls Addressing present financial position
How will a business determine its financial needs?
Size of business
Life cycle phase of business
Future plans for grow and development
Business may seek out a financial institution.
Budgets are often prepared to predict a range of activities relating to short and long term plans. Budgets enable constant monitoring of progress and signals for any adjustments to be made. Budgets can be classified as operating, project or financial budgets. Explain the three type of budgets.
Operating budgets - sales production, expense and raw materials/labour hours. Main activities of business
Project budgets - capital expenditure and research and development
Financial budgets - include the financial data of business which include budgeted income statement, balance sheet and cashflows.
What is an example of a record system?
Record systems are the mechanisms employed by a business to ensure that data is accurate reliable and valid. The double entry record system is accounting is an example.
How may a business identify financial risks?
Business should question if borrowing is crucial
Should asses if interest rates will increase
Global business should asses if exchange rates will fluctuate
What are the most common causes of financial problems? And how can a business overcome these problems using financial controls.
Theft
Fraud
Damage or loss
Errors in record system
Business may control cash to avoid theft such as use of cash registers and using cheque as payments.
Protecting assets, by locking premises and alarms
List the advantages and disadvantages of debt finance
Advantages
- funds readily avaliable
- tax deduction
Disadvantages
- security is required by business
- regular payments may have to be made
- increase risk
List the advantages and disadvantages of equity finance
Advantages
- low gearing (resources of owner and not external sources of finance)
- no risk
- cheaper as there are no interest rates
Disadvantages
- lower profits and return due to less risk
- expectation on return on investment
Sources of finance must relate to business purpose. Explain two factors which will determine the sources of finance for a business
Cost
Structure of business
Explain how the finance department can monitor and control the business
Main financial controls used for monitoring in finance include:
Cash flow statements
Incone statements
Balance sheets
Define the cash flow statement
Cash flow statement indicates the movement of cash receipts and cash payments resulting from transactions.
Cash flow inflow should exceed outflow
What are the three categories that cash flow is seperated into?
Operating activities - inflows and outflows relating to main business activites
Investing - inflow and outflow relating to purchase and sale of non current assets and investments.
Financing activities - inflows and outflows relating to borrowing activities. Inflows may be through equity such as shares. Outflows are related to repayments.
Define income statement
Income statement shows operating efficiency. That is income earned and expenses incurred over accountsnt period of profit or loss.
Shows operating income such as sales and operating expenses such as rent, advertising, insurance.
Define balance sheet
Balance sheets represents business assets and liabilities. It shows financial stabibility of business.
