Role, influences and processes of finance

Question 0

What can the mismangement of financial resources lead to?

Answer 0

Insufficient cash to pay suppliers
Inadequate capital for expansion
Overstocking of materials

Question 1

Define financial management

Answer 1

Financial management is the planning and monitoring of a businesses financial resources to enable the business to achieve its financial goals

Question 2

What are the objectives of financial management?

Answer 2

PLEGS

profitability
Liquidity
Efficiency
Growth
Solvency

Question 3

How is probability another important financial objective of management?

Answer 3

Probibility maximises profits to satisfy owners and shareholders in shorterm but in longterm it refers to sustainability

Question 4

How is growth important as an objective in financial management?

Answer 4

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.

Question 5

Define efficiency

Answer 5

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

Question 6

How is liquidity important in financial management?

Answer 6

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.

Question 7

Define solvency

Answer 7

Solvency indicates whether a business will be able to repay amounts that have been borrowed for investment capital. Solvency can be measured as gearing.

Question 8

Differentiate between short term and long term goals in financial management

Answer 8

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.

Question 9

What are the main influences on financial management?

Answer 9

Internal source of finance
External source of finance
Global market influences
Financial institutions
Influences of government

Question 10

What are the two internal sources of finance?

Answer 10

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

Question 11

What are the main external sources of finance in debt for short term borrowing?

Answer 11

Bank overdraft
Commercial bills
Factoring

Question 12

What are the main external sources of finance in debt for long term borrowing?

Answer 12

Mortgage
Debentures
Unsecured notes
Leasing

Question 13

What are the main internal sources of finance?

Answer 13

Ordinary shares

• new issues
• rights issues
• placements
• share purchase plans

Private equity

Question 14

Define bank overdraft, commercial bills and factoring

Answer 14

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.

Question 15

Define mortgage, debentures, unsecured notes and leasing.

Answer 15

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.

Question 16

What are some advantages to leasing?

Answer 16

Tax deductible

Payments include maintanence insurance and financial costs

Costs of establishing leasing are lower than other methods

Question 17

Define equity

Answer 17

Equity refers to finance raised by a company by issuing shares to public on ASX. Equity includes private equity and ordinary shares.

Question 18

What is an ordinary share?

Answer 18

Ordinary shares are shares purchased by individuals in which they become part of the company and receive dividends.

Question 19

List the different types of financial institutions

Answer 19

Banks

Investment banks

Finance and life insurance companiea

Superannuation funds

Units trust

ASX

Question 20

Explain the importance and role of banks in financial institutions

Answer 20

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.

Question 21

Explain the importance and role of investment banks in financial institutions

Answer 21

Invement banks mainly borrow and lend primarily to business sector.

Inestments banks:

• arrange project finance
• provide working capital
• arrange overseas finance

Question 22

Explain the importance and role of finance companies in financial institutions

Answer 22

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

Question 23

What are the three global marketing influences on finance?

Answer 23

The global market influences in finance include:

Economic outlook
Avaliability of funds
Interest rates

Question 24

How does the global economic outlook influence finance?

Answer 24

When the economy is positive and economic growth is increasing a business may:

• increase production to meet demand
• decrease borrowing to reduce risk

Question 25

How does avaliabilty of funds influence finance?

Answer 25

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.

Question 26

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.

Answer 26

Determining financial needs
Developing budgets
Maintaining record systems
Identifying financial risks
Establishing financial controls
Addressing present financial position

Question 27

How will a business determine its financial needs?

Answer 27

Size of business

Life cycle phase of business

Future plans for grow and development

Business may seek out a financial institution.

Question 28

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.

Answer 28

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.

Question 29

What is an example of a record system?

Answer 29

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.

Question 30

How may a business identify financial risks?

Answer 30

Business should question if borrowing is crucial

Should asses if interest rates will increase

Global business should asses if exchange rates will fluctuate

Question 31

What are the most common causes of financial problems? And how can a business overcome these problems using financial controls.

Answer 31

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

Question 32

List the advantages and disadvantages of debt finance

Answer 32

Advantages

• funds readily avaliable
• tax deduction

Disadvantages

• security is required by business
• regular payments may have to be made
• increase risk

Question 33

List the advantages and disadvantages of equity finance

Answer 33

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

Question 34

Sources of finance must relate to business purpose. Explain two factors which will determine the sources of finance for a business

Answer 34

Cost

Structure of business

Question 35

Explain how the finance department can monitor and control the business

Answer 35

Main financial controls used for monitoring in finance include:

Cash flow statements
Incone statements
Balance sheets

Question 36

Define the cash flow statement

Answer 36

Cash flow statement indicates the movement of cash receipts and cash payments resulting from transactions.

Cash flow inflow should exceed outflow

Question 37

What are the three categories that cash flow is seperated into?

Answer 37

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.

Question 38

Define income statement

Answer 38

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.

Question 39

Define balance sheet

Answer 39

Balance sheets represents business assets and liabilities. It shows financial stabibility of business.