Topic 3- Finance Flashcards
What is financial management?
Controlling, organising and planning of monetary assets to achieve short and long term goals.
What are the objectives of financial management? (PLEGS)
- Profitability
- Liquidity
- Efficiency
- Growth
- Solvency
Define liquidity
The short-term cash flow (availability of cash)
Define solvency
The long-term cash flow (availability of cash)
Name and define the term used to determine solvency
Gearing. It is the proportion of debt to equity that is used in a businesses activities
What’s one example of potential conflicts between short and long-term objectives
Decision to expand would increase value of business. However, increased costs and gearing will lead to lower overall profits in short term. This can create conflict with business owners, shareholders or investors.
List the key business functions
- Operations
- Marketing
- Finance
- Human resources
Name one example of how each operations, marketing and human resources rely on finance?
Operations- purchase inputs and carry out transformation process
Marketing- requires funds to undertake various forms of promotion
Human resource- pay staff
Name one example of how finance relies on operations, marketing and human resources
Operations- produce products
Marketing- promote products
Human resources- manage staff
Name and define one source of internal finance
Retained profits. Refers to cash kept in the business
Name the two external sources of finance
- Debt
- Equity
Name the two aspects of debt finance
- Short-term borrowing
- Long-term borrowing
Name and define the three examples of short-term borrowing (FOC)
- Factoring- selling of accounts receivable for a discounted price
- Overdraft- bank allowing one to overdraw their account
- Commercial bills- loans issued by financial institutions
Name and define the four examples of long-term borrowing (MULD)
- Mortgage- borrowed money, which is repaid with interest
- Unsecured notes- borrowing money from investors, not secured against assets so higher interest
- Leasing- payment of money for use of equipment owned by someone else
- Debenture- fixed rate of interest, for a fixed period of time
Define equity
The finance raised by a company through inviting new owners
Name the two aspects of Equity finance
- Ordinary shares
- Private equity
What does ordinary shares refer to?
Individual becoming part-owners of a publicly listed company. They receive payments called dividends
Name and define the four examples of ordinary shares (NRPS)
- New issues- security issued and sold for the first time on a public market
- Rights issues- privilege to shareholders to buy new shares in the same company
- Placement- offered to new, specific investor at a discounted rate per share
- Share purchase plans- offered at a discounted rate or without fees to existing shareholders
What does private equity refer to?
The money invested in a private company not listed on the ASX. Aim to raise capital finance
Name and define the seven financial institutions (BUF SAIL)
- Banks- receive savings and make investments and loans to borrowers
- Unit trusts- pools investors’ money into a single fund, which is managed by a fund manager
- Finance companies- concerned primarily with providing money
- Superannuation funds- employers make financial contributions to a fund accessible by each employee when they retire
- Australian Securities Exchange- a platform which facilitates the public selling and purchasing of shares
- Investment banks- a bank that purchases lots of newly issued shares and resells them to investors
- Life insurance companies- non-bank’s who provide cover and lump sum payment in the event of a death
What is the ASX?
The Australian Securities Exchange is the primary stock exchange group, where shares are sold and bought.
Name the two influences government has on financial measures for businesses?
- ASIC (Australian Securities and Investments Commission)
- Company taxation
What is the aim of ASIC?
Reducing fraud and unfair practices
Name the three global market influences (GAI)
- Global economic outlook
- Availability of funds
- Interest rates
Name one implication for businesses in relation to the influence of the government
- Legislation policies
Name the five stages of planning and implementing (NCRRB)
- Financial needs
- Financial risks
- Financial controls
- Budgets
- Record systems
What are the three methods in which companies can control and manage?
- Cash flow statement
- Balance sheet
- Income statement
List two advantages of Debt financing
- Funds are readily available
- Flexible payment periods are available
List two dis-advantages of Debt financing
- Debt can be expensive due to further debt
- Regular payments must be made
List two advantages of Equity financing
- Doesn’t have to be repaid unless owners leave business
- Cheaper due to no interest repayments
List two dis-advantages of Equity financing
- Expectation is RIO (return on investment)
- Long and expensive process to obtain funds
What is the COGS formula?
Opening stock + purchases - closing stock
What is the Gross profit formula?
Sales - COGS
What is the Net profit formula?
Gross profit - Expenses
What is the Assets formula?
Liabilities + Owner’s Equity
What are the four financial ratio categories? (THESE FORMULAS ARE PROVIDED IN EXAM)
- Liquidity
- Solvency
- Profitability
- Efficiency
What is the name of the liquidity formula, how do you calculate and how do you evaluate the results?
- Current ratio
- Current assets over current liabilities
- Higher ratio suggests favourable liquidity, should be 2:1; double the amount of assets to liabilities
What is the name of the solvency formula, how do you calculate and how do you evaluate the results?
- Debt to Equity ratio (Gearing)
- Total liabilities over total equity
- High ratio indicates high gearing and therefore higher risk- should be less than 100%
What is the name of the first profitability formula, how do you calculate and how do you evaluate the results?
- Gross Profit ratio
- Gross profit over sales
- Higher ratio is The higher the ratio, the better- need to compare with industry standards and internal benchmarks
What is the name of the second profitability formula, how do you calculate and how do you evaluate the results?
- Net profit ratio
- Net profit over sales
- Higher ratio is The higher the ratio, the better- need to compare with industry standards and internal benchmarks
What is the name of the third profitability formula, how do you calculate and how do you evaluate the results?
- Return on Owner’s Equity
- Net profit over owners equity
- Higher ratio is The higher the ratio, the better- need to compare with industry standards and internal benchmarks
What is the name of the first efficiency formula, how do you calculate and how do you evaluate the results?
- Total Expense ratio
- Total expenses over sales
- High ratio may indicate poor control over expenses - should compare with industry standards
What is the name of the second efficiency formula, how do you calculate and how do you evaluate the results?
- Accounts Receivable ratio
- 365 divided by Sales over accounts receivable
- High turnover ratios indicate efficient debt collection - should compare with industry standards
What is comparative Ratio Analysis?
Comparisons to understand the businesses progress
What are three ways in which comparisons can be made?
- With results from previous years
- With similar businesses
- Industry standards
Name the six limitations to financial reports
- Normalised earnings
- Capitalising expenses
- Valuing assets
- Timing issues
- Debt repayments
- Notes to the financial statement
Name one unethical practice, and two financial management practices related to financial reports
Unethical;
- Budget preparation
Management;
- Audited accounts- independent check of accuracy
- Record keeping- cash received being recorded
What are the three types of audits?
- Internal audits
- Management audits
- External audits
What are the four ways a business can increase their cash flow?
- Cash flow statement
- Distribution of payments
- Discounts for early payment
- Factoring
How does a business manage their working capital?
- Control of current assets
- Control of current liabilities
- Implementing strategies
Name three types of current assets
- Cash
- Accounts receivable
- Inventories
Name three types of current liabilities
- Accounts payable
- Loans
- Overdrafts
What is the strategy of leasing?
Payment of money to use equipment owned by another party
What is the strategy of Sale and lease back?
Process of selling an owned asset to a lessor and leasing the asset back through fixed payments for a specified period of time
Name three cost controls
- Fixed and variable costs
- Cost centres
- Expense minimisation
What are the five factors of global financial management?
- Exchange rates
- Interest rates
- Methods of international payment
- Hedging
- Derivatives
Name the strategies used to achieve profitability management
- Cost controls
- Revenue controls
What are cost centres?
Particular areas, departments or sections of a business which costs can be directly attributed
Name and define the revenue control
Marketing objectives, refers to strategies and objectives that should lead to an increase in sales.
What are derivatives?
a contract that derives its value from the performance of interest rates
Name and differentiate between the four methods of international payment
- Payment in advance- exporter receives payment before sending goods
- Letter of credit- document from bank which guarantees payment of goods
- Clean payment- exporting of goods before receiving of payment
- Bill of exchange- document from exporter shipped with goods, demanding payment by a specified time
What is hedging?
Hedging is a form of insurance, it is a way to offset the financial risks of any adverse price movements
Name and define the three types of contracts associated with derivatives
- Forward exchange contract- exchange one currency for another at an agreed exchange rate
- Options contract- gives the buyer the right but not the obligation to sell or buy foreign currency
- Swap contract- exchange currency in market with an agreement to reserve the transaction in the future
