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business influences - finance Flashcards

1
Q

what is the difference between internal and external sources of finance

A

difference is some of finance comes from within the business and some come from outside of it

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2
Q

what r the four types of internal sources of finance

A
  • owner’s equity
  • retained profits
  • sale of unwanted or unproductiver asset
  • using existing capital more efficiently
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3
Q

what are advantages of internal sources

A

theres no interest payment/extra loan fees and no contracts

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4
Q

what r disadvantages of internal sources of finance

A
  • amount of funds are limited to the amount of new profit recorded
  • short terms solution and have maximum limits
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5
Q

what are the two broad types of external sources of finance

A

debt and equity

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6
Q

what are the three types of short term borrowing external sources of finance

A
  • overdraft
  • commercial bills
  • factoring
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7
Q

what is overdraft?

A

An overdraft in finance is like a safety net provided by a bank for businesses. It allows them to spend more money than they have in their account, up to a certain limit set by the bank.

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8
Q

what are the positives of overdraft

A
  • Assists with short-term liquidity problems e.g. seasonal decreases in sale
  • variable interest rate provides flexibility
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9
Q

what is the disadvantage of overdraft

A

the longer it takes to repay, the more the business will pay

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10
Q

what are commercial bills

A

short term loans of 100k+ issued by financial institutions. the funds MUST be repaid within 6 months or can be paid in full at the end of the contract

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11
Q

what are the advantages of commercial bills

A

it gives a business immediate access to funds and there is an extended repayment period making it flexible

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12
Q

what r the disadvantages of commercial bills

A

if the repayment isnt paid in full, their assets can be taken from the financial institution

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13
Q

what is factoring?

A

selling of accounts recievable (money owning 2 a business) at a discounted price to a third party business.

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14
Q

what does it mean if a factoring company offers with or without recourse?

A

without recourse - if there is no collection of money, it is in the hands of the factoring company

with recourse - bad debts will be the responsibility of the business

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15
Q

what is the advantage of factoring?

A

Improves business’s liquidity position (cash flow) in the short-term as it provides an immediate access of cash

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16
Q

what is the disadvantage of factoring 4 a thirdparty business

A

Involves risk due to the likelihood of unpaid debts within a recourse factoring agreement.

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17
Q

what are the four types of long term borrowing 4 debt

A

mortgage, debentures, unsecured notes, leasing

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18
Q

what r mortgages?

A

loan secured against the asset being purchased. the financial institution owns the property until the loan can be paid off.

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19
Q

what r advantages of mortgages

A

allows business to purchase non current assets and lower interest rates

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20
Q

what are disadvantages of mortgages

A
  • long time to repay
  • assets cant be sold/used until mortgage has been repaid
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21
Q

what are debentures?

A

a loan from an investor with a promise to repay it in a set time w fixed interest and it involves a prospectus

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22
Q

what is a prospectus and how is it relevant to debentures

A

prospectus is a company’s invitation to investors to buy shares in the company

its relevant to debentures as it offers a prospectus to the general public on the securities exchange

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23
Q

what is an advantage to debentures?

A

debentures r used to buy buildings and equipment. everything is fixed (time, amount, interest)

24
Q

what is a disadvantages of debentures

A

interest repayments will incur long term costs 4 business n if its not paid an asset may be lost

25
Q

what r unsecured notes?

A

similar to debentures however its not secured against an asset. interest rates r extremely high

26
Q

what is leasing?

A

paying anorher party to use their assets w ongoing regular payments that allow business to use the asset wo large sums of money (like rent)

27
Q

what r advantages of leasing

A
  • Better for cash flow and working capital
  • Fixed payments
  • No added fees for maintenance and insurance
28
Q

what r disadvantages of leasing

A
  • business does not retain ownership of asset until end of lease agreement
  • interest rates higher than other forms of borrowing
29
Q

what is equity finance?

A

Finance raised by the company though inviting new owners (shareholders) though ordinary shares and private equity.

30
Q

what are the main advantages and disadvantages of equity finance

A

-no interest and rate and no repayments (pros)

-diluted ownership, lower returns, less control (cons)

31
Q

what are ordinary shares

A

ordinary shares provide part-ownership in public companies by issuing shares to public on the ASX

32
Q

Ordinary shareholders are considered …

A

an unsecured creditor

33
Q

what are the four types of ordinary shares

A

new issues, right issues, placements and share purchase plans (SPP)

34
Q

What are new issues?

A

securities issued and sold for the first time on a public primary market. some investors highly desire the share as any excess demand will boost the share price in the first few days

  • Businesses make initial public offerings and must issue prospectus which are expensive and resource exhaustive
35
Q

what are right issues

A

opportunity granted to existing shareholders to buy more shares in the business. theyre enabled to right/opportunity to purchase additional shares direct from the company. the price of rights issue shares is generally discounted, hence desirable.

36
Q

what are placements?

A

An allotment of shares made directly to investors at a discounted price.
* The sale of shares to a small number of private investors rather than offered to the public.
* Fast method for generating funds and does not require prospectus

37
Q

what are share purchase plans?

A

allows existing companies to issue max 15,000 in new shares to each existing shareholders wo prospectus.

No need for brokerage fees =admin fee for transaction.

38
Q

what is private equity?

A
  • Finance raised through private investments and not listing business on ASX, saving costs.
  • Owners have right to choose how much dividends each share holder gets and still has more control
39
Q

FIBLUAS

what are the sources of finance - financial institutions

A

-finance companies
-Investment banks
-Banks
-Life insurance companies
-Unit trusts
-Australian SECURITIES Exchange
-Superannuation funds

40
Q

what are finance companies?

A

provides financial services for S-M businesses, it provides secured and unsecured loans to businesses and usually charges a higher interest rate.

41
Q

What are superannuation funds

A

accumulated funds of employees and self-employed people who pay into these for retirement. Superannuation companies can use contributions to provide finance to businesses.

42
Q

what are life insurance companies

A

Allow individuals to accumulate funds for death and income protection. Many superannuation funds include a life insurance component. Way of protecting financial future of loved ones
* Life insurance companies must invest premiums to grow wealth by either purchasing shares or providing loans.
* Higher interest

43
Q

what are unit trusts

arab one

A

A unit trust is a form of collective investment in which a large number of investors contribute funds. Money is then put together and invested into financial assets by trustee. Unit trust investments include shares, mortgages and property and public securities. This allows businesses to diversify their income and EOS reducing transaction cost

44
Q

What is ASX and what does it act as

A

Acts as a primary market and enables companies to raise sales through issues of shares. Also operates as a secondary market where pre-owned shares are traded between investors

45
Q

difference between primary and secondary market

A

So, while the primary market is where new stuff is first sold, the secondary market is where previously-owned stuff gets traded around.

46
Q

what is the government’s general impact upon financial management?

A
  • Governments tend to develop economic policies and implement corporate legislation
  • Penalties are often imposed on businesses that are non-compliant
47
Q

what are the two main examples of gov influences on financial management

A

compan y taxation and ASIC (AUS securities and investments commision)

48
Q

What is ASIC? list 5 main points

A

An independent statutory commission of the federal government which enforce and administer law, esp. Corporations Act 2001 (Cth)

  • Regulate corporations’ markets and the provision of finance services
  • Protects consumers and investors from fraud and other unfair practises
49
Q

what is company taxation and list the 5 main points

A
  • private and pubic incorporated businesses must pay tax on profits b4 distributed to shareholders
  • Businessses must pay 30% of their Net profit to the ATO
  • *Businesses need to take into account when purchasing and pricing products the tax they will pay
  • Businesses must ensure their financial records are maintained and up to date to accurately calculate how profitable they are
  • Two measure of net profit : net profit before tax (NPBT), net profit after tax (NPAT)
50
Q

How does the global market influence financial management?

A

although not all businesses operate globally, businesses r influenced by global market

  • globalisation creates interdependence upon world’s economies
  • businesses must implement finance strats to maximise opportunities.
51
Q

Three main factors in regard to global market influences on financial management?

A
  • global economic outlook
  • availability of funds
  • interest rates
52
Q

what is the global economic outlook?

A

projected changes to the level of economic growth

53
Q

how is the availability of fundds relevant in global market influences upon finance

A

The ease at which a business can borrow funds from international financial markets. Due to globalisation, businesses easily borrow funds from overseas lenders creating more options and flexibility to expand.

  • Transaction exposure limits the idea of overseas funds as rates can change w/o relo 2 contract
54
Q

Aspects that come along with the global economic outlook

A
  • Our perception of how the economy will fare in the future will impact the financial decisions of a business
  • Increasing demand for products and services. It would mean a business needs to increase production to meet demand and hence require funds to purchase equipment, employ/train staff or expand size of business.
  • A decrease of interest rates on funds borrowed internationally because of the decrease of risk associated with repayments (as sales increase profits increase)

Poor economic outlook has the opposite effect.

55
Q

interest rates interconnection with global market influence

A

The higher the level of risk involved with lending to a business, the higher the interest rates are. Australian rates tend to be above international rates, causing some businesses to borrow overseas. However, the fluctuations of the exchange rate can see the advantage of international interest rates be eliminated.

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