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Finance Flashcards

1
Q

Strategic role of financial management

A

Make funds available for business activities and to ensure day-to-day transactions and operations run smoothly.

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2
Q

Objectives of financial management

A
  1. Profitability - ability to maximise profits(increased sales, decreased costs) long term goal
  2. Growth - increasing the size of the business(profit, sales(revenue) - productivity → increased volume, market share)
  3. Efficiency - maximising the outputs relative to the inputs in the business(using resources effectively hence reducing costs, waste and lead times, increase in payments made to you) i.e. getting the most for your dollar → minimise costs
  4. Liquidity - the extent to which a business can meet its short term financial commitments = sufficient cash flow(by selling inventory)
  5. Solvency - the business’ ability to cover its long-term liabilities. It indicates a possible risk to investors. Relationship/ratio between debt and equity
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3
Q

Interdependence with other key business functions

A

Finance supplies money to each of the KBFs, who in return are able to make the business more profitable, giving more money to the finance team

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4
Q

Internal sources of finance

A

Funds provided by the owners(equity) of the business (finance) or from the outcomes of business activities (retained earnings).
- Retained profits - using the business profit from previous years to reinvest into the business, rather than the owner(s) cashing out.

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5
Q

External sources of finance

A

DEBT
Short-term borrowing - COF
- Overdraft - when money is overdrawn from a bank
Commercial bills - a large loan repaid within a specific time frame 7- 180 days
Factoring - selling the business’ accounts receivable

Long-term borrowing - MUDL

  • Mortgage - a secured long term bank loan.
  • Debentures - loan from investors with a fixed interest rate
  • Unsecured notes - loans without collateral
  • Leasing - paying an asset over time without owning it.

EQUITY -SPRN
Ordinary shares - investors purchase a share of ownership
- New issues - makes the main public offering to investors
- Right issues - sells additional shares to shareholders
- Placements - sells shares privately to investors
- Share purchase plan - shares to shareholders instead of dividend payments.

Private equity - giving a large financier part ownership business in return for a large number of funds.

  • handed over to the equity firm
  • venture capitalism - capitalist takes a big risk by investing in a company, often expecting a good return.
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6
Q

Financial institutions

A

BULIFAS
Banks - the most common financial institution, provide short-term loans such as overdrafts and long-term ones being mortgages.

Life insurance companies - provide cash payouts to the family of someone in the event of their death. Invest it into businesses in order to make a profit

Investment banks - financial institutions which offer to fund businesses, but not individuals.

Unit trust - invest the money of others for a fee, can then invest the large amount into a business

Finance companies - give finance to businesses which the banks will not, but their interest rates are likely higher

Australian Securities Exchange(ASX) - shares are bought and sold - can raise funds by selling part of the equity in the business

Superannuation funds - Australians must contribute at least 9% of their income to superannuation. The money the fund receives is then invested into businesses to try and increase their value

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7
Q

Infleunce of the government

A

Australian Securities and Investments Commission(ASIC)
- monitors and regulates activities by companies to ensure corporate laws are followed, safeguard consumers

Company taxation - the ATO enforces collection of tax from businesses and individuals
The tax rate for businesses is 30%

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8
Q

Global market influences

A

Economic outlook - how well the global economy looks to be going can affect how businesses and individuals choose to invest.
E.g. If there is a global economic downturn, businesses would expect some level of impact in Australia and might hold off any sort of large investment.

Availability of funds - Many investors in Australian businesses come from overseas. Overseas markets can therefore affect how much money is available.

Interest rates - interest rates can rise or fall based on how well the economy is doing. The current interest rate will impact how easily a business can source funds from overseas.
Relationship between risk and reward – overseas investors will weigh up the risk of investing in Australia against the interest rate they can expect to receive in return.

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9
Q

Planning and implementing

A

Planning implementing - financial needs, budgets, record systems, financial risks, financial controls

  • debt and equity financing - advantages and disadvantages of each
  • matching the terms and source of finance to business purpose
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10
Q

Planning implementing - financial needs, budgets, record systems, financial risks, financial controls

A

Financial needs - identifying the financial actions that need to be taken to achieve goals

Financial risks- Involves identifying and analysing factors that could harm the financial position of the business

Budgets - a tool for planning expected costs and revenues over a set period of time

Financial controls - Day-to-day adjustments to improve the financial performance of the business in areas such as liquidity and profitability. SAFEGUARD

Record systems - Without budgets or any other system of recording information, the business would be unable to accurately control its spending and still be able to ensure liquidity and solvency

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11
Q

Planning and implementing

- debt

A

ADV.

  • Funds are usually readily available
  • Increased funds should lead to increased earnings and profits
  • Tax deduction for interest payments

DISADV.

  • Increased risk, if debt comes from financial institutions as the interest, bank charges, and the principal, has to be repaid
  • Security is required by the business
  • Regular payments have to be made
  • Lender has the first claim on any money if the business ends in bankruptcy
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12
Q

Planning and implementing

- equity

A

ADV.

  • Does not have to be repaid unless the owner leaves the business
  • Cheaper than other sources of finance as there are no interest payments
  • The owners who have contributed the equity retain control over how that finance is used
  • Low gearing

DISADV.
Lower profits and lower returns for the owner
The expectation that the owner will have about the return on the investment(ROI)

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13
Q

Planning and implementing

- debt and equity financing comparison

A

DEBT

  • The lender has a prior claim in the event of liquidation
  • The debt must be repaid by periodic repayments
  • Interest payments are tax-deductible
  • The lender usually requires a lower rate of return
  • Interest payments are fixed
  • Debt providers have no voting rights

EQUITY

  • Shareholders have a residual claim on assets
  • Equity has no maturity date
  • Dividends are not tax-deductible
  • Shareholders require a higher return due to higher risk
  • Dividend payments are not fixed and may be reduced through lack of funds
  • Equity holders have voting rights
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14
Q

Matching the terms - Assets

A 
ASSETS - items of value
Current Assets: PICA
- Cash
- inventories(stock)
- Accounts receivable(debtors)
- Prepaid expenses

Non-current assets: BELIV

  • Equipment
  • Land
  • Buildings
  • Vehicles
  • investments
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15
Q

Matching the terms - Liabilities

A 
LIABILITIES - debt owed by the business
Current liabilities:
- Accounts payable(creditors)
- Accrued wages
- Overdrafts

Non-current liabilities:

  • Long-term loans
  • Mortgage loans
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16
Q

Matching the terms - owners equity

A

Owners equity - the value of owners’ stakes in the business

  • Capital
  • Net profit(retained earnings)
  • Drawings
17
Q

Monitoring and controlling

A

Measuring and comparing the actual performance against planned performance and making changes as needed. (Achieved through financial reports)

Financial Reports

  • Cash Flow Statement = Indicate movement of cash inflows and outflows. (Liquidity of the business)
  • Income Statement = Show revenue earned and expenses incurred. (Profitability)
  • Balance Sheet = Shows a business’s assets, liabilities, and owner’s equity determining the net worth of the business.
18
Q

Basic equations

A

Gross profit = sales - costs of goods sold

COGS = opening stock + purchases + other COGS expenses - closing stock

Net profit = Gross profit - expenses

19
Q

Financial ratios

A
  • liquidity
    Current Ratio = current asset ÷ current liabilities
    Ideal ratio = 2:1 (higher assets)
  • Gearing(solvency)
    debt to equity ratio = total liabilities ÷ total equity
  • Profitability
    Gross profit ratio = Gross profit ÷ sales
    Net profit ratio = net profit ÷ sales
    Return on equity = net profit ÷ total equity
  • Efficiency
    Expense ratio = total expenses ÷ sales
    Accounts receivable turnover ratio = sales ÷ AR → 365 ÷ x

Comparative ratio analysis

  • Comparing the results against standards, or with similar businesses.
  • Make an informed decision if the ratio displays a good or bad value.
20
Q

Limitations of financial reports

A
  • Capital expenditure ⇒ can be listed as an asset on the balance sheet rather than an expense on the income statement.
  • Valuing Assets Difficult to accurately value assets (overquote/underquote)
  • Ethical Issues → overestimating any future revenues, and underestimating future costs. (unrealistic forecasting) or underquote income, to pay less tax.
21
Q

Financial management strategies

A

Cash flow management

  • cash flow statements
  • distribution of payments, discounts for early payments, factoring

Working capital management

  • control of assets (cash, receivables, inventory management)
  • control or liabilities (payable, loans, overdrafts)
  • strategies (leasing, sale and lease back)

Profitability management

  • cost controls
  • cost centers
  • expense minimisation
  • revenue controls

Global financial management

  • exchange rates
  • interest rates
  • Methods of International Payment
  • hedging
  • derivatives
22
Q

Financial management strategies - cash flow management

A

EFFICIENCY
Cash Flow Statement
→ used to record when cash inflows and outflows occur (patterns and trends within the business)

Payment Distributions
→ manipulate timing of cash outflows to avoid cash shortages (delay/strategic timing of cash outflow)

Discounts for early payments
→ Offered in order to encourage people to pay the businesses accounts receivable soon (small loss = prompt financial gain)

Factoring
→ business sells its accounts receivable to a third party (debt factor) for a discount.

23
Q

Financial management strategies - working capital management

A

LIQUIDITY
→ Working capital = operating liquidity, current assets - current liabilities
→ Control assets and liabilities to ensure balance

Control of Assets
→ Cash: short term expenses by using overdrafts, excess investments.
→ Receivables: ensure all receivables are paid by reminders, withhold further sales, blacklist, factoring
→ Inventory Management: minimise excess stock to maximise capital.

Control of Liabilities
→ Payable: hold off payments until the latest time.
→ Loans: effective repayment plans.
→ Overdrafts: provides short term working capital

Strategies:
→ Lease: purchase the right to use an asset via periodic payments.
→ Sale and Lease Back: raising capital by selling an asset and leasing it back.

24
Q

Financial management strategies - profitability management

A

Cost Controls
→ Minimising COGs and expenses (outsourcing, bulk, quality)
→ lowering variable costs = energy, raw materials, labour.

Cost Centers
→ areas that generate costs must be monitored.

Expense minimisation
→ reducing financial, administrative and selling costs to boost productivity.

Revenue Controls
→ generate more revenue through marketing of goods

25
Q

Financial management strategies - global financial management

A

→ international businesses have complex risks that must be managed.

Issues and Risks:

  • Exchange rates - fluctuation of the economy
  • Interest rates - lower rates = cheaper loans

Methods of International Payment:
- Payment in advance → seller does not ship the product until full payment is received = reduced risk for seller.
- Letter of Credit → a bank guarantees payment on behalf of a buyer = reduced risk for buyer.
- Clean payment → payment is not made until the product is received = increased risk for seller.
- Bill of exchange → buyer pays a specific amount at a time. = reduced risk for the seller
- Hedging → reducing risk associated with commercial transactions. E.g purchasing insurance, bulk buying when price is low.
- Derivatives → financial instruments businesses buy to lock in the price of an asset at a later date.
→ Forward Exchange Contract = a bank guarantees a specific exchange rate between currencies on a future date.
→ Options Contract = similar to forward exchange however one can retract if there is a better option. Extra is paid for flexibility.
→ Swap Contract = agreement to exchange currency on the spot with now with an agreement to do the same money swap later.

26
Q

Processes of financial management

A

Planning implementing - financial needs, budgets, record systems, financial risks, financial controls

  • debt and equity financing - advantages and disadvantages of each
  • matching the terms and source of finance to business purpose

Monitoring and controlling - cash flow statement, income statement, revenue statement

Financial ratios

Limitations of financial reports

Ethical issues related to financial reports

27
Q

Influences on financial management

A

Internal sources of finance - retained profits

External sources of finance

  • debt - short-term borrowing (overdraft, commercial bills, factoring) long-term borrowing (mortgage, debentures, unsecured notes, leasing)
  • equity - ordinary shares(new issues, right issues, placements, share purchase plans), private equity

Financial institutions - banks , investment banks, finance companies, superannuation funds, life insurance companies, unit trusts, and the Australian Securities Exchange

Influence of government - Australian Securities and Investments Commision, company taxation

Global market influences - economic outlook, availability of funds, interest rates

28
Q

Role of financial management

A

Strategic role of financial management

Objectives of financial management
- profitability, growth, efficiency, liquidity, solvency

Interdependence with other key business functions

Business (4 decks)

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