Finance Flashcards
(137 cards)
1
Q
What is the role of financial management?
A
To ensure that the business continues to grow, operate and is able to achieve its business goals and objectives.
2
Q
How is the strategic role of financial management performed.
A
— Preparing budgets and forecasts of future finances
— Preparing financial statements
— Maintain sufficient cash flow
— Sourcing finance
— Setting financial objectives
— Distributing funds to other parts of the business
3
Q
What is the job of financial managers?
A
Financial managers plan the financial aspects of a business for the future and are for managing the financial resources of the business.
4
Q
What is the acronym for financial management?
A
PLEGS
5
Q
What does PLEGS stand for?
A
Profitability
Liquidity
Efficiency
Growth
Solvency
6
Q
What is related to short-term objectives?
A
Operational and tactical
7
Q
What are the operational and tactical time periods respectively?
A
Day to day and one to two years
8
Q
What is related to long-term objectives?
A
Strategic
9
Q
What is the strategic period?
A
5 or more years
10
Q
What are the influences of financial management
A
- Financial institutions
- Influences of government
- Global market influences
- Internal sources of finance
- External sources of finance
11
Q
What is meant by profitability?
A
The ability of a business to maximise profits.
12
Q
A
12
Q
What is meant by growth?
A
Growth refers to the ability of a business to grow in size in the long term.
12
Q
What is meant by liquidity?
A
Refers to the extent of which a business can meet its financial commitments in the short term, typically lesser than a year.
13
Q
What is meant by efficiency?
A
Efficiency refers to the ability of a business to minimise costs to maximise profits achieved with the least resources used.
13
Q
What characterises growth?
A
- Increased value of assets
- Increased market share
- Merging/takeover of a business
- Diversifying product range
13
Q
What is meant by solvency?
A
Solvency refers to a business’s ability of fulfilling its long term commitments
13
Q
By what acronym can you remember the five influences on financial management
A
F.I.G.E.G
13
Q
What are the Five influences on financial management?
A
Financial Institutions
Internal sources of finance
Government influences
External sources of finance
Global Market influences
14
Q
What are the external sources of debt finance?
A
External Debt
Short term
- Over draft
- Commercial bill
- Factoring
Long term
- Debentures
- Mortgage
- Leases
- Unsecured notes
15
Q
What are the external sources of equity finance?
A
Private equity and ordinary shares
16
Q
What is an overdraft?
A
When a business is given the flexibility to borrow from a bank at short notice through its cheque or current account
17
Q
What is a commercial bill?
A
Is a written order for a loan amount that is guaranteed by the business’s bank. It is borrowed through surplus funds.
18
Q
What are surplus funds?
A
The excess cash or assets that a business has laying around.
19
What is factoring?
Refers to when a business sells its accounts receivable asset to a specialist factoring company to create cash flow for the business.
20
What are the advantages and disadvantages of factoring?
Advantages
- Businesses will receive up to 90 percent of the accounts receivable with in 48 hours of sending invoices to the factoring company. **By having this immediate access to funds, the business will improve cash flow and gearing**
- The business will not be concerned with the collection of the accounts receivable
Disadvantages
- Factoring involves greater risk than other sourceus of short term borrowing such as overdrafts because of the likelihood of unpaid debts
- Also can be expensive, as the business is usually held accountable for the debts that remain unpaid, plus the commission that is paid on the debt.
21
What is a bill of exchange?
An unconditional order that binds a party to pay a fixed sum of money.
22
What is Long-term borrowing, and which is the most common type?
Long term debt refers to the funds that are borrowed and meant to be paid back longer than 12 months. The most common type is the Mortgage.
23
What is a mortgage?
A mortgage is a loan that is used to finance the purchase of property such as new industrial operations facilities or offices. These are typically repaid with interest, through regular payments (likely to be monthly).
24
What are debentures?
A medium-long term debt instrument that are issued by a company for a fixed rate of interest and time periods.
25
What are debentures used for?
They are used to raise funds from investors.
26
What are unsecured notes?
They are a loan from investors for a set period of time that is not backed by any security (collateral.
27
Why do unsecured notes present investors with the most risk, and why does it attract a higher rate of interest?
As unsecured notes are not backed by any security/collateral, hence this long-term source of finance attracts a higher rate of interest.
28
What is Leasing?
Leasing involves the payment of money for the use of equipment that is owned by a separate party. Examples include cars, machinery, equipment, computers and software.
29
What is the difference between financial and operational leases?
Operational leases are assets that are leased for short periods and can be cancelled without penalty, whereas, financial leases are also assets that are leased for a longer period and have cancellation penalties.
30
What are the advantages of leasing?
- Leasing assists the business with their cashflow, as they are spaced over long time periods, hence, business pay smaller instalments making minimal impact on the cashflow in the short term.
- Lease payments are tax deductible
31
What are the disadvantages of leasing?
Interest charges maybe higher than the other forms of borrowing.
32
What is a type of external public equity?
Ordinary shares
- New issues
- Rights issues
- Placements
- Share purchase plans
33
What are ordinary shares?
They are the most commonly traded shares on public markets such as the Australian Stock Exchange.
34
What is a benefit of ordinary shares?
They enable individuals who possess shares in their company to voting rights and dividends, according to the amount of shares possessed.
35
What are New Issues?
Security that has been sold for the first time on the ASX, and can be referred to as primary shares or new offerings
36
What are IPOs (Initial Public Offerings)?
IPOs are when a private company issues shares publicly for the first time.
37
What is a prospectus?
A prospectus is a document that has some details of a business.W
38
Why does a prospectus need to be issued when an IPO is made?
This is so that investors can make informed decisions.
39
What are rights issues?
The privilege granted to investors to buy shares in the same company, occurring after an IPO has been made. They will have right to purchase more shares in proportion to their current share portfolio in the company.
40
What are placements?
Allotment of share made to investors directly from the company, and are typically offered at a discounted price.
41
What is the discounted price in placements intended to do?
To persuade specific investors to invest in the company.
42
What are share purchase plans?
They are an offer to existing shareholders in a listed company to purchase more shares in the company, free of the brokerage fee. However, the limit for this is $15,000.
43
What do share purchase plans allow companies to do?
They allow companies to issue new shares to current shareholders without a prospectus.
44
What is private equity?
It refers to the money invested in a company that is not listed on the stock exchange (ASX).
45
What is the purpose of private equity?
It is to raise capital/funds to finance future expansion/investment of the business.
46
What do Financial Institutions do?
They collect funds and invest them in financial assets.
47
What do Financial Institutions provide?
They provide financial services and focus dealing with financial transactions such as investments, loans, and deposit.
48
What are the different types of Financial Institutions?
- Unit Trusts
- Finance companies
- ASX
- Banks
- Investment Banks
- Superannuation Funds
- Life insurance
49
What acronym can help you remember the different financial institutions
F.A.I.L.S.U.B
50
What are banks?
Banks are financial intermediaries which accept deposits from the public and provide loans and in turn make investments.
51
What do investment banks do?
Provide services in both the borrowing and lending primarily to the business sector (but can be governments too).
52
What is an example of an investment bank?
An example of an investment bank stemming from Australia is **Maquarie Banks **
53
What are some conditions that may be imposed by investment banks?
* Trade in money, securities and financial futures
* Arrange long term finance for company expansion
* Provide working capital
* Arrange project finance
* Advise clients on foreign exchange cover
* Advice on mergers and takeovers
54
What are finance companies?
Finance companies are **non-bank financial intermediaries** that specialize in smaller commercial finance. They provide **short to medium-term loans.**
55
How do finance companies provide loans?
Consumer hire-purchase loans, personal loans and secured loans
56
How do finance companies raise funds?
Through shares issues which are debentures
57
What are Life insurance companies?
Life insurance companies are non-bank financial intermediaries that provide cover and lump sum payments in the event of death.
58
What do life insurance companies provide?
Life insurance companies provide both equity and loans to the corporate sector through receipts of insurance premium, providing funds for investment
59
What is superannuation?
Superannuation is a scheme set up by the Australia Federal Government.
60
What does a superannuation do?
It requires all employers to make a financial contribution to a fund, which will provide the employee with benefits when they retire.
61
What is the condition for superannuation?
Employers are required to make a contribution to employees within the age group 18 to 69, who are paid $450 in tax in calendar month
62
How does the government influence businesses?
Through the monetary and fiscal policy.
63
What is the monetary policy?
Monetary policy is steps taken by the Reserve Bank of Australia to affect the finance market and assist the federal government in achieving its goal of low inflation and economic growth.
64
What is the fiscal policy?
Fiscal policy relates to taxation and government spending.
65
What is the Australian Securities and Investments commision?
ASIC is an independent statutory commission accountable to the Commonwealth
parliament.
66
What does ASIC actually do?
ASIC enforces the Corporations Act 2001 and protects consumers in the areas of investment, life and general insurance, superannuation, and banking excluding lending in Australia.
67
What is company taxation?
All Australian businesses that have been incorporated are required to pay company tax on profits. This tax is levied
at a flat rate of 30 per cent of net profit.
68
What are Global Market influences?
Financial risks associated with global markets are greater than those encountered locally, but such risk is often necessary for business strategy. Largely uncontrollable influences include the availability of funds, interest rates and the global economic outlook.
69
What is meant by availability of funds?
The ease with which business can access funds (for borrowing) on the international financial markets. The availability of funds depends on the risk, demand, and supply and the domestic economic conditions.
70
What is Company taxation?
Companies and corporations in Australia pay company tax on profits. The tax is levied at a flat 30%
71
What are global market influences?
Global market influences are external influences that are not controlled by the business and are required for business strategy
72
What are the different types of global market influences
Availability of funds, economic outlook and interest rates.
73
What is meant by availability of funds?
The ease with which business can access funds (for borrowing) on the international financial markets. It depends on the risk, demand, and supply and the domestic economic conditions.
74
What are interest rates?
The cost of borrowing money. The higher the level of risk involved in lending to a business, the higher the interest rates.
75
What is meant by global economic outlook?
The projected changes to the level of economic growth throughout the world.
76
What are the processes of financial management?
- Planning and implementing
- Monitoring and controlling
- Calculating financial ratios
- Identifying limitations of financial reports
- Identifying ethical issues related to financial reports.
77
Why is financial planning important?
Financial planning determines how a businesses' goal will be achieved.
78
Why is determining financial needs for a business important?
Because, to determine where the business is headed and how it will get there; it is important to know what its needs are.
79
Where can important financial information be found?
- Balance sheets, income statements, cash flow statements, budgets
- Sales and price forecasts, bank statements, weekly reports from departments, break-even analysis
- Reports from financial ratio and analysis and interpretation.
80
What are financial needs determined by?
* The **size** of the business
* The current phase of the **business cycle**
* Plans for **growth and development**
* Capacity to **source finance** – debt and/or equity
* **Management skills for assessing** financial needs and planning
81
Why might a business plan be used when seeking finance
These institutions require a **guarantee** that their financial commitment to the business will be successful. A business plan sets out the finances required, the proposed sources of finance and a range of financial statements.
82
What are budgets?
Budgets are quantitatively defined plans for achieving set outcomes and is based on forecast figures or expectations of future operations.
83
What can budgets show?
* **Cash required** for outlays for a particular period
* The **cost of capital** expenditure and associated expenses against earning capacity
* Estimated **use and cost of raw materials or inventory**
* **Number and cost of labour hours** required for production.
84
What are record systems?
**Record systems** are the mechanisms employed by a business to ensure that data are recorded, and the information provided by record systems is accurate, reliable, efficient, and accessible.
85
What are financial risks?
**Financial risk** is the risk of a business being **unable** to cover its **financial obligations** such as the **debts** that the business incurs through borrowings, both short term and longer-term
86
What are some considerations when assessing financial risks?
* The amount of the **business’s borrowings**
* When borrowings are **due** to be repaid
* **Interest rates**
* The required level of **current assets**
87
What do financial controls do?
**Financial controls ensure** that the plans that have been determined will lead to the **achievement of the business’s goals in the most efficient way**.
88
Where is financial control especially important?
Control is particularly important in
assets such as accounts receivable, inventory and cash
89
What are some common policies and procedures that promote control?
* **clear authorisation** and responsibility for tasks in the business
* **separation of duties** — for example, one person is responsible for ordering and another for receiving inventories; one person writes the cheques and another signs the cheques
* **rotation of duties** — for example, staff are skilled in a number of areas and can rotate duties
* **control of cash**, such as the use of cash registers, cash banked daily, no money
* **kept on premises overnight**, payments made by cheque not cash
90
Why can debt financing be appealling to businesses?
Debt financing can be typically attractive to businesses because funds are usually available and interest payments are tax deductible, therefore, reducing the cost of debt financing.
91
What are the advantages of debt financing?
* **Funds are readily available** and can be acquired on short notice
* **Increased funds** should lead to increased earnings and profits
* **Interest payments are tax-deductible**
* **Flexible payment periods** and types of debt are available
* Doesn't **dilute ownership** in the business
92
What are the disadvantages of debt financing
* There is an **increased risk **if debt comes from financial institutions because interest, bank charges and government charges may increase
* **Security** is required by the business
* **Regular repayments** have to be made
* Lenders have first clame on any money of the business ends in bankruptcy
* Debt can be expensive due to interest
93
What are the advantages of equity financing
* **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** (use resources of the owner and not external sources of finance)
* **Less risk for the business** and the owner
94
What are the disadvantages of equity financing?
* **Long, expensive process** to obtain funds this way
* **Ownership is diluted** (the current owners will have less control
* The expectation that the owner will have about the return on investment (ROI)
* * **Lower profits and lower returns** for the owner
95
What is meant by Monitoring and Controlling?
**Measuring and comparing** actual performance with **planned business performance** and taking **corrective action**
96
What statements to what extent the business is achieving its objectives?
cash flow statement, income statement, balance sheet
97
What is the **cash flow statement?**
A document that summarises the cash transactions (inflows/receipts and outflows/payments) over a set period of time.
98
# W
What does a cashflow statement **indicate**?
* The business's ability to generate favourable cash flow
* Business's ability to pay its finacial commitments/obligations
* Trends so that the business can plan ahead, budget and strategise
99
What is an **income statment**?
Outlines the business's revenue and expenses over a set period of time.
100
What does an income statement **indicate**?
It indicates a business's **efficiency and profitability** as it shows:
* COGS = Opening stock + Purchases - Closing stock
* Gross profit = Sales - COGS
* Net Profit = Gross Profit - Expenses
101
What is a **balance sheet** representative of?
Represents a business's liabilities and assets at a given point in time.
102
What does a Balance Sheet indicate?
It indicates the business's **liquidity, solvency and net worth (owners equity). **
103
What does the Balance sheet consist of?
Assets:
Current (**CA**) 🡪 turned into cash **within 12 months) **
Non-current (**NCA**) 🡪 turned into cash **after 12 months**
Liabilities:
Current (CL) 🡪 repaid **within 12 months**
Non-current (**NCL**) 🡪 repaid **after 12 months**
Owner’s equity (owner’s contribution/net worth of business)
Formula: **Assets = Liabilities + Owner’s Equity**
104
What are financial ratios?
Financial ratios are used by stakeholders and management as an **indication of business performance**.
105
What is liquidity?
It is the ability of a business to pay its short-term debts using current assets.
106
What is the liquidity ratio measure?
Measures how well a business can meets its current liabilties using its current assets and short term financial stability.
107
What is the liquidity ratio called?
It is called the current ratio/working capital ratio/liquidity ratio.
108
What is the formula for the current ratio?
Current assets/Current liabilities
109
What is a acceptable ratio?
2:1
110
What are the implications of the ratio?
* Ratio too high 🡪 inefficient use of assets 🡪 lowered profitability
* Ratio too low 🡪 business will struggle to pay its short-term debts as they fall due
111
How can you make the current ratio higher?
* JIT
* Equity funding
* Factoring
* Sell NCA
112
What is Gearing?
The proportion of debt and equity that is used to finance business activities.
113
What does the gearing ratio measure?
Measures the reliance on **debt finance** and indicates the **solvency**
114
What are the gearing ratios called?
Debt-to-equity ratio/gearing ratio/solvency ratio
115
What is the formula for the Gearing Ratio?
Total Liabilities/Total Equity
116
What is an acceptable ratio for the gearing ratio?
0.5-0.7:1 for Small Businesses
117
List the indicators of the Gearing ratio?
* **Large reliable companies** (e.g. Woolworths) should operate with **1:1 ratio **to take full advantage of borrowing funds to expand
* **Ratio too high** 🡪 highly geared 🡪 more debt 🡪 **higher long-term risk** 🡪 **less solvency** (risk of insolvency)
* **Ratio too low 🡪** lowly geared 🡪 low risk approach to growth
118
What is profitability?
It is the ability to make a financial return from business activities.
118
How can the gearing ratio be increased?
* ↑ owner’s contribution
* Tighten credit policy
* Sell NCA
* Sale and lease back,
* ↑ A/C Rec by ↑ sales profitability
* Restructure debt
* Manage inventory better
119
What does the gross profit ratio measure?
* Measures the average percentage of each dollars of sales that is gross profit.
* Indicates the business's economic performance and capacity to use its resources for maximum profit
120
What is the formula for the gross profit ratio?
Gross Profit/Sales × 100
121
What is an acceptable ratio for the gross profit ratio?
10-18%
122
What are the indicators of gross profit ratio?
* High ratio 🡪 competitive prices
* Low ratio 🡪 profit margins too low
123
How can the gross profit ratio be increased/improved?
* Raise prices
* Source alternative suppliers 🡪 lower COGS
* Investigate competitors
124
What does the net profit ratio measure?
* Measures the average percentage of each dollar that is net profit (return for owner)
* Indicates the risk of investment and trends of expenses
125
What is the formula for the net profit ratio?
Net Profit/Sales × 100
126
What is an acceptable ratio for the net profit ratio?
13-20%
127
128
What are some implications of the net profit ratio?
* High ratio 🡪 high profits per unit 🡪 premium pricing or price skimming
* Low ratio 🡪 low profits per unit 🡪 often price penetration
129
How can the net profit ratio be improved/increased?
* ↓ COGS
* ↓ expenses without compromising quality
* ↑ sales
130
