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Flashcards in Finance Deck (82):
1

strategic role of financial management

analysing and evaluating all business financial records to make sure all financial objectives are met.

2

financial mismanagement

not making sure the business is a stable position, not managing funds correctly.
this could be:
- insufficient funds to pay suppliers
- overstocking materials/suppliers
- inadequate capital(assets, machinery, cash, stock) for expansion.

3

Objectives of financial management

Profitability
Efficiency
Liquidity
Growth
Solvency

4

Profitability

the earnings of a business after expenses have been paid
increased sales, decreased costs//earning more than spent

5

Efficency

if a business is efficient, they will be able to manage capital/assets and therefore recieve a better return ont he money they put into their capital

6

Liquidity

sufficient cash flow --> making sure you are able to pay immediate costs, not borrowing it, actually having it
short term

7

Growth

- more profit, more market share, more sales
- size of the business compared to competitors

8

Solvency

- meeting financial commitments
- being able to pay of debts long term
- having more assets than liabilities
- bank wont lend money if business is not in a secure place, not being efficient or managing finance --> insolvent

9

Short term goals

- tactical 1-2 years
- reviewed regularly
- operational day to day objectives
- involves the purchasing/updating old equipment, expanding into new markets, providing new services

10

Long term goals

- broader goals, reviewed annually
- generally more than 5 years
- goals such as increasing profits, market share, which requires short term goals to assist in the achievement

11

Internal sources of finance

- retained profits
- owners equity

12

Retained profits

- profits that are not spent (not given to workers) and kept in business for future use

13

Positive about retained profits

- cheap
- accessible source when needed for future financial activities

14

Negative about retained profits

- if not much profit is made nothing can really be returned

15

Owners equity

- funds contributed by the owner/partners to establish or to build the business

16

Short term external sources of finance

- provided by financial institution
- used to finance temporary shortages in cash flow or finance for working capital
- repaid 1-2 years

17

Bank overdraft ( short term )

- predetermined amount of which you can over draw
- interest paid on amount overdraft
- can be secured against assets or not secured

18

Positive bank overdraft

- flexible to borrow @ short term notice
- convenient
- automatic system - when money goes back into the account, automatically minus's what is owed

19

Negative bank overdraft

- interest could be higher if not secured
- repay on demand

20

Commercial bill ( short term )

- the idea of an IOU
- over $100 000
- from financial institutions not banks

21

Positive commercial bill

- interest is negotiable
- money received immediately

22

Negatives commercial bills

- have to pay back within 90-180 days + interest
- fixed future date that must be met

23

factoring ( short term )

- not having funds to pay bills, buy equipment etc
- a 'factoree' gives you money, determined by the risk involved with them having to chase up the money you are waiting for.

24

Positive Factoring

- get money when needed
- concentrate more on the business

25

Negative Factoring

- don't get the same amount of money as what you were waiting for due to the risk of the others
- expensive source --> business will have to work out the difference (debt) of money they did not receive from 'factoree'

26

Mortgage ( long )

- funds lent with interest
- secured against the house bought
- third party --> lent money to but house/property

27

Positives Mortgage

- Low interest if secured
- Get a property when you don't have the funds

28

Negatives Mortgage

- bank has interest into house if you don't fully own it
- interest changes/fluctuates --> you have to pay that rate
- have to prove you are secure --> can pay back and pay deposit

29

Debenture

long term financing that is secured to the business and has fixed repayments

30

Unsecured notes ( long )

- someone that lends you the money not attached to anything

31

Positives unsecured notes

- Don't need credit history
- get the money quickly
- less risk for the person getting the money as their assets aren't tied

32

Negaties unsecured notes

- big risk as it is unreliable that the other person will be able to pay back the money to the lender.

33

Leasing

- operating leases - day to day business operations
- financial leases - income producing basis - fit out,

34

leasing

- used for the purchasing of income producing assets --> equipment, cars

35

positives of leasing

- allows you to have the equipment with no upfront costs
- pay it of over instalments

36

negatives of leasing

- you don't own it until you have paid it off
- continually having to pay

37

External Equity

- money coming in
- ordinary shares
- new issues
- rights issues
- share placement
- share purchase plan
- private equity

38

Ordinary shares

-

39

New issues

- new shares on the share market for purchase
(first time being sold)

40

Rights issues

- rights are given to the existing shareholder to buy the shares first before new customers

41

Share placement

- private shares offered directly to investors at a discount

42

Share purchase plan

- an offer to existing shareholder to purchase more shares without a brokerage fees (purchase fee).

43

private equity

- private investor purchase ALL the shares in a business, effectively owning the business

44

financial institutions

- banks
- investments banks
- finance companies
- superannuation funds

45

Banks

- lend funds to business

46

Investment banks

- invest in business opportunities through loans and purchasing on

47

Superannuation funds

- personal superannuation is money put aside and saved for retirement
- over 18 earning more than $450 before tax per month
-

48

Insurance

- insurance protects your assets and income in the event of damage or financial loss of your belongings

49

life insurance

- provides cover that pays out on the death or disablement of a client
- if something happened to an insured member the org must pay the client a predetermined amount of funds to cover the incident

50

Unit trusts

- a legal entity with fixed units that can be purchased
- each unit valued the same
- although there are varying amounts of units
- members of the trust - 'trustees'
- group of people coming together to but something

51

ASX

- Australian securities exchange
- brings buyers and sellers together to exchange shares
- share can generate income
- shares can generate growth value when you go to sell your share
- companies get to chose amount distributed to shareholders

52

dividened

- money shareholders get back from owning the shares

53

Influences of government

- ASIC
- company taxation

54

ASIC

- Australian securities an investment commission
- regulates financial services
- is a deterrent to companies engaging in illegal financial activities
- monitoring companies financial involvement in the industry

55

Company taxation

- Australian company tax = 30% of all business profits
- lower tax can be received by moving business operations overseas

56

Global market influences

- economic outlook (global)
- availability of funds
- interets rates

57

economic outlook

- refers to the changes of economic growth throughout the world
- greater levels of global economic growth:
- increases demand for goods and services requiring greater production
- less risk results in a decrease in international interest rates

58

Availabilities of funds

- there are various conditions and rates that apply when the busines is looking to source funds in the global financial market.
due to:
- risk involved in lending funds
- demand and supply of funds at the current point in time
- domestic economic conitions

59

Interest rates

- greater levels of risk in lending money will result in higher interest rates
- Real risk is exchange rate fluctuations

60

Processes of financial management

- planning and implementing
- monitoring and controlling
- financial ratios
- limitations of financial reports
- ethical issues related to financial reports

61

Planning and implementing (BIFIE)

--> Budgeting
- shows cash required/needed for future plans

62

Planning and implementing

planning --> involves setting goals, determining strategies to use

Financial needs
Budgeting
Record systems
Financial risks
Financial controls



63

Financial needs

- determines where the business is heading and how it will get there
financial needs are determined by:
- the size of business --> do they have a steady income to expand?
- current phase of the business life cycle
- future plans for growth and development
- ability to gain finance - debt/ equity

64

Budgeting

- budgets used in both planning and controlling of business
Budgets show:
- cash required/needed for future plans
- estimated costs of inventory etc
Budgets allow us to see:
-past figures and trends
- potential market/share
- see if we are able to expand the business

65

Operating Budgets

monitor main activities of the business
- expenses
- sales

66

Project Budgets

- research and development
- how much money is spent on capital

67

Financial Budgets

- deals with financial reports
- income statement
- balance sheet
- cash flow statement

68

Record Systems

- ensures data recorded is accurate, reliable, efficient and accessible for future use, when deciding the business's next move

69

Financial Risks

- risk a business must be able to cover, control
including:
- interest rates going up
- exchange rates

70

Financial controls

- policies and procedures that ensure that the plans of a business will be achieved
this could be things such as:
- separation of duties --> one person ordering inventory, another receiving the inventory
- rotation of duties --> staff that are multi skilled can rotate between jobs
- Control of cash --> not having cash on premises overnight, using a register

71

Debt and Equity finance

debt
- external source of finance
- liability as business owes money

Equity
- internal source of finance in a business
- personal equity, retained profits

72

Advantages of debt

Advantages of debt
- funds are available to borrow
- sometimes borrowing (debt) allows the business to generate profit

73

Disadvantages of Debt

Disadvantage of debt
- increased risk - can be paid back
- interest levels fluctuate
- security needed = tied to assets
- regular payments to pay of debt
- lender have first take on $ if business goes bankrupt

74

Advantages of Equity

- doesn't have to be repaid
- cheaper than other sources
- low gearing/low debt
- less risk for business + owner

75

Disadvantages of equity

- lower profits and lower returns for the owner
- high expectations/ hope for return as it was your own $ invested
- still must have enough money to fund day to day business activities

76

**Monitoring and controlling

- financial systems used to control business's finances and spending

- cash flow statements
- income statement
- balance sheet
- financial ratios

77

Cash Flow Statement

- over a period of time
- shows the money going in and out of the business
brackets - shows the money being taken away

1. operating activities - main activities of the business
2. investing activities - sales and purchase of assets
3. Financing activities - borrowing activities of the business

78

Income Statement

- over a period of time
- AKA revenue statement, profit and loss statement
- summary of income earned and expenses experiences
-

79

Balance Sheet

- shows a particular point in time.
- A = LOE
Assets = Liabilities + owners equity
Assets should always = liabilities and the owners equity

80

Financial Ratios

1. Vertical - within one financial year
2. Horizontal - comparing figures from different years
3. trend analysis - figures from 3-5 years
These are used to find out
--> financial stability
--> Profitability
--> Efficiency

81

Current Ratio

Current assets ÷ current liabilities
- Measures LIQUIDITY = how they meet their liabilities
- Measures a business ability to pay of short term liabilities
- higher the better
- 2:1 current assets twice of current liabilities
- if it is too low, reduce liabilities (debt) by using retained profits.

82

Debt to Equity Ratio

total liabilities ÷ total equity
- measures gearing
- low gearing - means the business has not much debt
- high gearing - means the business has heaps of debt
-