Influences Flashcards
Internal sources of finance - retained profits
Internal sources: generated from within the (b) itself, don’t require turning to outside sources
Retained profits: Profits that are not distributed, but are kept in the (b) as a cheap and accessible source of finance for future activities.
ADV: lower risk option = does not add to gearing DISADV: could significantly reduce cash flow
Owner’s equity: funds contributed by owners or partners to establish and build the (b)
ADV: cheaper, don’t owe others, no interest
DISADV: loss of control, own liability
^^ pretty sure these apply to retained profits also
External sources of finance - debt: short term borrowing - commercial bill
Short-term debt: reduce liquidity (working capital) and profitability → interest is high on all short-term
Commercial Bills: short-term loans issued by financial institutions for larger amounts usually over $100 000, within a specific time frame (7-180 days) = commonly used to purchase stock, inventory
ADV: immediate access to cash, DIS: interest, liquidity
External sources of finance - debt: short term borrowing - overdraft
Overdraft: when a bank allows a (b) to overdraw their account up to an agreed limit and for a specific amount of time, to help overcome a temporary cash fall (ADV) –> allows a bank account to go into negative - interest daily (DIS)
External sources of finance - debt: short term borrowing - factoring
Factoring: selling of accounts receivable (money owed to you) for a discounted price which allows immediate access to funds = improves cash flow and gearing - adv
- (b) receives a lump sum payment while the factor chases the debt for profit (ADV = get paid, less stress), DISADV - lose money, last resort
External sources of finance - debt: long term borrowing - mortgage
Long-term debt: decrease solvency + profitability but will assist w/ growth and long-term profitability
Mortgage: secured long term bank loan - repaid w/ regular repayment w/ interest = best suited for high-value assets e.g. property purchases (factory etc)
ADV: owns property once fully paid off (security), DIASDV: have to pay bank charges + interest
External sources of finance - debt: long term borrowing - debentures
Debentures: long term loan from investors: issued by a company for a fixed rate of interest + for a fixed period
ADV: fixed = can plan
DIASDV:
External sources of finance - debt: long term borrowing - unsecured notes
Unsecured Notes: long term loans that do not need collateral (to be secured) - greater risk to lender
ADV: not secured against assets - less risk
DISADV: extremely high interest rate
External sources of finance - debt: long term borrowing - leasing
Leasing: involves the payment of money for the use of equip that is owned by another party
ADV: low cost, lease payments = tax-deductible, no maintenance costs
DISADV: does not own - potential lost asset
Long-term debt finance
For a takeover question - but can use for any
- If have low gearing: should use long-term debt finance ADV: provides a relatively quick injection of funds (can facilitate a takeover allowing for (b) growth)
DISADV: may increase risk due to increased repayments and charges
However = increased return generated through (b) expansion should cover any increase in debt repayments
External sources of finance - equity
- Refers to finance raised by a company through inviting new owners
- Can be internal (retained profits), external (sell shares (part of your ownership))
- Improve solvency and liquidity
External sources of finance - equity: ordinary shares
- Purchase of ordinary shares for indiv means they have become part-owners of a publicly listed company - has voting rights, receive dividends etc
New Issues: shares that have been issued and sold for the first time on a public market (aka IPO) = main public offering to investors
ADV: (b) able to raise funds w/ sale of part of (b) - DISADV: however have lost ownership
Rights Issues: (b) sells add shares to shareholders - privilege granted to shareholders to buy new shares in the same company, after IPO
Placements: selling shares privately, rather than through a public offering, via a financial institution
ADV: can sell to private investors at a lower cost than PO
Share purchase plans: an offer to existing shareholders in a listed company to purchase more shares in that company without brokerage fees - provide shares to shareholders instead of dividend payments
ADV: use to save extra cash - DIS: could have a higher long-term cost (eventually need to give returns over time)
External sources of finance - equity: private equity
- is the money invested in a (private) company not listed on the ASX by a large financier for a large amount of funds
- Aim of the private company is to raise capital to finance future expansion/investment of the (b)
- One main form: venture capitalism - capitalist takes a big risk by investing in a company = often expects good returns
Financial Institutions - Banks, investment banks
Banks: provide short-term loans e.g. overdrafts and long-term e.g. mortgages
- Banks receive savings as deposits and in turn make investments and loans to borrowers
Investment Banks: provide services in both borrowing + lending mainly for the (b) sector e.g. Macquarie Bank
- Provide a variety of loans and some may come with conditions - e.g. equity stake in (b)
- Advise on aspects of the (b) which could be improved- e.g. mergers and takeovers
IMPACT ON (B)
- provides a source of finance, advice –> increase profitability, value
Financial Institutions - finance companies, supa funds
Finance Companies: non-bank financial intermediaries that specialise in smaller commercial finance
- Provide mainly short and medium-term loans to (b)’s
IMPACT ON (B)
- Can provide quick access to funds and finance that banks will not, but interest rates are likely higher e.g. provide debentures
Superannuation Funds: Fed Govt scheme which requires all employers to make a financial contribution to a fund which provide benefits in retirement - 9.5% on top of wage/salary
IMPACT ON (B)
- Money in fund = then invested into (b)’s to try and increase its value
- legal requirement
- large expense
Financial Institutions - life insurance companies, unit trusts
LIC: non-bank financial intermediaries that provide cash payouts to the family of someone in the event of their death IMPACT ON (B) - Provide both equity + loans to corporate sector through receipts of insurance premiums, which provide funds for investment, in order to make a profit Unit Trusts: take funds from a large no. of small investors and invest them in specific types of financial assets i.e. mutual funds IMPACT ON (B) - Can then invest large amount into a (b) in order to make a profit --> increase (b) value Types of unit trust investments: short-term money market (cash management trusts), shares, mortgages etc
