Influences of Financial Management Flashcards
(100 cards)
1
Q
What are sections of Influnces on financial management
A
- Internal sources of finance
- External sources of finance
- Financial institutions
- Influences of government
- Global market influences
2
Q
Who contribute funds in the establsihment stage of a business
A
Owners and/or shareholders
3
Q
What are internal sources of finance
A
Funds generate from inside the business
4
Q
What is most common source of internal finance
A
Retained profits
5
Q
What are external sources of finance
A
External finance refers to funds provided by sources outside the business, including banks, other financial institutions, government or suppliers
6
Q
What are two types of external source of finance
A
Debt and equity
7
Q
What are two types of debt borrowing
A
Short-term borrowing and long-term borrowing
8
Q
What are examples of short-term borrowing
A
- Overdraft
- Commercial Bills
- Factoring
9
Q
What are examples of long-term borrowing
A
- Mortgage
- Debentures
- Unsecured notes
- Leasing
10
Q
What are two types of equity
A
Ordinary shares and private equity
11
Q
What are different types of ordinary shares
A
- New issues
- Rights issues
- Placements
- Share purchase plan
12
Q
What is short-term borrowing
A
Refers to funds that will be repaid within 1-2 years
13
Q
What is purpose of short-term borrowing
A
Finance temporary shortages in cash-flow
14
Q
What is a overdraft
A
Arrangement between the business and its bank that allows business to overdraw its account to an agreed limit and for a specified time to help overcome a temporary cash shortfall
15
Q
Whats purpose of overdraft
A
To improve liquidity
16
Q
Can overdrat be secured or unsecured
A
Yes
17
Q
What are commercial bills
A
Primarily short-term loans issued by financial institutions (non-bank) for larger amounts (usually over $100,000) for a period of generally between 30 and 180 days
18
Q
What are commercial bills secured against
A
The business’s assets
19
Q
What does ‘rolled over’ mean in relation to commercial bills
A
When repayment period is extended until borrower has funds to repay the loan in full
20
Q
What is Factoring
A
The selling of ‘accounts receivable’ for a discounted price to a finance or factoring company (i.e. a firm that specialises in collecting accounts receivable)
21
Q
What percentage of accounts receivable is business expected to recieve up front from factoring firm
A
90%
22
Q
Why do businesses do factoring
A
- Improve liquidity
- Minimise risk of debtors not paying accounts
23
Q
What are two types of factoring
A
- With recourse
- Without recourse
24
Q
What is long-term debt borrwoing
A
Funds borrowed for more than 2 years
25
Where is long-term borrwoing recorded on balance sheet
Non-current liabilities
26
Where is short-term borrowing recorded on the balance sheet
Current liabilities
27
What is purpose of long-term borrowing
To finance major assets such as real estate, plant (factory/office) and equipment and these assets often serve as security on the loan
28
What is a mortage
This is a loan secured by the property of the borrower (business).
29
What is purpose of mortage
Used to finance property purchases, such as new premises, a factory or office
30
What is a debenture
A promise made by a company to repay money that has been lent to the business at a fixed rate of interest for a fixed period of time
31
What is security of debenture
Company's assets
32
What is the person who lends the money to the business called
Creditor
33
What is a unsecured note
A loan from investors (referred to as the issuer) for a set period of time
34
What must accompany a debenture
A prospectus
35
What is a prospectus
Something that tells investor everything they need to know about the business
36
Why is it called a 'unsecured' note
Because loan is not secured against business's assets
37
What is interest on unsecured note compared to other sources of long-term borrowing
Higher interest due to lower security
38
What is leasing
Usually long-term source of borrowing that enables an enterprise to use an asset in return for payments over a set-time period
39
What are two types of leases
1. Financial lease
2. Operating leaase
40
What is a financial lease
Financial lease is for a set period of time and set payments cover interest and eventual purchase of the asset
41
What is a operating lease
Similar to financial lease but business does not gain ownership of asset at the end of the lease
42
Who carries out maintennace on asset for a operating lease
The owner or lessor
43
Can leases be cancelled
* Some leases can be cancelled some can't
* Agreement on lease will specify this
44
What is equity as an external source of funds
The finance raised by a company through inviting new owners
45
What are ordinary shares and features
* The most commonly traded shares in Australia and are traded on the ASX
* The purchase of ordinary shares by individuals means they have become part-owners of a publicly listed company
* In return for their holding in the company, shareholders are paid a dividend (share of the profit calculated as the number of cents per share)
46
How is value of share determined
By businesses current or future performance
47
What are new issue shares
A security that has been issued and sold for the first time on a public market
48
What is a Initial public offering (IPO)
When a company issues shares to the public for the first time
49
Other words for new issues
Primary offerings and new offerings
50
What are rights issues
Privilege granted to shareholders to buy new shares in the same company
51
When does rights issue occur
Occurs after the IPO and provides existing shareholders with the opportunity to purchase more shares
52
What are placements
Allotment of shares made directly from the company to investors
53
What does 'placements' involve
Additional shares are offered at a discount to their current trading price to special institutions or investors
54
What are share purchase plans
Offer to existing shareholders in a listed company to purchase more shares in that company without brokerage fees and may also be offered at a discount price
55
What does share purcahse plans allow companies to do
Issue new shares to current shareholders without issuing a prospectus
56
What is limit per shareholder for share purchase plans
$15000
57
What is private equity
The money invested in a (private) company (Pty Ltd) not listed on the Australian Securities Exchange (ASX)
58
Aim of companies using private equity
(like the publicly listed companies who sell ordinary shares) is to raise capital to finance future expansion/investment of the business
59
What do financial institutions do
Collect funds and invest them in financial assets such as investments, loans and deposits as well as provide financial services
60
What are the different financial institutions
* Bank
* Investment banks
* finance companies
* superannuation funds
* llife insurance companies
* trusts
* the asx
61
How do banks operate
Banks receive savings as deposits from individuals and businesses and in turn make investments and loans to borrowers (the difference in the interest paid to depositors and the interest paid by borrowers is how the banks make money).
62
Who supervises the banks
The RBA
63
What financial products do banks offer
* Deposit accounts
* Overdrafts
* Credit cards
* short-/long-term loans
* Mortgages
* Leases
* Services such as advice
64
What do investment banks do
Provide services in both borrowing and lending primarily to the business sector
65
What are main fucntions of investment banks
* Private equity activities
* International finance
* Funds management and advisory services (including advice related to mergers and acquisitions)
66
What are financial products offered by investment banks
* Commercial bills
* Loans
* Private and project equity raising
* Investment funds
* Financial market trading
67
What are finance companies
Non-bank financial institutions and act primarily as financial intermediaries that specialise in smaller commercial finance
68
How do finance companies function
Raise capital through share issue or debenture issue to the public and then lends capital to businesses and retains security over the assets of the business to whom they lend money should they default in payment.
69
What are financial products offered by finance companies
* Loans (short and long term)
* Credit cards
* Leasing
* Factoring
70
Who oversees finance companies, superannuation funds and life insurance companies
71
What is superannuation
The financial contributions that individuals and their employers make to a fund for use in retirement
72
Who contributes to a superannuation funds
Employers on behalf of their employees
73
How is money in superannuation used
The funds is invested into a range of short- and long-term investments with the aim of maximising a return
74
What are financial products offered by superannuation funds
* Equity capital
* Debt securities
75
How do life insurance companies operate in the financial market
Life insurance companies raise capital through insurance premiums they charge customers and they invest this money by providing large amounts of both equity and loan capital to businesses
76
What are financial products offered by life insurance companies
* Premiums
* Equity capital
77
How do unit trusts operate
Also known as mutual funds – these take funds from a large number of small investors and invest them in specific types of financial assets e.g. shares, commercial property, government bonds, gold, silver, oil and gas
78
What are financial products offered by unit trusts
* Mortgage funds
* Cash management trusts
* Share market funds
79
How does ASX operate as a source of funds
Acts as both a primary and secondary market for the sale shares to the public
80
What are financial products offered by ASX
* Shares
* Futures
* Options
* Exchange traded funds
* Real estate investment trusts
* Interest rate securities
81
How does ASX act as a primary market
It enables a company to raise new capital through the issue of shares
82
How does ASX act as a secondary market
ASX also operates as a secondary market where pre-owned or second-hand shares are traded between investors
83
In what ways does government influence business
* Legislation
* Monetary policy
* Fiscal policy
* Various Government bodies
84
How do company taxation laws
Provide that companies (private or public), pay company tax at a flat rate of 30% of net profits (which must be set aside by financial managers and not distributed to shareholders or reinvested in the business to purchase more assets).
85
What is tax rate for small businesses
27.5%
86
What is monetary policy
Concerned with the level of interest rates and these are set by the Reserve Bank of Australia (RBA)
87
In relation to monetary policy what does it mean if RBA sets interest rates low
* Spendning will increase
* Unemployment will decrease
88
What is fiscal policy
Concerned with taxation (revenue) and government expenditure plans
89
What does ASIC do
Concerned with taxation (revenue) and government expenditure plans
90
What are the roles of ASIC
* Maintain facilitate and improve the financial performance of the financial system and entities in it
* Promote investment
* Administer and enforce the law
* Receive and store information and make it available to the public
91
Are global market influences an part of internal or external business environment
External
92
What are the three main global market influences
* Economic
* Availabiltiy of funds
* Interest rates
93
What does global economic outlook refer to
Projected changes to level of economic growth throughout the world
94
What does positive economic outlook mean
Increasing demand for goods and services and businesses will want to increase production to meet demand and will require funds to purchase equipment, bigger premises etc
95
IMF world economic outlook April 2020
* As a result of the pandemic, the global economy is projected to contract sharply by –3 percent in 2020, much worse than during the 2008–09 financial crisis
* Global economy is projected to grow by 5.8 percent in 2021 as economic activity normalizes, helped by policy support
96
What does availiablity of funds refer to
The ease with which a business can access funds (for borrowing) on the international financial markets if they need to expand
97
What are conditions and rates based upon in relation to availiability of funds
* Risk
* Demand and supply
* domestic economic condition
98
How is level of interest rate determined
The higher the level of risk involved in lending to a business, the higher the interest rates
99
What may businesses choose to do if Australia's interest rates are higher than other countries
Borrow from overseas
100
What is risk of overseas borrowing
Changing exchange rates
