4.4: Business: Finance

financial institutions

• financial institutions are intermediaries that connect savers with borrowers

• they provide services such as deposits, loans, and investment products - helping businesses access finance for growth, innovation, and expansion into global markets

• role in global business:

  • enable businesses to obtain the funds necessary to expand internationally

  • manage cash flow in foreign markets

  • access financial products such as loans, foreign exchange, and trade finance

• types:

  • banks

  • finance companies

banks

• banks are authorised deposit-taking institutions regulated by the Australian Prudential Regulation Authority (APRA)

• they provide a wide range of financial services including savings accounts, loans, credit, and foreign exchange

• role in global business:

  • provide international loans to fund expansion

  • offer foreign exchange and trade finance (letters of credit)

  • manage cash flow across multiple countries

• benefits

  • reliable, accessible, diverse products

• challenges

  • strict lending criteria, higher interest rates, and regulatory compliance

• types

  • trading (commercial), merchant, credit unions

• example:
  Commonwealth Bank (CBA) supports Australian exporters with international trade finance; HSBC offers global business loans and investment banking services

trading banks (commercial banks)

• refers to Authorised deposit-taking institutions (ADIs) regulated by the Australian Prudential Regulation Authority (APRA) that provide a wide range of financial services - deposits, loans, and investments

  • examples: Commonwealth Bank, ANZ, Westpac, HSBC

• role in global business:

  • facilitate international trade finance (eg. letters of credit, foreign exchange, and export/import financing)

  • provide international loans for expansion and mergers

  • manage multi-currency accounts and cash flow for multinational corporations

• benefits:

  • accessibility to large capital pools

  • reliable, stable, and regulated

  • expertise in global financial systems

• challenges:

  • complex lending requirements and strict collateral conditions

  • interest rate fluctuations

  • bureaucratic procedures and slower approval times

merchant banks

•  refers to specialist banks providing financial services for large corporations and high-value international transactions

  • examples: Macquarie Group (Australia), Citibank (Global)

• role in global business:

  • arrange international mergers and acquisitions (M&A)

  • underwrite large-scale corporate bond or share issues

  • provide investment advice and manage large overseas capital projects

• benefits:

  • expertise in global markets and complex international finance

  • access to significant investment capital

  • can connect Australian firms with global investors and capital markets

• challenges:

  • only available to large or well-established firms

  • high service fees

  • exposure to international market volatility

credit unions

• refers to member-owned, not-for-profit financial cooperatives offering savings and credit services, typically on a smaller scale than banks

  • example: P&N Bank, Teachers Mutual Bank

• role in global business:

  • provide smaller, community-based loans or funding for SMEs entering international markets

  • useful for small exporters or importers needing start-up finance

• benefits:

  • lower fees and interest rates

  • more flexible and personalised service

  • cooperative structure supports small businesses

• challenges:

  • limited capital and smaller lending capacity

  • minimal international presence or foreign exchange facilities

finance companies

• finance companies are non-bank financial intermediaries, regulated by the Australian Securities and Investments Commission (ASIC)

• they raise funds by issuing debentures or borrowing from wholesale markets to provide short- and medium-term business loans

  • examples: Prospa, Pepper Money, Flexigroup

• role in global business:

  • offer equipment leasing or asset financing for expansion overseas

  • provide short-term working capital loans or cash flow support for international operations

  • may finance import/export contracts or purchase orders

• benefits:

  • fast loan approval and flexibility

  • useful for businesses with limited collateral or short-term needs

  • provide tailored lending products (eg. invoice finance, trade finance)

• challenges:

  • higher interest rates due to higher risk

  • smaller loan limits compared to banks

  • not ideal for large-scale or long-term global projects

sources of business funding

• internal:

  • retained profits

• external:

  • debentures

  • share capital

  • trade credit

  • venture capital

  • secured loans

  • financial institutions

  • government

retained profits

• refers to profits kept within the business after dividends are paid to shareholders

• nature: internal, long-term source of finance

• role in global business:

  • used to finance entry into new international markets, fund research and development (R&D), or invest in technology and global marketing campaigns

  • allows businesses to expand without external debt

• benefits:

  • no repayment or interest costs

  • maintains business independence

  • demonstrates financial stability to investors and lenders

• challenges:

  • limited by company profitability

  • may reduce shareholder dividends and satisfaction

• example: Qantas reinvests retained profits to expand new international routes and upgrade aircraft

debentures

• refers to long-term, fixed-interest securities issued by companies to raise capital from investors

• nature: debt-based funding - company pays interest regardless of profit

• role in global business:

  • provides finance for infrastructure or large global expansion projects (eg. factories, logistics systems)

  • often used by multinational corporations for global capital-raising

• benefits:

  • fixed, predictable repayment schedule

  • retains ownership control (no equity dilution)

  • suitable for long-term capital investment

• challenges:

  • obligatory interest payments even in low-profit years

  • high default risk if cash flow decreases

  • less flexible than equity financing

share capital

• refers to funds raised by issuing shares to investors, giving them ownership rights in the company

• nature: equity financing (long-term)

• role in global business:

  • provides large amounts of capital for international mergers, acquisitions, or foreign subsidiary establishment

  • attracts global investors via international stock markets

• benefits:

  • access to substantial funding

  • no repayment obligations

  • enhances business credibility and public image

• challenges:

  • dilution of ownership and control

  • pressure from shareholders for high returns

  • complex regulatory compliance in multiple countries

• example: CSL raised share capital to fund global vaccine production facilities

trade credit

• refers to an agreement between businesses allowing the buyer to purchase goods or services and pay later

• nature: short-term, external funding (usually 30–90 days)

• role in global business:

  • supports international trade transactions by allowing businesses to sell goods before paying suppliers

  • improves liquidity and supports cash flow during overseas expansion

• benefits:

  • interest-free short-term financing

  • strengthens supplier relationships and flexibility

• challenges:

  • potential supplier disputes if payments delayed

  • can impact credit rating if mismanaged

venture capital

• refers to investment from individuals or firms (venture capitalists) in exchange for equity, targeting high-risk, high-reward businesses

• nature: equity funding (external)

• role in global business:

  • common for start-ups or innovative companies expanding internationally

  • investors often provide expertise, contacts, and strategic advice for entering foreign markets

• benefits:

  • provides substantial funding without loan repayments

  • access to business networks and experience

• challenges:

  • loss of ownership and decision-making control

  • pressure for rapid growth and profitability

• example: Canva’s global expansion was supported by venture capital investment

secured loans

• refers to loans backed by collateral (eg. property, machinery) that the lender can claim if repayments default

• nature: long-term external debt financing

• role in global business:

  • used to fund overseas property, production facilities, or distribution networks

  • lower interest rates than unsecured loans, especially for stable businesses

• benefits:

  • access to significant funds

  • lower borrowing costs due to reduced lender risk

• challenges:

  • risk of losing assets if the business defaults

  • collateral value may fluctuate due to currency changes

financial institutions

• refers to entities like banks, merchant banks, or finance companies that provide credit, investment, and financial services

• role: act as financial intermediaries connecting businesses and capital sources globally

• role in global business:

  • provide foreign exchange services, international loans, letters of credit, and hedging tools to manage currency risks

  • essential for operating across multiple countries and currencies

• benefits:

  • professional expertise and diverse financial products

  • facilitate large-scale international projects

• challenges:

  • interest and fees can be high

  • exposure to currency fluctuations and geopolitical risks

government assistance

• refers to financial support from government programs such as grants, subsidies, or low-interest loans to encourage innovation and global expansion

• nature: external, non-repayable or concessional

• role in global business:

  • promotes export development and r&d

  • reduces financial barriers for small to medium exporters

• benefits:

  • no or low repayment required

  • encourages innovation and global competitiveness

• challenges:

  • stringent eligibility criteria and reporting requirements

  • competitive application process

• example: the Austrade export market development grant (EMDG) supports Australian exporters entering new markets

financial ratios

• financial ratios are analytical tools used to evaluate a business’s financial position and performance

• they simplify large volumes of financial data into key indicators that can be compared:

  • over time (trend analysis)

  • against competitors or industry benchmarks

  • across regions for multinational firms

• key functions

  • assist decision-making for managers, investors, lenders, and stakeholders

  • identify strengths and weaknesses in liquidity, profitability, and stability

  • support forecasting and strategic planning for future financial health

profitability vs liquidity vs stability/solvency/leverage vs efficiency

• profitability

  • the ability of a business to generate profit from its operations

  • indicates operational success and investor value

  • measured using gross profit, (net) profit, expense, return on equity

• liquidity

  • the ability of a business to meet its short-term obligations by converting assets into cash

  • measured using current ratio

• stability/solvency/leverage

  • the ability of a business to meet its long-term debts and financial obligations

  • measures reliance on debt and financial sustainability

  • measured using debt to equity ratio

• efficiency

  • the ability of a business to use its assets to generate revenue

  • identifies productivity and resource management

current ratio

• type - liquidity

• formula

  • current assets / current liabilities

• the current ratio measures a company’s ability to pay its short-term obligations (due within 12 months) using its current assets (cash, receivables, inventory)

• interpretation:

  • ideal benchmark: around 2:1 (for every $1 of current liabilities, there should be $2 of current assets)

  • <1: indicates liquidity risk — business may struggle to pay debts

  • >3: may suggest inefficient use of assets or excessive idle cash

• purpose:
  to assess short-term solvency and ensure working capital is sufficient to support day-to-day operations

• global business context:
  for international companies, liquidity is critical when dealing with currency fluctuations, cross-border transactions, and import/export payment delays maintaining optimal liquidity prevents reliance on high-interest short-term borrowing

• example:

  • a current ration of 391 suggests that the company has $391 of current assets for every $1 of current liabilities

  • this indicates strong liquidity, suggesting the company is well-positioned to cover its short-term debts

  • it could also point to inefficiency if too much capital is tied up in short-term assets rather than being invested in growth or other productive uses

gross profit ratio

• type - profitability

• formula:

  • gross profit / total revenue x 100

  • gross profit = revenue - COGS

• benchmark - 40-60%

• shows the percentage of revenue remaining after deducting the cost of goods sold (COGS), before deducting other expenses

• interpretation:

  • higher margins indicate better efficiency in managing production costs relative to sales

  • high ratio: strong pricing strategy or cost efficiency

  • low ratio: rising production costs or weak sales pricing

• purpose:
  to measure production and pricing efficiency — how well the company controls costs relative to sales

• global business relevance:
  businesses operating in multiple countries may see fluctuations due to supply chain costs, import tariffs, and currency exchange, which can impact their gross profit margins

• example

  • a GPM of 6474% means that the company retains 6474% of its revenue after accounting for the cost of goods sold (cogs)

  • this suggests that the company has a relatively low cost of production or acquisition relative to its sales price

  • a high GPM indicates efficiency in production or pricing power in the market

(net) profit ratio

• type - profitability

• formula

  • net profit / sales x 100

• benchmark - 10-20%

• measures the overall profitability after all operating and non-operating expenses (eg, wages, utilities, interest, tax)

• interpretation:

  • higher margins indicate more profitability after all expenses and taxes are paid

  • high: effective cost control and pricing

  • low: rising expenses, inefficiency, or declining sales

• purpose:

  • to assess overall business efficiency and the success of expense management

• global context:

  • profit ratios can be affected by tax regimes, exchange rate movements, and international shipping/logistics costs

  • comparing profitability across countries requires adjusting for local conditions

• example

  • a NPM of 1528% means that for every dollar of revenue, the business is generating 1528 cents of profit after all expenses (including taxes, interest, etc) have been deducted

  • this is a strong margin, indicating good cost management and profitability

  • however, it's also important to compare this figure to industry averages to fully assess performance

expense ratio

• type - profitability

• formula

  • operating expenses / net sales

• benchmark – 0.5-07.5

• indicates the proportion of sales revenue used to cover operating expenses

• interpretation:

  • high: overspending or inefficiency in cost management

  • low: strong expense control and operational efficiency

• purpose:

  • to identify if expenses are increasing disproportionately to sales, signalling potential inefficiencies or rising costs

• global context:

  • expense ratios can rise due to import duties, foreign currency volatility, or increased wage costs in overseas markets businesses use this ratio to optimise international cost structures

• example:

  • if expenses are 30% of sales, the business spends 30 cents for every $1 earned

return on equity ratio

• type - profitability

• formula

  • net profit / total owner’s equity x 100

• benchmark - 10-20%

• measures how effectively a business uses owners’ or shareholders’ equity to generate profit

• interpretation:

  • higher roe indicates a company is generating more profit with shareholders’ investments

  • high: efficient use of equity; good return for investors

  • low: inefficient capital use or declining profitability

• purpose:

  • to evaluate the return on owners’ investment, guiding investors on performance relative to alternative investment options

• global business relevance:

  • investors compare roe across countries when deciding on multinational investment currency risk, taxation, and local economic conditions may influence comparative returns

• example

  • an ROE of 15.05% means the company is generating a return of 15.05% on the equity invested by shareholders

  • this is a solid figure, suggesting that the company is effectively using shareholders' equity to generate profits

  • roe is often compared to industry averages and the company's historical performance to evaluate efficiency and management effectiveness

debt to equity

• type - stability/leverage/solvency

• formula

  • total liabilities / total equity

• benchmark – 0.5-1

• indicates how much of the company’s assets are financed through debt versus equity - a key measure of long-term financial stability and solvency

• interpretation:

  • lower ratios indicate less reliance on debt for financing

  • <1: financially stable; equity outweighs debt

  • >1: high gearing; greater reliance on borrowed funds (riskier)

  • 1: equal balance between debt and equity financing

• purpose:

  • to assess a business’s long-term ability to meet financial commitments and manage leverage risk

• global context:

  • highly geared global firms are more exposed to interest rate fluctuations, foreign exchange risks, and political instability international lenders may require a lower ratio for cross-border financing

• example:

  • a ratio of 0.75 means for every $1 of equity, the business has $0.75 of debt

summary of ratios

Ratio	High Value Indicates	Low Value Indicates	Benchmark/Ideal Range
Current Ratio	Strong liquidity, able to meet short-term debts	Possible cash flow issues	1.5–2.0:1
Gross Profit Ratio	Efficient production, strong sales pricing	High COGS, weak pricing	40–60% (industry-dependent)
Profit Ratio	Effective cost management	High expenses or weak sales	10–20% (industry-dependent)
Expense Ratio	Overspending	Efficient cost control	Lower is better
ROE	High return for investors	Poor capital efficiency	10–15% (varies by sector)
Debt to Equity	Riskier capital structure	Stable, low-risk financing	<1.0 (ideal)

Category	Key Ratio	Purpose	Interpretation Focus
Liquidity	Current Ratio	Can the business pay its short-term debts?	2:1 ideal – too high = idle assets, too low = liquidity risk
Profitability	Gross Profit, Profit, Expense, ROE	How efficiently the business generates profit	Compare with industry averages and prior years
Stability	Debt to Equity	How reliant the business is on debt	<1 preferred for lower risk

limitations of financial ratios

general limitations

• based on historical data; may not reflect current conditions

• do not explain causes — only symptoms of financial performance

• different accounting policies distort comparisons

• ratios ignore qualitative factors like management quality, innovation, or brand value

additional limitations for global businesses

• different accounting standards (eg, IFRS vs GAAP) make cross-border comparisons difficult

• currency fluctuations distort ratio results when converting financial data

• varying inflation rates affect asset valuations and profit margins

• different tax laws and government policies influence reported profitability