Business report finance notes

Strategic role of finance

The effective planning and monitoring of a business's financial resources to achieve its financial objectives of profitability, growth, efficiency, liquidity and solvency.

Profitability - objective

Maximising the greatest positive difference between total revenue and total cost

Growth-OB

The expansion of business operations to service new markets and build financial assets

Efficiency - OB

Producing at least costs and maximising the output of goods and services

Liquidity: OB

Ability of a business to pay liabilities using current assets as they fall in the short term

Solvency: Ob

The extent to which a business can meet their financial obligations in the longer term.

Finance and Operations

Operations needs funds to purchase inputs, equipment, and run production activities. Finance needs products to provide finance

Finance and Marketing

Marketing needs funds for advertising, marketing, promoting. Finance needs effective marketing to generate finance.

Finance and Human resources

HR needs finance to pay for wages, recruitment, training costs. Finance needs skilled employees and staff to generate finance

Internal finance + retained finance

Refers to funds generated within the business. Profits that are not distributed, kept in the business as a cheap and accessible source of finance.

External finance

Funds provided by sources outside of the business

Debt finance

Short and long term borrowing from external sources

Overdraft/credit card

Short term finance. when a bank allows a business to overdraw their account up to an agreed limit for a specified time, to help overcome a temporary cash shortfall

Commercial bills

Short-term loans issued by financial institutions, for larger amounts usually over 100 000 for a period of generally between 30-180 days

Factoring

Short term finance of selling accounts receivable at a discount to a firm that specialises in collecting accounts receivable. Can receive up to 75-90 %of the amount of receivables within 48 hours of submitting its invoices to the factoring company. Expensive as business is responsible for the unpaid debts and commission

 

Mortgage

Loan secured by the property of the business. Property that is mortgaged cannot be sold or used as security for further borrowing until the mortgage is repaid. Finances property purchases and repaid with interest = regular repayments, over an agreed period of time.

Debentures

A promise issued by a company to repay a loan for a fixed rate of interest and for a fixed period of time. Companies provide them as a way to raise funds from investors, as opposed to financial institutions. Debenture products must have a prospectus which tells investors how they will use the funds and the terms of the investment

Unsecured notes

Loan from investors for a set period of time. Not secured against the business’s assets = most risk to the investors in the note, therefore attract a higher rate of interest than a secured note.

Leasing

The payment of money for the use of equipment that is owned by another party.

Equity finance

External source of finance raised by a company through inviting new owners

Ordinary shares

The purchase of ordinary shares by individuals mean part owners of a publicly listed company. Access to voting rights and dividends when shareholders purchase shares in a company.

New issue (OS)

First time a company sells shares to the public

Rights issue

Offered only to existing shareholders, in proportion to how much you already own.

Placements

New shares issued to selected investors, usually institutions

Share purchase plans

Offered to existing shareholders only, based on a maximum dollar amount you can invest

Private equity

Money invested in a private company not listed on ASX

Financial institutions

Collect funds and invest them in financial assets. Provide financial services and transactions.

Banks

Primary operators in financial markets and source of funds for businesses. They accept deposits and lend these funds at higher interest rates, generating profit through the interest margin.

Investment banks

Provide specialised financial services primary to business sector. They assist firms with activities such as raising capital and expansion.

Financial companies

Non bank financial intermediaries specialising in smaller commercial finance. They offer quick access to funds, including leasing and hire purchase finance, charge higher interest rates.

Life insurance

Non bank intermediaries provide financial protection by offering policies that pay beneficiaries a lump sum upon death or specified circumstances. Invest premium income into financial assets, supplying equity and loan finance to businesses.

Superannuation funds

Retirement savings schemes where employers contribute a portion of employees’ income into long-term investment funds.

Unit trusts

Unit trusts pool funds from many investors and invest them in range of financial assets.

Aus securities exchange

Main stock exchange where financial securities are issued and traded. Companies raise capital and investors buy and sell existing securities.

Advantages of debt finance

Funds are usually readily available and can be acquired at short notice, interest payments are tax deductible, doesn’t dilute current ownership

Disadvantages of debt finance

Security is required by the business, regular payments

Advantages of Equity finance

Does not have to be repaid unless owner leaves the business, cheaper due to no interest rates, owners who contribute retain control over how finance used

Disadvantages of equity finance

Lower profits and lower returns for the owner, long and expensive process

Monitoring

process of measuring actual performance against planned performance

Controlling

Taking corrective action to improve performance

Cash flow statements

Records the movement of cash receipts and cash payments that result from transactions over a given time

Income statement

Summary of income earned and expenses incurred over a period of time

Balance sheet

shows current and non-current liabilities and assets and owners equity