Financial Management Flashcards

Flashcards on Financial Management

Financial Management

Planning and monitoring a business’s economic resources to enable it to achieve its financial objectives.

Planning (Financial Management)

Setting financial objectives, budgeting, and forecasting future finances.

Monitoring (Financial Management)

Preparing financial statements

Sourcing (Financial Management)

Sourcing money through debt and equity

Allocation (Financial Management)

Distributing funds to other parts of the business

Efficiency

Minimise cost and manage assets (max profit, minimum assets). Also, the ability of the firm to use its resources effectively in ensuring financial stability and profitability of the business.

Profitability

The ability of a firm to maximise profits. Difference between revenue & expenses.

Growth

The ability of a business to increase its size in the longer term.

Liquidity

How easily assets are turned into cash; the ability of a firm to pay its short-term debt obligations as they fall due, i.e., overdrafts, accounts payable, inventory purchases, and commercial bills.

Solvency

The ability of a company to meet its long-term financial obligations.

Retained Profits

Profit that is kept and not distributed to shareholders; a cheap/accessible form of finance.

Overdraft

A short-notice loan from a bank (usually a feature where you can ‘withdraw’ more money than you have).

Commercial Bills

A short-term loan from a bank or other financial institutions for usually larger amounts ($100,000 or more): money borrowed from other firms looking to earn interest on excess funds not being used.

Factoring

Selling your accounts receivable for a discounted price to third parties/debt collectors to get immediate cash.

Mortgage

Large loans from a bank secured against a business's land/buildings, repaid with interest over an agreed period.

Debentures

Large loans are secured from investors, but the right to the money can be sold; promise to make regular interest payments for a fixed period of time.

Unsecured Notes

A loan from the bank is not secured by assets for a set period; usually, a medium-sized loan ($50,000).

Leasing

When a business rents an asset instead of buying it.

Shares

Give a share of ownership of your company in exchange for money.

New issues

When you issue a prospectus (info about your business) and sell shares on the ASX. (e.g. the public)

Rights issues

After the IPO, existing shareholders get to buy shares at a special price (existing shareholders).

Placements

Privately selling shares (no IPO, not available on ASX) (E.g. sophisticated investors, such as banks).

Share purchase plans

Instead of getting dividends, you get more shares (e.g. employees).

Private Equity

Businesses that buy ownership in businesses (or part of them).

Banks

Stores money and provides loans. Major operators in financial markets are the most important source of funds for businesses.

Investment Banks

Provide debt and equity to businesses (borrowing and lending).

Finance Companies

Provide debt to businesses (short-term mostly). Some specialise in factoring or cash flow financing.

Superannuation Funds, Life Insurance Companies and Unit Trusts

Pool money together (either from people paying for insurance or savings) and invest it in businesses.

Australian Securities Exchange

Where securities (financial tools like shares) are bought and sold publicly.

Australian Securities and Investments Commission

Reducing fraud and unfair practices in financial markets and financial products.

Australian Taxation Office

Sets the tax rate at either 27.5% OR 30% of net profit for all companies, depending on the business's turnover.

Economic Outlook

Refers specifically to the projected changes to the level of economic growth throughout the world.

Availability of Funds

Refers to the ease with which a business can access funds (for borrowing) on the international financial markets.

Financial needs

Refer how much money the business needs to operate and achieve its financial objectives.

Budgets

Forecasts of expenditures and revenues.

Financial Risks

possibility of loss.

Financial controls

Procedures, policies and means by which a business monitors and controls the allocation and usage of its resources.

Debt Financing

Borrowing, i.e. loans, debentures, mortgages.

Equity Financing

Raising money by selling shares in your business, either to your existing shareholders or to a new investor. Exchange ownership for money.

Cash flow statement

Measures inflows and outflows of cash; provides a summary of the cash receipts and cash payments over a period of time.

Income statement

A summary of the income earned and the expenses over a period of time.

Balance sheet

Details the assets, liabilities and owner’s equity at a point in time.

Liquidity Ratio

Measures the capacity of the business to pay its short-term debts as they fall due.

Solvency/Gearing: debt to equity ratio

Total liabilities ÷ total equity; shows the extent to which a firm's operations are funded by lenders vs shareholders.

Gross profit ratio

Gross profit (sales - COGS) ÷ sales; look at how profitable the business is BEFORE taking into account other expenses.

Net profit ratio

Net profit ÷ sales, takes into account expenses.

Return on Equity Ratio

Net profit (same as ‘retained earnings’)÷ total equity (equity capital); tells you how much VALUE or ATTRACTIVE your business is to investors.

Expense ratio

Total expenses ÷ sales, shows the percentage of sales taken/absorbed by expenses.

Accounts receivable turnover ratio

Credit sales ÷ accounts receivable, measures how efficient the business is in collecting its accounts receivable (money owed to the business).

Normalised Earnings

The removal of the effects of once-off, or abnormal events, from financial data to indicate core earnings.

Capitalising expenses

Expenses are removed from the income statement and placed into the balance sheet as a non-current asset.

Cash Flow Management

requires financial managers to understand the monetary flows and to control them as much as possible.

Distribution of payments

Distribution of payments involves paying suppliers, employees, and bank shareholders.

Working capital

The funds available for the short-term financial commitments of a business.

Working capital management

the best mix of current assets and current liabilities to effectively manage day-to-day payments

A JIT inventory management system

delivers stock to retailers, but still require the use of warehouses.

Leasing

making regular payments under a lease agreement to use an asset instead of buying it

Sale and Leaseback

business selling an asset and then leasing it back through fixed payments for a specific time

Cost control

In pursuit of revenue, it means the business is more efficient

Cost centres

Areas within the business where costs can be identified.

Expense minimisation

business to identify areas where costs are high…and then pursue means by which to reduce these to the lowest level possible.

Global Financial Management

making payments in different currencies

Exchange rates

The rate of two currencies can be traded

Appreciations

Rises in currency values mean the buying power of the dollar is stronger

Depreciation

Mean that the payment costs rise.

Interest Rates

The cost of borrowing money from overseas.

Payment in advance

Seller doesn't ‘ship’ the goods until the payment is received, good for sellers, bad for buyers.

Letter of credit

Actual letter issued by the buyer’s bank. It guarantees the transfer of the money if the producer meets specifications.

Clean payment

Buyer doesn't pay until the goods are received. No risk for buyers, very risky for sellers.

Bill of exchange

a document drawn up by the exporter demanding payment from the importer at a specified time.

Hedging

The process of minimising the risk of currency fluctuations to help reduce the level of uncertainty involved with international financial transactions.

Establishing offshore subsidiaries

A company overseas in that country

Derivatives

Give you the right to buy a certain amount of foreign currency IN THE FUTURE at a price you’ve agreed on now.

Futures

Allows the importer to exchange currency at a specified time in the future

Options

Postpone currency conversions

Swaps

Engages in currency swaps with another business

*Spot rate

The exchange rate that exists at the time the goods are received.