Finance Business Studies

Financial Management

The planning and monitoring of a business's financial resources to enable the business to achieve its financial objectives

Profitability

The ability of a business to maximise its profits

Liquidity

The extent to which a business can meet its financial commitments in the short term (less than 12 months)

Efficiency

The ability of business to minimise its costs and manage its assets so that maximum profit is achieved with the lowest possible level of assets

Growth

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

Solvency

The extent to which the business can meet its financial commitment in the longer term

Owner's Equity

The funds contributed by owners or partners to establish and build the business

Retained Profits

Not all profits are distributed, but kept in the business as cheap and accessible source of finance for future activities

Overdraft

Short term - the bank allows a business or individual to overdraw their account up to an agreed limit for a specific time, to help overcome a temporary cash shortfall

Commercial Bills

Short term - a bill of exchange issued by a commercial organisation to raise money for short-term needs, the money cannot be paid off until the maturity date, either 30, 60 or 90 days

Factoring

Short term - the selling of accounts receivable for a discounted price to a finance or factoring company

Mortgage

Long term - a loan secured by the property of the borrower

Debentures

Long term - issued by a company for a fixed rate of interest and for a fixed period of time, comes from a finance company or company, not a bank

Unsecured Notes

Long term - a loan from investors for a set period of time, not secured against the business's assets

Leasing

Long term - involves the payment of money for the use of equipment that is owned by another party

Debt Financing

Finance provided from external sources through creditors or lenders

Equity

Finance raised by a company through inviting new owners. E.g. through the ASX

Ordinary Shares

New issue, rights issue, placements, share purchase plan

New Issue

A security that has been issued and sold for the first time on a public market. Often referred to as primary shares or new offerings. An initial public offering (IPO) is when a company issues shares to the public for the first time.

Rights Issue

The privilege granted to shareholders to buy new shares in the same company. This occurs after an IPO and provides existing shareholders with the opportunity to purchase more shares.

Placements

Allotment of shares made directly from the company to investors. Shares are offered at a discount to their current trading price to special institutions or investors.

Share Purchase Plan

An offer to existing shareholders in a listed company to purchase more shares in that company without brokerage fees, can also be offered at a discounted current market price.

Banks

The largest and most significant financial institution within the entire financial system

Financial and Insurance Companies

Obtains funds by issuing debentures and other securities

Merchant / Investment Banks

Used by businesses, particularly large businesses. Have very few dealings with the general public.

Superannuation

Australian businesses are required by law to make these contributions for their employees

Companies

Provide an extra source of income for a business besides banks, etc.

Government

Treasury and Reserve Bank of Australia are both large employers in their own right

Australian Securities Exchange (ASX)

Allows companies to raise capital by floating a company. E.g. operating in primary marketing

Unit Trust

Company that operated to benefit the beneficiaries, run by trustee

Positive Economic Outlook - Global Perspective

Boom periods include happy customers, lower unemployment rates, higher wages, growth, consumer confidence high, investment high, looking global to expand

Negative Economic Outlook - Global Perspective

Recession periods include low consumer confidence, higher unemployment rates, low growth, decline in business, less investment, slowing economy, lower demand, negative growth

Cash Flow Statement

A financial statement that indicates the movement of cash receipts and cash payments resulting from transactions over a period of time

Balance Sheet

Represents a business's assets and liabilities at a particular point in time, expressed in money terms, and represents the net worth of the business

Income Statement

A summary of the income earned and the expenses incurred over a period of trading. It helps users of information see exactly how much money has come into the business as revenue, how much has gone out as expenditure and how much has been derived as profit

Cash Flow Management

Distribution on payments, discounts for early payments, factoring

Working Capital

The funds available for the short term financial commitments of a business. Links into the liquidity of the business.

Net Working Capital

The difference between current assets and current liabilities. It represents those funds that are needed for the day to day operations of a business to produce profits and provide cash for short term liquidity.

Current Assets

Stock (inventory), cash and accounts receivable

Current Liabilities

Accounts payable, loans, overdraft

Sale and Lease Back

Originally has the asset and sells it off to free up working capital

Profitability Management

Involves the control of both the business's costs and its reveue

Cost Controls

The costs associated with a decision needs to be carefully examined before it is implemented

Fixed Costs

A cost that stays the same and does not change as the level of operating activities changes. E.g. rent

Variable Costs

Are costs that change with the level of operating activities. E.g. electricity

Cost Centres

Are particular areas, departments or sections of a business to which costs can be directly attributed

Direct Costs

Are those that can be allocated to a particular product

Indirect Costs

Are those shared by more than one product

Budgets and cost-volume-profit analysis

The tools used in the control of revenue

Marketing objectives and strategies

Should lead to an increase in sales and hence an increase in revenue