Finance. Business...

6!!!!!!!!!!

Strategic role of financial management

Planning and monitoring financial resources to enable a business to meet its financial objectives.

Objectives of financial management

Profitability, liquidity, efficiency, growth and solvency.

Short-term financial objectives

Tactical goals (1–2 years) and operational goals (day-to-day).

Long-term financial objectives

Strategic goals, generally over 5+ years.

Financial management and marketing

Financial resources are used to devise and implement the marketing mix.

Financial management and operations

Financial resources are used to purchase inputs and other resources.

Financial management and human resources

Financial resources are used to pay wages, salaries and monetary benefits to retain highly skilled staff.

Owners' equity

Finance provided by the owners or partners of a business.

Retained profits

Profits kept and reinvested back into the business.

Overdraft

A short-term source of finance allowing a business to overdraw its account up to an agreed limit.

Overdraft interest

Variable interest is charged on the daily outstanding balance.

Overdraft key feature

Allows the business to have a negative account balance up to the agreed limit.

Commercial bills

Short-term finance generally over $180,000 for 30–180 days.

Commercial bills repayment

The borrower receives the sum immediately and repays it with interest.

Commercial bills rollover

Commercial bills may be rolled over until the full amount can be repaid.

Factoring

Selling accounts receivable to another party to create an immediate cash inflow.

Factoring finance

Business may receive around 90% of accounts receivable within 48 hours.

Factoring disadvantage

Factoring is expensive and the business may remain responsible for unpaid debts.

Mortgage

A long-term loan secured against property.

Mortgage repayment

Typically repaid over 30–40 years with interest.

Mortgage restriction

The property generally cannot be sold until the mortgage is repaid.

Debentures

A company receives money from an investor and issues a debenture in return.

Debenture interest

Interest is fixed and must be paid regardless of the company's profit.

Debenture term

A debenture is issued for a fixed period of time.

Unsecured notes

A loan from investors for a set period that is not secured against business assets.

Unsecured notes interest

Unsecured notes generally have higher interest rates because of the greater risk to investors.

Unsecured notes use

May be used to finance share purchases or acquisitions.

Leasing

Paying to use an asset owned by another party.

Leasing advantage

Lease payments are generally tax deductible.

Leasing finance

Can provide 100% financing of an asset without purchasing it outright.

New issue

A security or shares issued and sold by a company for the first time.

New issue requirement

A prospectus is generally required when shares are offered to the public.

Rights issue

A privilege given to existing shareholders to purchase new shares in the same company.

Rights issue participation

Existing shareholders do not have to take up their rights.

Placement

Shares allotted directly by a company to selected investors.

Placement discount

Shares may be offered at a discount to selected investors to encourage investment.

Share purchase plan

Shares offered to existing shareholders, generally without fees or brokerage.

Share purchase plan discount

Shares may be offered at a discount to existing shareholders.

Share purchase plan cap

An individual shareholder can generally purchase up to $15,000 under an SPP.

Private equity

Money invested into a company that is not listed on the ASX.

Banks

Financial institutions that receive deposits and provide investments and loans to borrowers.

Investment banks

Financial institutions that provide borrowing and lending services to the business sector.

Finance companies

Non-bank financial institutions providing short-term and medium-term loans.

Superannuation funds

Funds receiving financial contributions from employees to provide benefits when they retire.

Life insurance companies

Non-bank financial institutions that provide insurance cover and a lump-sum payment upon death.

Unit trusts

Investment structures that pool money from small investors and invest it in specific financial assets.

Australian Securities Exchange (ASX)

A stock exchange group offering shares, futures, exchange-traded funds and interest-rate securities.

Australian Securities and Investments Commission (ASIC)

Regulator that enforces the Corporations Act 2001 (Cth), helping reduce fraud and unfair practices.

Company tax rate

Companies are generally subject to a 30% tax rate in Australia.

Economic outlook

The projected level of changes in economic growth.

Availability of funds

The ease with which a business can access funds for borrowing.

Interest rates

The cost of borrowing money.

Financial needs

Determined by the size of the business, current stage of the business life cycle, future plans and capacity to source finance.

Budgets

Financial plans showing cash required, cost of capital, use and cost of inputs, and number and cost of labour hours.

Financial record systems

Systems that ensure financial data is recorded accurately, reliably, efficiently and accessibly.

Financial risks

Risks associated with financial management, including the possibility of bankruptcy.

Financial controls

Policies and procedures designed to ensure the efficient implementation of a business's financial plans.

Debt financing

Short-term and long-term borrowing from external sources.

Advantages of debt financing

Readily available funds; interest repayments are tax deductible; does not dilute ownership.

Disadvantages of debt financing

Interest creates financial risk; regular repayments are required; security may be required.

Equity financing

Finance raised through ownership in a business, such as owners' equity or shares.

Advantages of equity financing

No interest repayments; owners can retain control depending on the source; generally no mandatory repayment.

Disadvantages of equity financing

May reduce profits/returns; investors have expectations; ownership can be diluted; raising equity can be a long and expensive process.

Matching finance to purpose

The term and source of finance should be matched to the purpose for which the finance is required.

Matching loan term to asset

The term of a loan should generally match the economic lifetime of the asset being financed.

Cash flow statement

A financial statement showing the movement of cash inflows and outflows over a period.

Income statement

A financial statement showing income earned and expenses incurred over a period.

Cost of goods sold (COGS)

Opening stock + purchases − closing stock.

Gross profit

Sales − cost of goods sold (COGS).

Net profit

Gross profit − expenses.

Balance sheet

A financial statement showing a business's assets, liabilities and owners' equity at a particular point in time.

Net worth

The value of a business's assets minus its liabilities.

Balance sheet equation

Assets = Liabilities + Owners' Equity.

Comparative ratio analysis

Comparing a firm's financial ratios with previous results, similar businesses and industry standards.

Normalised earnings

Earnings adjusted to take into account changes in the economic cycle.

Capitalising expenses

Recording an expense as an asset rather than immediately recording it as an expense.

Valuing assets

Estimating the value of a business's assets.

Timing issues

Ensuring expenses are recorded in the appropriate accounting period when the related revenue is earned.

Debt repayments

Payments made to repay money owed by a business.

Notes to financial statements

Additional information provided alongside financial statements that is not included in the main statements.

Ethical issues in financial reports

Issues involving audited accounts, record keeping and reporting practices.

Distribution of payments

Spreading payments across each month to prevent large expenses and cash shortfalls.

Discounts for early payment

Discounts offered to customers who pay within a specified period.

Working capital management

Managing funds available to meet short-term financial commitments.

Current assets

Assets controlled as part of working capital management, including cash, receivables and inventories.

Current liabilities

Short-term obligations including payables, loans and overdrafts.

Leasing vs sale and leaseback

Leasing involves hiring an asset owned by another party; sale and leaseback involves selling an owned asset to a lessor and then leasing it back.

Sale and leaseback

Selling an owned asset to a lessor and leasing the same asset back.

Cost controls

Controlling fixed and variable costs, cost centres and expenses to minimise costs.

Revenue controls

Controls designed to ensure marketing objectives generate an acceptable level of revenue that contributes to profit maximisation.

Exchange rates

The value of one country's currency in terms of another country's currency.

Payment in advance

A payment method where the buyer pays before the goods are sent.

Letter of credit

A document issued by a financial institution guaranteeing payment for goods, subject to specified conditions.

Bill of exchange

A document demanding payment from the importer.

Clean payment

A payment arrangement where goods are delivered before payment is made.

Hedging

A strategy used to minimise the risk of currency fluctuations.

Derivatives

Financial instruments used to reduce exporting risks associated with currency fluctuations.

Forward exchange contract

A contract to exchange one currency for another at an agreed exchange rate on a future date.

Options contract

A contract giving the buyer the right, but not the obligation, to buy or sell foreign currency in the future.

Swap contract

An agreement to exchange money in the spot market and reverse the transaction at an agreed future time.