Business Studies Flashcards

Flashcards based on Year 12 Business Studies 2019 Examination Study Notes

Financial management

Planning, organizing & controlling of financial or monetary resources.

Strategic role of financial management

To ensure the business continues to operate, grow and provide substantial profits to the owners.

Long term objectives

Broader goals achieved through short term objectives (tactical plans, 1-2yrs) which are reviewed more regularly.

Short term objectives

Tactical plans, 1-2 years.

Overall long-term objective of financial management

Increase owner’s wealth; this is dependent on profitability in the short-term resulting from increased operating efficiency.

Profitability

Ability to make a financial return from business activities

Growth

Increase in size and value of a business over time.

Efficiency

Generating maximum returns for minimum costs.

Liquidity

The ease with which an asset can be converted into cash. It refers to the extent to which a business can meet its short-term debt (current liabilities).

Solvency

Ability of business to pay both short-term & long-term liabilities as they fall due.

Gearing

Shows how much debt finance business has acquired to fund its operations compared to use of equity finance.

Owners equity

Funds contributed by owners/partners to establish and build the business.

Retained profits

Earnings that instead of being distributed to shareholders in dividends, are kept in the business as a cheap and accessible source of finance.

Bank overdraft

Allows business to overdraw their account up to an agreed limit & for a specified time to help overcome temporary cash shortfall.

Commercial bills

Written instruction to repay a specified amount of money on a specific date in the future.

Factoring

Cash sale of a business's accounts receivable at a discount to a factoring company

Mortgage

Used to fund property purchases e.g. land, factory site, offices

Debentures

Secured loans made by a company to a business for a fixed rate of interest & period of time

Unsecured notes (bonds)

Issued by finance companies to gain funds; Loan for a set period of time that is not secured by any assets

Leasing

Businesses lease non-current assets e.g. company car, delivery vehicles, equipment, office or factory space.

Term Loan

Loan that has a term of repayment longer than 12 months.

Equity

Refers to the finance raised by a company by issuing shares to the public.

New issues

Security that has been issued and sold for the first time on a public market; sometimes referred to as primary shares or new offerings.

Rights issues

The privilege granted to shareholders to buy new shares in the same company.

Placements

Where the business arranges the sale of large blocks of shares to investment institutions.

Share purchase plan

Allows listed companies to issue up to $5000 in new shares to each existing shareholder without issuing a prospectus.

Private Equity

Money invested in a private company not listed on the ASX, meaning the general public are not invited to invest.

Australian Securities and Investments Commission (ASIC)

Independent statutory commission that enforces/administers the Corporations Act. Protects consumers, investors & creditors by ensuring companies adhere to law and conduct fair transactions.

Company Taxation

Australian businesses pay 30% (flat rate) of net profit to the government.

Economic Outlook

Refers to the expected levels of economic growth of individual nations around the world.

Availability of Funds

Refers to the ease with which a business can access funds on the international financial market.

Interest Rates

The higher the level of risk, the higher the interest rate.

Banks

Are the main providers of finance to businesses & consumers. They receive savings and deposits which is then invested in the form of loans to borrowers.

Investment Banks

Banks that specialize in the provision of services to corporations. Their functions include arranging international finance, providing advice on mergers/takeovers and managing portfolio investment.

Finance and Insurance Companies

Offer a range of secured and unsecured loans to businesses. They gain large amounts of funds from policy & premium payments, which they then use to invest and provide loans to other businesses.

Superannuation

These institutions receive long-term funds from superannuation contributions and provide them to the corporate sector by investing in shares, government securities and property.

Unit Trusts

Formed under a trust deed and is controlled/managed by a trustee. Units are offered to the public for investment, the money from the sale of units is then pooled and invested in financial assets by the trustee.

Australian Securities Exchange (ASX)

The primary stock exchange in Australia which acts as a primary market for businesses ® enables a company to raise capital through new shares & also acts as a secondary market ® purchase and selling of pre-owned securities.

Financial risk

Possibility of the business being unable to cover its financial obligations.

Financial Controls

Tools that provide feedback on the financial performance of a business. They can include budgets, cash flow statements, income statements & balance sheets. These controls are vital for the continual and future planning and success of the business.

Cash Flow Statement

Document summarizing cash transactions that have occurred over a period of time. It shows how much money is coming into the business (receipts) and out of the business (payments) over the set time period.

Income Statement (profit and loss)

Outlines income and expenses of a business over a set period of time, indicating the business’s operating efficiency & profitability.

Balance Sheet

Represents a business’s assets and liabilities at a particular point in time & presents the net worth of a business. Its purpose is to indicate the liquidity & solvency of a business.

Current ratio (working capital)

Measures how well business can meet its current liabilities from the current assets

Gearing

Shows the proportion of debt and the proportion of equity that is used to finance business activities.

Debt to equity ratio

total liabilities / owner’s equity

Gross profit ratio

Indicates the average % of each dollar of sales that is gross profit.

Return on equity ratio

Shows how effective funds contributed by the owners have been in generating profit (return on investment)

Net profit ratio

Measures the net profit for every dollar of sales.

Expense ratio

Shows relationship between sales and expenses incurred in making those sales ® indicates day-to-day efficiency of the business.

Accounts receivable turnover ratio

Shows how long it takes for the business to collect money from its debtors (people owing the business $)

Normalized Earnings

Process of removing one-time influences from the balance sheet such as special circumstances or economic upswing/downswing.

Capitalizing Expenses

Turning expenses into assets ® may not represent true financial condition of the business as it understates expenses

Valuing Assets

Putting estimated market value of an asset on the balance sheet, businesses often record the original purchase price.

Timing Issues

Companies listed on the ASX are required to publish half-yearly financial reports. Manipulating timing of transactions to mislead about businesses financial position

Debt Repayments

Reporting debt finance on the balance sheet as a historic cost (amount initially borrowed) & not presenting the debt repayments on the revenue statement (as expenses)

Notes to the Financial Statements

Normally at end of financial reports and includes additional details & info left out of the main reporting documents (balance sheet and income statement) such as the methodology used to record transactions or pension plan details.

Audits

Independent examination of the financial records of a business to ensure they represent a true and fair financial picture of the business.

Cash flow

The movement of cash in and out of the business over a period of time

Working capital

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

Working capital management

WC = CA - CL

Receivables

credits sales = accounts receivable

Leasing

Owner of asset agrees to another party using their asset in return for payments over a set period.

Sale and Lease Back

Selling (liquidating) assets and then leasing them back from the purchaser

Inventories

Inventory control = process of ensuring stock is kept to a minimum so costs are as low as possible

Fixed Costs

Fixed costs = do not change when a business produces more goods (e.g. salaries, lease, insurance)

Variable Costs

Variable costs = vary according to output (e.g. raw materials, labor/delivery expenses)

Cost Centres

Areas/departments of a business incurring significant costs.

Sales Objectives

Sales objectives = the link between the marketing plan & financial plan.

Sales Mix

Refers to the breakdown of sales revenue by products ® no. of units sold & profit per unit

Pricing Policy

Based on COGS + a % mark up to ensure a set amount of profit is made from each sale

Payment in advance

Payment sent by buyer before goods are sent (e.g. via mail, electronic payment)

Bill of exchange

Document instructing the importer to pay for the goods at a specified time

Hedging

Any method used to minimize risk or loss in a financial transaction, it is how global businesses overcome the issue of exchange rate variations.

Derivatives

Financial instruments used to support a business’s hedging activities. It is a contract dealing in the future price of an asset.

Forward exchange contracts

Bank locks in certain exchange rate on certain date, regardless of what actual exchange rate is.

Option contracts

Right but not obligation to buy or sell at a set exchange rate at a time in the future. Business can choose not to use this if the currency fluctuation is favorable.

Swap contracts

Allows two businesses to use an exchange rate on a particular day & reverse the transaction at that spot rate despite what currency movement.

Letters of credit

Contract guaranteeing the importer's bank will pay the exporter once bank receives documentation proving shipment of goods.

Clean payment

Payment is sent to, but not received by exporters until goods are transported. Requires complete trust between the parties.

Document against payment

Importer can collect goods only after paying for them

Document against acceptance

Importer may collect goods before paying for them.