Finance

• Profitability

  Determined by revenue - expenses
• The larger the profit, the greater the dividends
• Key strategies for profitability

  • Maximising revenues
  • Minimising expenses
• Measures for growth

  • Increasing revenue
  • Increasing market share
  • Increasing number of sites/locations
• Efficiency


  Ability to lower costs and manage assets
• Max profit is achieved by using assets to maximise profits
• Businesses must have strong control measures in place
• Liquidity


  The ability of a business to pay its financial obligations (short-term) within 1 year
• Solvency


  To the extent to which a business can meet its financial obligations < 12 months
• Short-term debts


  Debts to be paid in less than 1 year
• Long-term debts


  Debts to be paid over a longer time (+12 months)
• Short-term debts

  • Machinery for a small business
• What is an overdraft:

  A bank overdraft is a line of credit that covers your transactions if your bank account drops below zero 

  • When a bank allows a business or individual to overdraw their account up to agreed limit and for a specified time. 
  • Help overcome a temporary cash shortfall
  • Allows a business to “overdraw” their savings account 
  • Only pay interest for each day the account is in debt
• Example: Overdraft

  1. A company applies to the bank for a pre-approved overdraft limit 
  2. Bank approves an overdraft and allows one of their bank accounts to draw negative bt the pre-approved amount if it is being required
  3. In the event of a short-term cash flow issue, the company draws that account negatively and starts paying interest on the debt 
  4. Company uses sales revenue to repay the overdraft when it can 
• Commercial bills

  • Primarily short term
  • Issued by financial institutions
  • Larger amounts (+ $10,000)
  • Periods between 30-180 days
  • Receives the sum immediately 
  • Flexible
  • Secured against the business’ assets 
  • Generally rolled over until the borrower has the funds to repay in full
  • Essentially a short-term loan, except doesn't have to come from the bank 
• Example: Commerical Bill

  1. The company requires a relatively large amount of money in the short term (250’000) they are about to receive an inflow of cash in 30 days, however, they have a short-term wage bill that needs to be paid tomorrow 
  2. They approach a bank that facilitates a commercial bill for this amount, at an interest rate of 6% (i.e. above the risk-free savings rate)
  3. The company repaid the lenders after the bill period (i.e. maturity date)
• Factoring

  Short 

  • Raise their funds immediately by selling accounts receivable at a discount to a firm that specialises inc collecting accounts receivable 
  • Finance or factoring business
  • Receive up to 90% of the receivables within 48H
  • Immediate access to funds
  • Improve cash flow
• Example: Factoring

  Advantages for business 

  • Receives immediate cash 
  • Help to urgent cash flow problems
  • If customers don't pay - factoring customers issue

  Disadvantages

  • Lost income
  • Customers - negative experience ≠ returning customers

  Advantages for factoring business

  • Make a relatively large amount of profit

  Disadvantages (Factoring business)

  • If customers do not pay = loss of money 
  • Long drawn out legal cases
• Mortgage

  Long (personal avg. 30 yrs)

  (business - avg. 10yrs)

  • A loan secured by the property of the borrower
  • The property that is mortgaged cannot be used as security for further borrowing or sold. 
  • Repaid with interest → regular payments 
  • Used to finance property purchases
  • Premises
  • Factory
  • Office  
• Debentures

  Long 

  • Issued by a company requiring funds agree to a fixed rate of interest to the lenders and for a fixed period
  • An investor lends money 
  • In return, the company issues a debenture
  • Promise to make regular interest payments for a defined term and then repay the loan
  • Secured against company assets 
  • Debenture products must have a prospectus
  • This will tell investors everything about how they will use the fund's
• Example: Debenture:

  1. Woolies needs $10m to expand into a new location. Their CFO decides to use a long term debt product, rather than sell new shares (i.e. not keen on equity)
  2. They decided to issue a debenture and receive many expressions of interest from high-net-worth individuals they accept these based on the lowest rate of interest offered first (until they need the $10 million they need)
  3. Woolies now make 6 monthly interest payments to these lenders regularly throughout the maturity of these debentures 
• Unsecured notes

  Long 

  • Not secured by the assets of the company 
  • Loan from investors for a set period 
  • Most risk to the investors
  • Higher rate of interest than a secured note
• Leasing

  Long 

  • Payment of money → owned by another party
  • Cars, plant, machinery, equipment, computers, software
  • Enables an enterprise to borrow funds and use the equipment without the large capital outlay required 
  • For an agreed period 
  • Cannot be cancelled without costs, fees 
  • Assist businesses with their cash flow → cash outflows or payments are spread out over several years
  • Provides long term financing 
  • Permits 100% financing of assets 
  • Cash flows are monitored 
  • Tax deductible 

  Negtives

  • If property prices rise → you miss out because you aren't the owner 
• Example: Leasing

  1. A new gym owner wishes to kit out their gym with equipment but doesn't have the current cash flow to purchase the machines - decide to enter into a lease agreement with a finance company 
  2. The finance company owns the equipment and allows the gym to use this equipment on the condition that they make regular repayments on the lease agreement. Both parties benefit from this arrangement 
  3. The gym owner uses the revenue from new memberships to make these payments over time. 

  Commonly used for office furniture, laptops/computer systems, company cars, any type of equipment
• Short Term Borrowing:

  • Overdraft
  • Commercial Bills
  • Factoring
• Long Term Borrowing:

  • Mortgage
  • Debentures
  • Unsecured Notes
  • Leasing
• Equity Finance:

  • Internal
  • retained profits
  • External
  • banks
  • financial institutions
  • governement
  • suppliers or financial intermediaries
  • potential future share markets
• Ordinary shares

  • Most traded type of shares in Australia

  Dividend: shared distribution of a company’s profits (yearly to half-yearly) - calculated by the number of cents/share

  • They become part-owners of the business (publicly listed - ASX)
  • Voting rights
• New issue

  • First time a company offers its shares to the public
  • Called IPO (initial public offering)
  • A prospectus is issued and interested investors contribute their savings in return for shares 
  • A company must prepare a prospectus and lodge it with ASIC
  • Most new issues come from privately held companies that become public and present investors with new opportunities
• Rights issue

  • Invitation to existing shareholders to purchase additional new shares in the same company 
  • Can purchase new shares @ discounted market price on a set future date
  • Not obliged to buy these shares
  • Has a prospectus 
  • New shares are offered in proportion to existing shareholder holdings
• Placement:

  • Non-public offering 
  • Issue of shares to an investor or group of investors at a discount 
  • Placement doesn't have to be registered with the ASX
  • Doesn't require a prospectus
  • Time + cost (adv)
  • Disadvantage existing shareholders by diluting or reducing their interests
  • Placements can raise funds of up to 15% of the capital base 
  • Advantage
  • Speed
  • Certainty 
  • Issuers raise capital relatively quickly and cost-effectively from targeted investors and are often preferred over rights issue 
• Share Purchase plans

  • Maximum $30’000 from each investor 
  • Don't have to issue a prospectus 
  • Expedient and cost-effective method of raising up to $30’000
  • There is not option for the largest shareholder to buy anymore than the smallest
• Private Equity:

  • Is the money nvested in a (private) company not listed on the ASX
  • Characterise funds as venture capital, expansion, buyout or distressed according to the life stage of the companies in which they inest
• Financial instituation

  • Banks
  • investment Banks
  • finance companies
  • superannuation funds
  • life insurance comapnies
  • unit trusts
  • ASX
• Banks

  • Banks are the major operators in financial markets and are the most important source of funds for businesses
  • Banks receive savings as deposits from individuals, businesses and governments, and, in turn, make investments and loans to borrowers
• Investment banks (Complex) 

  • Investment banks provide services in both borrowing and lending, primarily to the business sector.
  • They provide a wide variety of different types of loans for businesses and can therefore customise loans to suit the business’s specific needs.
  • Investment banks sometimes impose conditions when providing loans, e.g. equity in the business borrowing funds.
• Finance companies

  • Non-bank financial intermediaries that specialise in smaller commercial finance.
  • Provide short-term and medium-term loans to businesses through personal loans and secured loans
  • They are the major providers of lease finance to businesses.
  • Some finance companies specialise in factoring or cash flow management
  • Finance companies themselves often raise money through debentures.
  • Generally, interest rates offered by Finance Companies will be higher than banks
• Superannuation funds

  • Provide funds to the corporate sector through investment of funds received from superannuation contributions.
  • Super funds have grown rapidly in Australia over the past 20 years due to tax incentives and compulsory superannuation introduced by the government.
  • Due to their long-term nature, Super funds are able to invest in long-term securities, such as shares, government and company debt (debentures).
• Life insurance companies

  • Non-bank financial intermediaries who provide insurance cover to individuals in the event of their death.
  • The premiums paid to insurance companies provide a large pool of funds for investment. These are invested in a variety of financial assets:
  • E.g. a life insurance company may choose to invest in shares, debentures, etc
• Unit trusts

  • Also known as mutual funds
  • Take funds from a large number of small investors and invest them in specific types of financial assets 
  • Unit trusts often invest in the corporate sector - short-term money market 
  • Shares
  • Property