Influences of FM

• Internal Sources of Finance


  • Owners Equity
  • Retained profits
• Owners Equity


  Funds contributed by owners to establish and build their business
• Retained profits


  Earnings made through previous financial gain that are reinvested into the business
• Advantages of Internal Sources


  • Do not need to pay funds back
  • Unlimited access to funds
  • No interest
• Disadvantages of Internal Sources


  • Owners have the potential to dissolve their funds
• External Sources of Finance


  • Debt
• Short-Term Debt


  • Overdraft
  • Commercial bills
  • Factoring
• Overdraft


  Bank allows business to overdraw their account
• Commercial bills


  A loan of $100,000+ issued by a financial institution
• Factoring


  Selling of accounts receivable at a discounted price
• Long-Term Debt


  • Mortgage
  • Debentures
  • Unsecured notes
  • Leasing
• Mortgage


  A loan secured against the asset being purchased
• Debentures


  Loan from an investor secured against an asset
• Unsecured notes


  Loan from an investor not secured against an asset
• Leasing


  Paying another business to use their equipment
• Equity


  • Ordinary shares
  • New issues
  • Rights issues
  • Placements
  • Share purchase plans
• Ordinary shares


  Finance raised by selling shares to the public on the ASX (Australian Securities Exchange)
• New issues


  Security issued & sold for the first time
• Rights issues


  Opportunities for shareholders to buy more shares
• Placements


  Shares offered to selected investors at a discount
• Share purchase plans


  Offerings made to existing shareholders to purchase more shares without brokerage fees
• Private equity


  Finance raised through private investments (not listed on ASX)
• Prospectus is a document published to potential investors with details about the business (legally required, but not in share purchase plans)
• Sue's business is growing rapidly as sales are increasing


  She needs to purchase stock worth $10,000
• Internal source of finance for Sue's stock purchase

  • Retained profits
• External source of finance for Sue's stock purchase


  • Mortgage
• A business has decided to expand into a larger factory and is now considering its financial options
• Long-term finance options for the business


  • Leasing
  • Mortgage
• Leasing


  Similar to renting the property, does not pay for maintenance & the lease payments are tax deductible, does not own the property at the end of the lease period
• Mortgage


  The business can use the new factory as security, it has the advantage that it owns the property once the mortgage is fully repaid, has the disadvantage that bank charges and interest have to be paid
• Financial Institutions


  • Banks
  • Investment Banks
  • Finance companies
  • Superannuation funds
  • Life insurance companies
  • Unit Trust
• Banks


  Receive deposits from individuals, businesses & government which are then lent to fund business activities
• Investment Banks


  Lend funds & provide advice to large institutional clients & government, assist businesses seeking to raise larger amounts of capital for activities e.g. company expansions, acquisitions, mergers, projects, working capital
• Finance companies


  Provide financial services for small-medium businesses, provides loans, lease equipment, offer factoring services, lend money more freely to borrowers, so the risk is higher for the lender (but still regulated by the Australian Prudential Regulation Authority)
• Superannuation funds


  Invest employees superannuation contributions into organisations (% of their wage), so they have an income stream when they retire, purchase shares in businesses listed on ASX
• Life insurance companies


  Provide life insurance to individuals, must invest premiums to grow wealth, purchase shares in businesses (dividends) & loans to a business (interest, higher interest rates than banks) (potential source of finance)
• Unit Trust


  Invest funds from a large group of smaller investors into financial assets, purchase shares in a business, providing funding & businesses can invest in a unit trust, earning dividends, allow businesses to diversify their income, small businesses can make investments they otherwise wouldn't be able to, economies of scale reduces transaction costs (have to pay intermediary manager, which is a cost)
• Roles of the Australian Securities Exchange (ASX)


  • Primary market: raise new capital through the issues of shares, purchase shares in other companies (dividends)
  • Secondary market: pre-owned securities are traded between investors, trading securities at the right time can generate revenue (greater dividends)
• Government Influences


  • ASIC (Australian Securities & Investments Commission)
  • Company Taxation
• ASIC


  Independent statutory commission of the federal government, administers & enforces legislation i.e. Corporations Act 2001, ensures business practices are in accordance with the law, can impose monetary penalties/imprisonment