Finance

• Financial management


  The planning, organising and controlling of financial resources to achieve the goals of the business
• Strategic role of financial management

  • Effectively and efficiently ensure that a business sources and controls its funds so that it continues to operate, grow and is able to achieve its future financial goals and objectives
• Objectives


  What the business wants to achieve, achieving these will lead to a competitive advantage, profit maximization and growth
• Profitability


  The money a business makes from its operation after all expenses have been accounted for, involving maximizing sales and minimizing costs
• Growth


  A business expanding its activities through increased production, higher sales and expanded product range, they can merge with another business (external strategy), or they can increase their sales, market shares, and expand overseas (internal strategy)
• Efficiency


  The ability of a business to maximise the return from its assets with minimal costs (to do more with less), less wastage of resources
• Liquidity


  Ensuring a business has enough cash to fund its day-to-day activities and to pay off short term debt, easily accessible money
• Solvency


  The extent to which a business can meet its financial commitments in the long term (more than 12 months), it indicates the level of risk they have of failure
• Financial objectives


  • Short term (tactical and operational plans, one to two years)
  • Long term (strategic plans, more than five years, increasing profit or market share)
• Short and long term financial objectives


  Can be conflicting, to achieve long term goals short term goals may have to be sacrificed
• Impact on business


  • Financial managers must constantly assess the achievement of short and long term objectives and must attempt to reconcile conflicting goals
• Constant flow of information, must work effectively with other functions, role of finance to manage and allocate funds
• Finance and Operations


  Finance managers will create budgets and make funds available to purchase inputs and maintenance, operations will minimise these costs in order to maximise profit margins
• Finance and Marketing


  Finance provides funds to develop successful marketing campaigns, marketing provides income from marketing strategies that increases value of business and makes it easier to borrow funds
• Finance and HR


  Finance allocates funds so HR can acquire, train and maintain employees, HR will employ the best people which will result in higher productivity and growth
• Internal finance


  Funds generated from inside the business, profits can be retained, or owners can contribute funds
• Retained profits


  • Most common internal source of finance, cheap and accessible for future activities
• External finance


  Funds provided by sources outside the business, finance from creditors or lenders is known as debt finance
• Short-term borrowing


  Used to finance temporary shortages for working capital, will be repaid in 12 months, recorded as current liabilities
• Short-term borrowing


  • Overdrafts
  • Commercial bills
• Overdrafts


  Most common type of short-term borrowing, bank allows a business to overdraw its account to an agreed limit, assists will liquidity problems, costs can be high as interest rates are higher on this source
• Commercial bills


  The commitment of a borrowing business to receive an injection of cash and pay it back in the short term, cheap as it is repaid quickly
• Factoring


  Selling of accounts receivable for a discounted price to a specialist factoring company, saves on the costs of unpaid accounts and debt collection, immediate cash injection
• Long-term borrowing


  Funds borrowed for longer than 12 months, usually to purchase major assets like building or equipment, recorded as non-current liabilities
• Long-term borrowing


  • Mortgage
  • Debentures
  • Unsecured notes
• Mortgage


  A loan secured by the property of the business, repaid with interest over an agreed period of time
• Debentures


  A promise issued by a company to repay a loan for a fixed rate of interest and for a fixed period of time
• Unsecured notes


  A loan from investors that is not secured against assets, high risk to the lender, high interest rates
• Leasing


  Payment of money at regular intervals for the use of equipment owned by another party, cheaper as the full value is not paid in one transaction
• Equity finance


  Funds raised by companies through inviting new owners (money from existing owner is owner's equity, not external), by inviting new equity a business is diluting ownership and control
• Ordinary shares


  Purchased by individuals who become part-owners of publicly listed companies, shareholders purchase shares and provide a source of finance for the company, the value of the shares is determined by the company's performance
• New issues


  A security that has been issued and sold for the first time on a public market
• Rights issues


  An invitation to existing shareholders to purchase additional new shares in the same company, the shareholder has the right to purchase new shares at a discounted price
• Placements


  Creating new shares and issuing them to selected investors at a discount to the market price of the company's shares, the discount aims to persuade investors to invest larger sums of funds
• Share price plans


  An offer to existing shareholders in a listed company to purchase newly issued shares in that company without fees
• Private equity


  The money invested in a company not listed on the Australian Securities Exchange (ASX), the business invites new private owners to the business so level of control will be higher
• Financial institutions


  • Banks
  • Investment banks
  • Finance and insurance companies
  • Superannuation funds
  • Unit trusts
• Banks


  Take deposits from the public then loan out those funds to individuals and businesses at higher interest rates, source of short and long-term finance, low risk investment, invest directly into businesses
• Investment banks


  Provide services in both borrowing and lending, helping companies introduce their new securities to the market, riskier than a bank
• Finance and insurance companies

  Non-bank institutions that offer loans to businesses, finance companies raise money through share issues (debentures) and then using those funds to conduct its business, insurance companies raise funds through selling life insurance policies, high interest rates