FINANCE AIDENS QUIZLET

• What are the financial objectives?

  Specific goals for a business's financial performance

  Profitability: Ability for business to maximise profits and minimise costs

  
  

  Growth: Ability of a business to increase its size and value over long-term to ensure long term sustainable business practises

  - Depends on ability to develop and use its asset structure to increase sales, profit and market share

  
  

  Efficiency: Ability of a business to maximise the use of its assets in a cost effective way

  
  

  Liquidity:Ability for a business to meet short-term financial commitments (<12 months)

  
  

  Solvency: Ability of the business to meet long-term financial commitments (>12 months)
• What is the interdependence of finance?

  Other business functions rely on financial managers for funding.

  
  

  Operations:Purchase inputs, reduce costs, maximize profits.

  Marketing:Funding for market research, promotions, advertising, and marketing mix.

  HR:Pay employees, offer rewards, provide training and support.
• Internal and External sources of finance

  Internal:

  1.Retained profits: No interest, unlimited control, though requires careful planning and budgeting

  
  

  External:

  Debt and Equity
• What're the short and long term forms of debt funding

  Short term:

  1.Overdraft: overdraw bank account up to an agreed limit for a specific time. Assists with short-term liquidity

  
  

  2.Commercial Bills: Short term loans of $100,000+ issued by financial institutions other than banks

  
  

  3.Factoring: Selling of accounts receivable at a discounted price (up to 90% of original value) to a third party. Assists with cash flow shortages

  
  

  Long Term:

  1.Mortgage: Loan secured against the property asset being purchased (30-40 years).

  
  

  2.Debentures: A loan issued from an investor for a set time of repayment and set high interest rate, secured on business asset which isn't property

  
  

  3.Unsecured Notes: A loan with a set period of repayment and fixed interest. Not secured against asset

  
  

  4.Leasing: Payments for use of equipment/property to an external owner

  -Operation leasing: Short periods, often less than life of the asset, owner carries out maintenance on asset and cancelable without penalty

  -Financial Leasing: Lessor purchases the asset on behalf of the lessee, usually for the life of the asset. Penalties for cancellation
• What is equity and methods of distributing shares?

  Funds raised by issuing shares that dilute ownership

  
  

  Private equity:Finance invested through private investments (not ASX).

  -Investors still receive dividends though they're less involved in decision making

  -Saves on costs associated with listing on (ASX)

  
  

  
  

  Ordinary Shares: Shares sold to the public or ASX.

  -New issues

  -Right issues

  -Placements
• What are new issues?

  Shares issued and sold for the first time on a public primary market. Business makes prospectus (A document outlining relevant business details for investors) to include in initial public offering (IPO) allowing anyone to purchase shares
• What are right issues?

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

  Offer is proportional to each investor's existing shares.
• What are placements?


  Allotment of shares made directly to investors at a discounted price to encourage desired investors to become shareholders
• What is the maximum amount of a business's existing capital base that can be raised through placements?

  Up to 15%
• What are share purchase plans?

  Shares offered to existing shareholders of a listed company (ASX) to purchase more shares without brokerage fees
• Whatre banks


  Banks: Receive deposits from individuals, businesses and governments which are then lended to fund business activities. They are major operators in financial markets.

  Influences:

  Businesses must pay interest on funds they borrow

  Interest is then dispersed between the banks saving members

  Provide general services to a wide range of different customers
• Investment banks


  Investment Banks: Provides borrowing and lending services to the business sector.

  -Offer tailored services e.g. customised loans, portfolio investing, exchange cover, overseas finance

  -Assist businesses seeking to raise large amounts of capital for activities
• Finance Companies


  Finance Companies: Non-bank institutions that specialise in smaller commercial finance for SMEs with immediate access to funds

  - Provide loans, lease equipment, offer factoring services to individuals and businesses

  -Source funds through through debentures and premiums

  Provide loans, lease, factoring and equity capital

  -Higher interest rates than other financial institutions

  -Lend more freely to borrowers, increasing risk for lenders (regulated by the Australian Prudential Regulation Authority)
• Whatre superannuation funds


  Superannuation Funds:Provide funds to corporate sector through investment of fund received from employees superannuation contributions

  Invest long-term securities as company shares, government and company debt because of the long-term nature of their funds
• Life insurance funds


  Life Insurance Companies:Provide life insurance to individual, provide cover and lump sum payments

  Purchase shares in business (dividends)

  Provide loans to businesses (interest higher than banks)
• Unit trusts


  Unit Trusts:Invest fund from a large group of smaller investors into financial assets. Trusts may purchase shares in a business, providing dividends to business

  Investments include the short-term money market (cash management trusts), shares, mortgages, property and public securities.

  Influence:

  Allows businesses to diversify their income

  Small businesses can make investments they otherwise wouldn't be able to
• Australian Securities Exchange (ASX)

  Australian Securities Exchange:Primary market for purchasing and exchanging shares and other securities in Australia

  Influence:

  Raise new capital through issue of shares

  Purchase shares in other companies (dividends)

  Offers futures (derivative contract agreement to buy or sell a specific commodity asset or security at a set future date for a set price)

  - Primary Market: Deals with new issue of debt instruments by the borrower of funds

  - Secondary Market: Market pre-owned securities are traded between investors. Shares purchased in other countries are traded here
• 2 types ofgovernment influence on finance

  1.Australian Securities and Investments Commissions (ASIC): Independent statutory commission of the federal government which protects consumers in the area of financial services through enforcing legislation, especially the Corporations Act of 2011

  
  

  2.Company taxation: Company tax is paid before profits are distributed as dividends.

  27.5% For Small Companies (<$10 Million net profit)

  30% For Large Businesses (>$10 Million net profit)
• Role of government in finance

  Development of economic policies and implementing corporate legalisation. It establishes government bodies to ensure businesses act within the law and impose penalties for non-compliance.
• Global market influences


  Global Economic Outlook: Projected changes to the level of economic growth worldwide. Creates or reduces consumer spending confidence, access to borrowing and demand

  
  

  Availability of funds: Ease of access to funds from international financial markets.

  Limited by transaction exposure (the risk of exchange rates changing after signing a contract).

  
  

  Interest Rates: Australia has high interest rates, offshore borrowing can lead to improved solvency, profitability and cash flow due to reduced interest rates.

  Exchange rates are variable and depreciation of AUD or increase of borrowed currency can eliminate the savings.
• What is the planning and implementing cycle of financial management

  Determine financial needs→Develop budget→Maintaining record systems→ Identify financial risks →Establishing financial controls
• How to identify financial needs of a business and what they're defined by

  Collection of financial reports and forecasts→ determine needs and deficits that inhibit longterm growth

  Needs determined by size, financial state capacity to borrow funds and plans for development
• 3 types of budgets

  Operating budgets: Primary activities of Business

  Sales Production, Expense, Raw materials and labour hours

  Project Budgets:

  Capital expenditure and Research and development

  Financial Budgets: Overall financial situation of a business and predictions of operating and project budgets
• What're financial controls of the planning and implementing cycle of financial management

  Policies and procedures ensuring the efficient obtainment of financial goals. Preventing:

  Theft and Fraud:

  -Unnecessary/Over purchase of stock for personal use

  -Misuse of expense accounts

  -Theft of assets

  -Credit card fraud

  Damage/Loss of assets:

  Errors in record systems:
• Common policies controls for the financial controls portion of planning and implementing cycle.

  Clear authorisation and responsibility for tasks

  Distribution and separation of responsibilities (e.g. One person purchases stock, another picks it up)

  Rotation of duties

  Control of Cash (Cash registers, daily banking of cash, no money kept overnight)

  Protection of assets (locking of properties, asset registry, security systems)

  Control Of Credit Procedures (hiring of debt collection agencies for outstanding receivables and customer credit checks)
• What is the matching principle and the dangers of wrong usage of financial services

  Debt Finance (most utilised method):

  Short term finance (overdraft, commercial bills, factoring) for current assets (stock/inventory, short-term investments)

  
  

  Long term finance (mortgage, debentures, unsecured notes, leasing) for non-current assets (equipment, vehicles, office equipment)

  
  

  
  

  Short term finance for Non-current assets leads to repayment being due prior to assets generating revenue, influencing solvency

  Long term finance for current assets leads to loan payments outlasting the assets usage, influencing cash flow
• Types of financial documents and what do they indicate

  Balance Sheet→ Snapshot summary of assets, liabilities and equity → Must be balanced (accounting equation)

  Indicates:

  financial stability

  Liquidity and solvency

  Return on investment

  
  

  Income Statement/Statement of financial performance→ Summary of income and expenses overtime→ Shows revenue to expenditure to profit.

  
  

  Cash flow statement: Movement of cash receipts and payments overtime

  Indicates:

  Cash flow

  Liquidity and solvency

  Ability to expand

  Net cash (at bottom)

  Operating activities (customer receipts, payments to suppliers and employees, interest payments)

  Informal → sole traders, SME, partnerships and private firms

  Formal → annual reports for shareholders (use categories)
• What're the three expenses categories of income statements

  Expenses: Administrative (rent), spending (salaries), financial (dividends).
• What're the three activity categories of cash flow statements

  Investing activities (Asset sales, plant and equipment)

  Financing activities (issuing shares, proceeds and payments for borrowings, dividends)

  Operating activities (customer receipts, payments to suppliers and employees, interest payments)
• What're the financial ratios and what do they indicate

  Financial Ratios→ Assess the achievement of financial objectives

  
  

  Liquidity→ Current Ratio: current assets/current liabilities

  Measures ability for current assets to cover current liabilities

  
  

  
  

  Solvency →Debt to equity ratio: liabilities/equity

  Indicates reliance on equity or debt financing

  (Low = less debt→ low gearing)

  (High risk → High gearing → High reward)

  
  

  Profitability→

  Gross profit ratio: GP/sales

  Higher→ COGS low relative to sales→ Better

  Net Profit ratio: NP/sales

  Measures net profit derived from sales

  High→ high profitability

  
  

  Return on equity: NP/equity

  Return on owners investment

  
  

  
  

  Efficiency:

  Expense Ratio: Expenses/sales

  Sales revenue allocated to expenses

  
  

  Accounts Receivable turnover:Sales/Accounts receivable

  Effectiveness of debt collection (accounts receivable)

  Turnover period → 365/(SalesAccounts receivable)

  To high → Cash flow strategies implemented to offset cash shortages
• What is the benchmark for Current ratio (current assets/current liabilities)

  2:1 Benchmark
• What is the benchmark for debt to equity ratio

  1:1.5 Benchmark
• What is the benchmark for net profit ratio and return on equity ratio

  Net Profit ratio: >10% benchmark→ Sound financial position

  
  

  Return on equity:>10% benchmark→ Receive same amount of return for borrowing.

  Too low → Business may get better return from borrowing.
• What is the benchmark for accounts receivable turnover period

  Turnover period → 365/(SalesAccounts receivable)

  Benchmark 30 days turnover
• Describe the limitations to financial reports

  Normalised Earnings:Earnings listed on financial reports that have been adjusted to account for changes in the economic cycle or remove one off items that skew profitability

  
  

  Capitalising Expenses: Listing expenses as assets on balance sheets

  
  

  Valuing Assets: the inclusion of assets estimated worth on balance sheets → assets can be difficult to value, especially non-current assets

  
  

  Timing Issues: Recording expenses/profits within different timing periods to improve profitability (matching principle→Record matches time incurred)

  
  

  Debt Repayments: Specific information about debt repayments not displayed on financial reports (past repayments, due dates, length of debt, capacity to pay/provisions in place)

  
  

  Notes to financial statement: Report details that are left out of documents→ Useful to stakeholders understanding of documents and businesses financial position
• What're the limitations of valuing assets

  Often listed under historical cost→ Verifiable though some assets appreciate/depreciate over time

  Intangible assets (good will, trademarks)→ no formula to calculate
• What're the ethical issues related to financial reports

  Misrepresentation of financial statements→ Manipulating financial info to skew performance indicators

  Misuse of funds→ Manipulating financial information to conceal misuse of funds

  Tax minimisation→ Understating revenue to reduce tax
• How is ethical financial reporting enforced

  Enforcing ethical financial reporting:

  Auditing→Independent check of financial records accuracy and accounting procedures

  
  

  Ethical Record Keeping: Australian government mandates 5 years worth of source documents (receipts) for all transactions→ Australian taxation office monitors these to penalise tax evasion

  
  

  Reporting Practices: Corporations legal obligation to produce accurate records and disclose them to shareholders and public → Enforced by Australian Securities exchange corporate governance council.
• What're the types of audits

  Internal: accuracy of procedures and records→ SME's

  Management: Review of financial plan

  External: Independent audit accountants required under corporations Act 2001→ Large businesses/companies
• What're the cash flow management strategies and what do they do

  1.Distribution of payments to prevent cash shortfalls. Assisted by cash flow projection

  
  

  2.Discounts for early payments→ Incentives unreliable debtors to pay→ improves cash flow and accounts receivable turnover

  
  

  3.Factoring→ Selling of accounts receivable at a discount to factoring companies (below 90%) → eliminates cost associated with debt collection → improves working capital