Influences of financial management

  • Created by: Alice
  • Created on: 04-04-13 13:23
Internal sources of finance
comes from the business owners or from outcomes of the business (known as equity)
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features of retained profits
most common source of finance, profit is kept within the business as a cheap and accessible source of finance, on average about 50% of profits are retained to be invested
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external sources of finance
funds provided by sources outside the business
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Is owner's equity internal or external?
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what's owner's equity?
the funds contributed by owners/partners to establish and build business
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what are the two types of debt?
Short and long term
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what's short term debt?
finances temporary cash shortages and repaid within 1-2 yrs
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Advantages of bank overdrafts
costs minimal, interest rates lower than other forms of borrowing, flexible, interest paid as a tax deducation
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Disadvantages of bank overdrafts
high costs, daily interest rates
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what's a bank overdraft?
when a bank allows a business to overdraw its account to an agreed limit in order to assist with short term cash problems
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Advantages of commercial bills
bills can be rolled over for extended time periods, good for quick large sums of money
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Disadvantages of commercial bills
complex, difficult to arrange
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what's a commercial bill?
a loan issued by institutions other then banks
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features of a commercial bill
- lasts between 30-180 days, given for large amounts, borrowed from companies that have a surplus fund, money is recieved immediantly with repayment in the future
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what's factoring?
when a business sells its accounts recievable to a specialist factoring firm to create cash inflow for the business
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advantages of factoring
great for cash flow, immediate access to funds
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disadvantages of factoring
fees charged, greater risk, expensive source of finance
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features of factoring
a business will recieve up to 90% of the amount recievable within 48hrs of submitting invoices to a company and services are offered with or without recourse
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without recourse
business transfers responsibility for non-collection to the company
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with recourse
bad debts will still be the responsibility of business
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long term debts
funds borrowed for periods longer then 2yrs
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what are the four types of long term debt?
mortgage, debentures, unsecured debts, leasing
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what's a mortgage?
a loan secured by the property of the borrower to have enough finances to purchase a property
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advantages of a mortgage
long term, low interest
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disadvantages of a mortgage
needs an asset
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features of a mortgage
repaid over 15-30 years, repaid through regular repayments
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what's a debenture?
when a finance company/large firms invest in businesses by lending large amounts of money to the business
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advantages of a debenture
large sums of money, lower interest than banks
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disadvantages of a debenture
businesses loose some control
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features of a debenture
offers security to the lender over the company's assets, finance companies raise funds through debentures, used to buy buildings and equipment
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what's an unsecured note?
loans set for a period of time but are not backed by assets
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who issues unsecured notes?
finance companies to raise finance
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advantages of unsecured notes
getting larger sums of money without securing an asset
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disadvantages of unsecured notes
higher interest, more risk
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what's leasing?
the payment of money for the use of equipment that is owned by another party
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examples of leasing
cars, equipment, office/factory space
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what's operating leases
assets leased for short periods
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what's financial leases
leasing for the life of the asset. e.g. vechicles, equipment
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advantages of leasing
- reduces cost of acquiring assets, reserves cash flow, gains tax advantages, has affordable monthly payments
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disadvantages of leases
- pays more in the long run, cancellation incurs big fees
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what's equity?
finance raised by a company by issuing shares to the public for purchase
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what are the two types of equity
ordinary shares and private equity
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what are the four different types of ordinary shares?
new issue, rights issue, placements, share purchase plans
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disadvanatges of ordinary shares
owners want a share of profits and stay in running of the business
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advantages of ordinary shares
does not have to be repaid
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features of ordinary shares
most commonly traded within australia, the purchase of shares results in becoming part owner of company
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what's private equity
money invested in a private company not listed on the ASX
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how does private equity work?
businesses invite other people to become part owners by selling shares in businesses without a public share issue
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advantages of private equity
cost of finance can be postponed as dividends will not need to be paid immediatly
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disadvantages of private equity
ownership becomes diluted, complex to organise, orginal owners have less control
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what's venture capital?
capital acquired from a specialised venture institution venture instutition that seeks to become part owner of the business
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what are grants?
a financial gift provided provided by the government to assist businesses to establish/expand
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what are the five main financial institutions
Banks, investment (merchant) banks, finance and life insurance companies, superannuation funds, unit trusts, australian securities exchange
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what are the different types of economic policies the government make?
montary and fiscal policies
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what are the two different government departments?
monitoring and administration
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what are the aims of the ASIC?
to assist in reducing fraud and unfair practices in financial markets and financial products, ensures companies adhere to the law, collects info about companies and makes them available to the public
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what's the Australian Securities and Investment Commission?
A commission which enforces and administers the corportations act, protects consumers in investing, insurance, superannuation and banking and oversees the corporations act
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what are the four main roles of the ASIC?
To Regulate, Educate, Enforce and Administer
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what's company taxation?
where australian companies pay a flat rate tax of 30% on profits
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what's the advantage of company taxation?
This tax is redistributed to the shareholders and helps to improve australia's international competitiveness and make australia more attractive to invest in
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Benefits of lower tax
Encourage foreigners to start businesses in Australia
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Benefits of higher tax
more money for infrastructure
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features of a positive outlook
increased demand for products/services and a decrease in interest rates on funds borrowed internationally from the financial money market
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features of a poor outlook
decreasing demand for products/services and an increase in the interest rates on funds borrowed internationally from the financial money market
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definition for the economic outlook
the changes in the level of growth throughout the world
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definition for the availability of funds
the ease in which a business can access funds for borrowing on the international financial markets
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how did the GFC of 08-09 impact the availability of funds?
it caused a sharp increase in interest rates, which reflected the high risk in lending
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what are the conditions and rates of the availability of funds based on?
Risk, demand of supply, domestic economic conditions
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What are interest rates?
the cost of borrowing money
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examples of risk in interest rates
exchange rate movements, any currency fluctuations which eliminates cheaper international interest rates
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Other cards in this set

Card 2


features of retained profits


most common source of finance, profit is kept within the business as a cheap and accessible source of finance, on average about 50% of profits are retained to be invested

Card 3


external sources of finance


Preview of the front of card 3

Card 4


Is owner's equity internal or external?


Preview of the front of card 4

Card 5


what's owner's equity?


Preview of the front of card 5
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