Influences on Financial Management

1. Retained Profits

   Annotations:

   • Retained profits  are money that has been earned by the business and not distributed to its shareholders in payments called dividends.

1. Short Term
   1. Overdraft

      Annotations:

      • The overdraft is the most common type of short-term borrowing. A bank overdraft is an agreement between a commercial bank and a business that allows the business to have a deficit balance on its cheque account to an agreed amount.
   2. Commercial Bills

      Annotations:

      • Another common type of short-term borrowing is a commercial bill. A commercial bill is also called a bank bill. It is a bill of exchange. A commercial bill is simply a written instruction to repay a specified amount of money on a specific date in the future. For example, company XYZ agrees to repay company ABC $50 000 (which has been borrowed) on the 30th April.
   3. Factoring

      Annotations:

      • Factoring is the sale of a customer debt to a financier or financial institution. Some businesses factor all their customer debts, or accounts receivable as they are called in accounting terms. The managers of these businesses argue that they need fewer staff to look after the accounts and therefore factoring is cheaper than running an accounts department.
2. Long Term
   1. Mortgage

      Annotations:

      • Mortgages are secured loans. The loan is secured by the land or building the loan is financing. The mortgage is a legal document that is registered at the titles office against the title of the property.
   2. Debentures

      Annotations:

      • A debenture is a loan contract where the borrower gives a written promise to pay the amount borrowed back on a specific day, as well as payments for interest at regular specified times. The company intending to make the debenture must issue a prospectus providing all the information members of the public will need in making their decision to lend the company money. A debenture is a secured loan subject to a range of government regulations. All the company’s assets are used to secure the loan in what is called a ‘floating charge over assets’.
   3. Unsecured Notes

      Annotations:

      • Unsecured notes are very similar to debentures, except that a debenture holder is a secured creditor and the holder of an unsecured note is not. Unsecured notes are called bonds. Typically, unsecured notes have an interest rate about 1% higher, because the risk is higher since the loan is unsecured.
   4. Leasing

      Annotations:

      • Leasing is now a very popular method of financing the widest possible range of assets. Leasing is an arrangement where the owner of an asset agrees to someone else, or another business, using the asset in return for periodic payments. In the past it was only assets such as cars and buildings that were leased. Now just about any asset can be leased.

Annotations:

• Equity refers to the owners’ contribution to the financing of the business or the business activity. Businesses use a variety of types of equity that include ordinary shares (new issues, rights issues, placements, share purchase plans) and private equity.

1. Ordinary Shares

   Annotations:

   • An ordinary share is part ownership in a business. When the investor purchases ordinary shares, it gives them the right to share in the profits of the business. The payment of a share of profits to the shareholder is called a dividend.
2. New Issue

   Annotations:

   • When a new business offers the general public shares in the business it is required to issue a prospectus. A prospectus provides a potential investor in the business with all the information they need to make a reasoned decision to invest in the business by buying shares.
3. Right Issues

   Annotations:

   • A rights issue is where existing shareholders are invited to buy, for cash, new shares in proportion to their existing holdings. A business may offer, for example, the right to purchase one new share for every two shares they own.
4. Placements

   Annotations:

   • Placement of ordinary shares is used to minimise the costs of the capital raising. An ordinary share placement is where the business arranges the sale of large blocks of shares to investment institutions.
5. Share Purchase Plans

   Annotations:

   • A share purchase plan is where a company can issue a maximum of $5 000 in new shares to each existing shareholder without having to issue a prospectus. It is a cheap and easy way to raise additional finance.

Annotations:

• Financial institutions are businesses that buy and sell financial products. An example of a financial product is a bank loan. The product is sold by a bank and purchased by a business. These products are called financial securities. There are a large number of financial products sold in the financial markets. There are also a number of different types of financial institutions - that is, businesses whose main activity is selling financial products.

1. Banks

   Annotations:

   • A bank is a financial establishment that invests the money deposited by its customers.Generally the money deposited is invested in loans to other customers. Interest is charged on the loans. Examples of banks include the four major banks - National Australia Bank (NAB), Commonwealth Bank of Australia, Australia and New Zealand Bank (ANZ).
2. Investment Banks

   Annotations:

   • Investment banks are financial institutions that assist individuals, companies or governments in raising capital. Sometimes called merchant banks, investment banks, unlike commercial banks, do not take deposits. Example of an investment banks include Macquarie Bank.
3. Finance Companies

   Annotations:

   • Finance companies have an important role in providing both consumer and business finance. The largest finance company in Australia is GE Capital Australia (GECFA). GE provides the interest-free finance offered by businesses such as Harvey Norman. GE borrows money from small investors by selling debentures (loans to the general public secured by all the assets of GE) and uses this money to provide consumer credit and small business loans.
4. Superannuation Funds

   Annotations:

   • Superannuation/mutual funds are important participants in the financial markets because they  invest the large amounts of savings made by their contributors in things like shares in public companies and property.
5. Life Insurance Companies

   Annotations:

   • Insurance companies such as the AMP or AXA are important because they invest surplus funds from their insurance premiums on businesses by buying shares in businesses or lending money for property
6. Unit Trusts

   Annotations:

   • Unit trusts can take many forms, but a trust is when one or more people (trustees) hold or own a property for the benefit of other people who are known as the beneficiaries. When the interests of the beneficiaries are divided into units, the trust is called a unit trust and the beneficiaries are referred to as unit holders. A unit trust is therefore a type of investment vehicle for pooling the investment resources of a number of individual investors. Unit trusts are registered as a managed investment scheme with ASIC under the Corporations Act and some unit trusts are listed on the ASX.
7. Australian Securities Exchange

   Annotations:

   • The Australian Securities Exchange (ASX) was created in 2006 by the merger of the Australian Stock Exchange and the Sydney Futures Exchange. In this role, the ASX operates as a stock exchange, providing market-place services for stockbrokers and traders to trade stock, bonds and other securities. As you recall, public companies are listed on the stock exchange and their share price reflects the forces of supply and demand that fluctuate over time.  

1. Australian Securities and Investments Commission

   Annotations:

   • The Australian Securities and Investments Commission (ASIC) states its role as to  ‘enforce company and financial laws to protect consumers, investors and creditors. ASIC also regulates and informs the public about Australian Companies.’
2. Company taxation

1. Economic outlook

   Annotations:

   • The economic outlook can be a very powerful influence on financial management because it affects business and consumer confidence. The economic outlook refers to perceptions of how global economic events might impact on the local economy.
2. Availability of funds

   Annotations:

   • Businesses need funds for a variety of purposes and when the availability of funds tightens it can be a real problem. The availability of funds is now global. The availability of funds refers to the level of confidence in the banking system that determines their willingness to make loans. When confidence is high, money for loans is readily available.
3. Interest rates

   Annotations:

   • Interest rates are an important global influence on financial management. An  interest rate is the price of money. Typically the interest rate is not just the cost of borrowing money but it also incorporates the risk of the borrower not paying the loan back. Interest rates are a global influence because the financial markets are now global. Large businesses can borrow from anywhere in the world where surplus funds are available.