TOPIC 3: FINANCE
Influences on Financial Management
- internal sources of finance - retained profits
- external sources of finance
- > debt - short-term borrowing (overdraft, commercial bills, factoring), long-term borrowing (mortgage, debentures, unsecured notes, leasing)
- > equity - ordinary shares (new issues, rights issues, placements, share purchase plans), private equity
- financial institutions - banks, investment banks, finance companies, superannuation funds, life insurance companies, unit trusts and the Australian Securities Exchange
- influence of government - Australian Securities and Investment Commission, company taxation
- global market influences - economic outlook, availability of funds, interest rates
Internal sources of finance
Retained profits – read Accounting Tool's webpage about retained profits.
External sources of finance
Debt finance is funds borrowed by the business which must be repaid over a fixed period of time. Debts are liabilities. Debt holders do not have ownership rights to the business but they have the right to liquidate the assets of the business if it cannot meet its debt repayments.
Equity finance is capital contributed to the business by its owners. If the business is a company this is in the form of shares.
- Explain why short-term finance should not be used to finance the global expansion of a business.
- A large publishing business is in the process of converting all its PCs to Macs. Explain the sources of finance available to fund the new Macs.
- Advise on the type of finance you would suggest for the following, providing reasons for your response.
- Payment of inventory
- Purchase of a new motor vehicle
- Diversification of the business over the next five years
- Interstate expansion to double the volume of sales
TASK: Research the various financial institutions online. Create a table summarising the financial instruments and the purpose they serve for the following financial institutions:
- investment banks
- finance companies
- superannuation funds
- life insurance companies
- unit trusts
- the Australian Securities Exchange
Influence of government
- Describe the role of ASIC and discuss its importance as a regulator of financial markets.
- Read the article 'Australia cannot stand still': Business lobby reheats calls for company tax cuts (smh). Discuss the arguments for dropping the company tax rate.
Global market influences
- Economic outlook: Research how China's economy is performing and how its performance will have an impact on Australian businesses.
- Availability of funds: Read the smh article 'Local businesses to avoid credit crunch' - explain what the term 'credit crunch' means and how it could impact businesses.
- Interest rates: Compare interest rates around the world and assess how differing interest rates around the world affects businesses.