Influences on financial Managment
Syllabus
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
Content
Internal sources of finance are generated from within the business itself and
don’t require turning to outside sources.
- Using your own money is obviously cheaper and you don’t the owe
anyone else nothing - but of course you do have an opportunity cost of
what else that money could have been used for
Owners equity
- Funds contributed by owners to establish and build their business
Retained profits
- Earnings made through previous financial gain that are reinvested into
the business
External sources:
Finances obtained from individuals and institutions outside of the business
such as banks and shareholders.
Using external sources means you have to pay for the money you have
borrowed in one way or another; either through interest or giving up part
ownership of the business. Giving up part of the ownership in return for funds
is known as equity.
Equity financing might not have a direct dollar value attatched to it at the time
of issue, however you may lose the freedom to make some decisions, which
could cost you in the future
Debt
Short term borrowing - borrowed funds to be repaid within 1 year
Overdraft - allows bank account to go into negative, up to a maximum amount
Interest calculated daily, good for short term loans.
Commercial bills
- Loan of large amount of $100,000 or more within a specific time frame
between 7 to 180 days
Factoring
Selling of the business’ accounts receivable to a debt factor for a discount.
You receive a lump sum immediately while the factor chases up the debt for a
profit.
E.g business is owed $1,000 by someone who won’t pay. You decide to
approach a debt factor who will buy the debt from you for $800
Long term borrowing
Refers to debt that has more than one year to be repaid
Mortgage
- a secured long term bank loan. Secured means the secured asset can be
taken if payments are not made. Can last decades, e.g you house can be
repossessed by the bank if you do not make the required payments9
Debentures
- a long term loan from investors with a fixed interest rate
These are ‘sold’ by the business to the investors. In 2009, Westpac Bank
raised $25bn in funds through debentures. The bank would pay back the
money, with interest on each debenture.
 Equity Finance
Funds raised by inviting new owners into a business as shareholders
- Losing part ownership for funds

Ordinary shares
Finances raised by selling shares to the public on the ASX. Investors
purchase a share of ownership in a business which can give uncertain
rewards in the form of dividends.

Placements
- An allotment of shares made directly to investors at discounted price
- Selling shares privately, rather than through public offering
- Via a financial institution

Share purchase plans

- Offering made to existing shareholders to purchase more shares
- Providing shares to shareholders instead of dividend payments
- Use this to save extra cash that would otherwise be given as dividends

External influences of Finance

Private equity
- a type of ownership of assets (financial equity) and is a class of assets
(debt securities and equity securities), which provides funding

New issues
- when a business make a main public offering to investors
- Business is able to raise funds with the sale of part of the business,
however they now have lost ownership of that part.

Right issues
- When a business sells additional shares to shareholders. Sometimes
the business needs more funds later and wants a cheaper way of
doing so. This could be done by offering current shareholders one
additional share for every five they already own.

financial institutions – Banks

banks, investment banks,
finance companies,
superannuation funds, life
insurance companies, unit
trusts and the Australian Investment banks
Securities Exchange
- Major operator and most important source of funds.
- Savings (from firms, consumers) → investments (loans and borrowers)
- Also includes super annuation
- provide services in both borrowing and lending, primarily to the
business sector
- customise loans to suit the business’s specific needs
- May sometimes require equity in the business
- Provide advice for clients
- Long term finance for company expansion

Finance companies
- non-bank financial intermediaries that specialise in smaller commercial
finance
- Provide short to medium term loans
- Provide lease finance to businesses
- Raise money through share issues (debentures)
- Carry fixed rate of interest
- Priority in case of liquidation for lenders

influence of government –
Australian Securities and
Investments Commission,
company taxation
global market influences –
economic outlook,
availability of funds, interest
rates
- Provides quick access to funds
Superannuation funds
- Employers are required to make contributions to workers aged 18 - 69
who are paid more than $450.
- able to invest in long-term securities as company shares, government
and company debt
-
Life insurance companies
- non-bank financial intermediaries who provide cover and a lump sum
payment in the event of death
- Policy holders pay regular premiums in return for sum if death occurs
- provide both equity and loans to the corporate sector through receipts
of insurance premiums
- Reserves, are invested in financial assets.
Unit trusts
- AKA mutual funds
- Takes funds from a large number of small investors and invest them in
specific types of financial assets
- Includes short term money market, property, public securities
Australian securities exchange
- primary stock exchange group in Australia
- clearing house and payments system facilitator
- promotes standards of corporate governance among Australia’s listed
companies
- Offers shares, futures, warrants, real estate investment trusts etc.
- Biggest stocks - BHP Billiton, CBA, Rio Tinto, NAB
- Primary market for businesses, raise capital through shares
- Secondary market for investors, shares
-
The Australian Securities and Investments Commission (ASIC)
- Independent statutory commission accountable to the Commonwealth
parliament.
- protects consumers in the areas of investments, life and general
insurance, superannuation and banking
- Aims to reduce fraud and unfair practices in financial markets
- Ensures companies adhere to laws
- Provides public information about companies
- ASIC investigates law breaking companies and takes corrective action
Company Taxation
- All private and public companies must pay company tax on profits
- Levied at 30% of net profit (flat rate)
- Paid before profits are distributed to shareholders
- The Australian company tax rate was reduced from 36 to 34 per cent in
2000–01
Global economic outlook
- projected changes to the level of economic growth throughout the
world
- Businesses may increase production (equipment, staff, etc) to meet
aggregate demand
- May decrease interest rates borrowed internationally from the money
market.
Availability of funds
 - Ease at which business can borrow money from international finance
markets
- Condition and rates based on risk, demand/supply, economic conditions

Interest rates:
- Cost of borrowing money
- High risk = high interest rates
- Usually needed when relocating or expanding
- Firms may borrow from overseas (if interest rates are lower)
- Based on exchange rate

The influence of government and the global market on financial management:

Implications for firms under government influence
- Legislation affecting decisions
- Legal compliance
- Negative publicity
- Tax regulation affecting finance decisions
- Tax regulations require organisation to meet deadlines

Implications for firms due to global market influences:

- Demand for Australian exports based on economic stance
- Availability of funds dictating if Australian firms can expand
- Overseas interest rates, fluctuates and affects payback price.