Finance

[pic]

Strategic plan: encompasses the strategies that a business will use to achieve its goals.

Financial Resources: resources in a business that have monetary or money value.

Financial management: is the planning and monitoring of a business’s financial resources to enable the business to achieve its financial goals.

Assets: are the property and other items and effects of a business, such as business premises, machinery, vehicles and cash (tangible assets) and patents, trademarks, and goodwill (intangible assets).

Objectives of financial management:

• Profitability: is the ability of a business to maximise its profits.

• Growth: is the ability of a business to increase its size in the longer term.

• Efficiency: is the ability of a business to use its resources effectively in ensuring financial stability and profitability.

• Liquidity: is the extent to which the business can meet its financial commitments in the short term.

• Solvency: is the extent to which the business can meet its financial commitments in the longer term.

Short term financial objectives are the tactical (1-2years) and operational (day-to-day) plans of a business, reviewed regularly; to see if targets are being met and if resources are being used to the best advantage to achieve the objectives.

Long term financial objectives are the strategic plans of a business, determined for a set period of time, generally more than five years. They tend to be broad goals such as increasing profit or market-share, and each will require a series of short term goals to assist in its achievement. The business would review their progress annually to determine if changes need to be implemented.

[pic]

Financial decision making: requires relevant information to be identified, collected and analysed to determine an appropriate course of action.

Internal finance: is the funds provided by the owners of the business (finance) or from the outcomes of the business activities (retained earnings).

Owner’s equity: is the funds contributed by owners or partners to establish and build the business.

Retained profits: are profits that are not distributed, but are kept in the business as a cheap and accessible source of finance for future activities.

External finance: refers to the funds provided by sources outside the business, including banks other financial institutions, government, suppliers or financial intermediaries.

Debt: Short term borrowing: is used to finance temporary shortages in cash flow or finance for working capital. It is provided by financial institutions though:

• Bank overdraft: is when a bank allows a business or individual to overdraw their account up to an agreed limit and for a specified time, to help overcome a temporary cash shortfall.

• Commercial bills: are a type of bill of exchange (loan) issued by institutions other than banks.

Bill of exchange: is a document ordering the payment of a certain amount of money at some fixed future date.

• Factoring: is the selling of accounts receivable for a discounted price to a finance or factoring company.

Debt: Long term borrowing: relates to funds borrowed for periods longer than two years. It can be secured or unsecured, and interest rates are usually variable. It is used to finance real estate, plant (factory/office) and equipment. It includes:

• Mortgage: is a loan secured by the property of the borrower (business). Used to finance property purchases, such as new premises, a factory or office. • Debentures: are issued by a company for a fixed rate of interest and for a fixed period of time. They are usually not secured to specific property. The amount of profit made has no effect on the rate of interest because debentures carry a fixed rate of interest.

Unsecured note: is a loan for a set period of time but is not backed by any collateral or assets. (Most risk to the lender =