Syllabus Points:

- 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 Investments Commission,company taxation
- global market influences – economic outlook, availability of funds, interest rates

Internal Sources of Finance:

- Funds that come from within the back (no banks, financial institutions or shareholders).
Owners’ Equity:
- Refers to the funds contributed by owners of a business.
- Advantages:
- Not indebted to a lender (funds cannot be repaid)
- No interest
- Unlimited access to funds
- Disadvantages:
- Potential for owners to dissolve their funds (requires careful planning to avoid)
-
Retained Profits:
- Earning made through previous financial gain that is reinvested into the business. (can be
reinvested or withdrawn)
- Advantages:
- No Interest
- Not indebted to lender
- Unlimited access to funds
- Disadvantages:
- Potential for owners to dissolve their funds.
- Minimal reinvestment of funds
- Mis-management of retained profits.

External Sources of Finance: Debt

- Debt - Refers to the funds borrowed from an external source that must be repaid.
Short-Term Borrowing: (Borrowing finds that must be repaid within 12 months)
- Overdraft:
- Bank allows a business to overdraw their account up to an agreed limit for a specified
time.
- Assists with short-term liquidity problems e.g seasonal decrease in sales, bills.
- Advantages:
- More flexibility than a bank loan
- Costs are minimal
- Variable interest rate (paid on the daily outstanding balance of the account)
- Disadvantages:
- The longer it takes to repay, the more the business will pay.
 - Commercial Bills:
- Short-term loans of $100,000+ issued by financial institutions.
- Funds must be repaid within 30-180 days (can be paid in full at the end of borrowing
term)
- Advantages:
- Immediate Access to funds
- Extended repayment period
- Disadvantages:
- Secured against the asset being purchased
- Factoring:
- Selling accounts receivable (money owing to a business) at a discounted price to a
third party business.
- Advantages:
- Immediate access to funds (within 48 hours)
- Disadvantages:
- Must sell at a discounted price (will only receive 90% of original value)
- Must return funds if third party business cannot access the account

Long-Term Borrowing:(Borrowing funds that are repaid over more than 12 months)
- Mortgage:
- A loan secured against the asset being purchased.
- Advantages:
- Allows a business to purchase long-term assets.
- Lower interest rate than other forms of borrowing
- Disadvantages:
- Long time to repay
- Asset can’t be sold or used as security for further borrowing until the mortgage
has been repaid.
- Debentures:
- A loan from an investor with a promise to repay it in a set time with a set interest rate.
- Advantages:
- Fixed interest rate
- Disadvantages:
- Higher interest rate than a financial institution.
- Secured against an asset
- Unsecured Notes:
- A loan from an investor with a promise to repay it in a set time with a set interest rate.
- Advantages:
- Fixed interest rate
- Disadvantages:
- Higher interest rate than a financial institution. (higher than debentures)
- Leasing:
- Paying another party to use their equipment.
- Advantages:
- Better for cash flow and working capital
- Fixed Payments
- No added fees for maintenance and insurance
- Disadvantages:
- Higher payments and interest rates than other forms of borrowing.
External Sources of Finance: Equity
- Funds raised by inviting new owners into a business as shareholders.
- Ordinary Shares:
- Finance raised by selling shares to the public on the Australian Securities Exchange
(ASX).
- New Issues:
- Securities that are issued and sold for the first time on a public primary market.
- Business will make an initial public offering (IPO) allowing anyone to purchase shares.
- Must issue a prospectus (Document outlining relevant business details for
investors)
- Rights Issues:
- An opportunity granted to existing shareholders to buy more shares in the business.
- Proportional to each investor’s existing shares.
- No need to reach out to new investors.
- Control of the business remains with their existing shareholders.
- Cheaper than making an IPO
- Placements:
- An allotment of shares made directly to investors at a discounted price.
- Discount intended to persuade specific investors to become shareholders.
- Fast method for generating funds.
- Does not require a prospectus.
- Can raise up to 15% of a business’s existing capital base.
- Share Purchase Plans:
- An offering made to existing shareholders to purchase more shares without
brokerage fees.
- Shares discounted to encourage shareholders
- Doesn’t require a prospectus
- Limits the number of shareholders in the business.
- Shareholders who don’t purchase more shares dilute their ownership.
- Private Equity:
- Finance raised through private investments (not on the ASX).
- Owners maintain the right to choose investors
- Owners maintain more control over business

Financial Institutions:
- An organisation that provides financial services to individuals and businesses. (essential source of
external finance)
- Financial managers must consider which options best suit tier business’s financial goals.
- Banks:
- Role:
- Receive deposits from individuals, businesses and governments which are then
lended to fund business activities.

- Influence:
- Businesses must pay interest on the funds they borrowed
- Interest is then shared with those who save money with the bank.
- Provide general services to a wide range of different customers
- Investment Banks:
- Role:
- Lend funds and provide advice to large institutional clients and governments
- Assist business seeking to raise large amounts of capital for activities
e.g company expansions, acquisitions, mergers, projects, working capital.
- Influence:
- Specialised knowledge on how large business can maximise their fiances.
- Offer tailored services e.g customised loans, portfolio investing, foreign
exchange cover, overseas finance.

- Finance Companies:
- Role:
- Provide financial services for small-medium businesses
- Provide loans, lease equipment, offer factoring services.
- Influence:
- Immediate access to funds
- Higher interest rates than other financial institutions.
- Lend more freely to borrowers, so the risk is higher for the
lender(regulated by the Australian Prudential regulation Authority)

- Superannuation Funds:
- Role:
- Invest employees superannuation contributes into organisations. (potential
source of finance)
- Purchase shares in business listed on the ASX

- Life Insurance Companies:

- Role:
- Provide insurance to individuals.
- Influence:
- Life insurance3 companies must invest premiums to grow wealth
- Purchase shares in businesses (dividends)
- Provide loans to business (interest) (potential source of finance and
higher interest rates than banks)

- Unit Trusts:
- Role:
- Invest funds from a large group of smaller investors into financial assets.
- Unit trusts may purchase shares in a business, providing funds.
- Business can invest in a unit trust, earning dividends
- Influence:
- Allow business to diversify their income
- Small business can make investments they otherwise wouldn't be able to
- Economies of Scale reduces transaction costs (Have to pay intermediary
manager, which is a cost)
 - Australian Securities Exchange (ASX)
- Role:
- Market for purchasing and exchanging shares and other securities.
- Influence:
- Primary Market:
- Raise new capital through the issue of shares
- Secondary Market:
- Pre-owned securities are traded between investors.
- Shares purchased in other companies can be traded.
- Reading securities at the right time can generate revenue
(greater dividends)

Government Influences:
- Government Influences on Financial Management
- All financial decisions made by a business are influenced by government.
- Role:
- Develop economic policies and implement corporate legislation.
- Establish government bodies that ensure businesses act within the law
- Impose penalties for non-compliance
- Australian Securities and Investments Commission (ASIC):
- Role:
- To enforce and administer legislation i.e. Corporations Act 2001 (Cth)
- Regulation corporations’ markets and the provision of finance services
- *ASIC investigates fraud and other unfair practices*
- Influence:
- Protects consumers and investors from fraud and other unfair practices.
- Can impose monetary penalties or imprisonment
- May result in a loss of trust from customers and reduced sales
- Company Taxation:
- All private and public incorporated companies must pay company tax on their profits.
- Role:
- Essential source of funding for the government.
- Allows them to provide essential resources and services e.g healthcare
- Influence:
- Businesses must ensure their financial records are maintained and up to date.
- Reduces the expected returns (profits) of a business
- Businesses must pay the right amount of tax
- Businesses must be aware of any tax deduction they can claim.

Making less than $10 million: 27.5% profits taxed

More than $10 million: 30% profits taxed

Global Market Influences:
- Global Market influences on Financial Management:
- Not all businesses operate globally, but every business is influenced by the global market.
- Globalisation has created more interdependence between the world’s economies.
- The Global market is part of the external environment, so it is outside the control of a
business.
- Businesses must implement financial strategies to maximise opportunities and minimise
threats.
- Global market influences are external influences that are not controlled by the business
- Global Economic Outlook:
- The projected changes to the level of economic growth throughout the world.
- Forecasts of how the economy will fare in the future impact the financial decisions of a
business
- When economic outlook is positive:
- Consumers are more confident.
- More likely to spend disposable income
- Greater demand for goods and services
- Need to increase production
- When economic outlook is negative: (the opposite of positive)
- Reduced demand for goods and services
- Need to decrease production
- Need funds to cover expenses
- Reduced access to borrowing( greater risk for lender)
- When outlook is positive, businesses are more profitable and have greater access to
borrowing.
- When outlook is negative, profits are reduced and borrowings less accessible.

- Availability of Funds:
- The ease with which a business can borrow funds from international financial markets
- Due to globalisation, businesses can easily borrow funds from overseas lenders. (gives
business more flexibility if they want to expand)
- The availability of overseas funds is limited due to transaction exposure.
- The risk of exchange rates changing after signing a contract

- Interest Rates:
- Payments for borrowing funds as a percentage of the loaned amount.
- As businesses can borrow funds globally, different economies offer different interest rates.
- Australian interest rates are often higher than other countries.
- If exchange rates change during the repayment period, the interest to repay will also change.
- These changes, may eliminate the expected interest savings.