HSC Business Studies Notes

Enjoy these FREE NOTESThey’re part of the new

HSC Business Studies CRAM app

The Finance App will be

available on July 26th, 2012

FINANCE The app includes THREE AND A HALF HOURSof videos and visual explanaIons of all the most important parts of the topic that you can take with you wherever you go.

To stay up to date on the latest updates, Like the Facebook page h?ps://www.facebook.com/HscBusinessStudiesCramApps)

h?p://itunes.apple.com/au/app/finance-‐business-‐studies-‐cram/id545069870?ls=1&mt=8

http://itunes.apple.com/au/app/finance-business-studies-cram/id545069870?ls=1&mt=8


2. INFLUENCES ON FINANCIAL MANAGEMENT

EXTERNAL (debt)

EXTERNAL (equity)

Short-‐term OverdraW

Commercial billsFactoring

Long-‐term Mortgages Debentures

Unsecured NotesLeasing

Ordinary sharesNew issuesRights issuesPlacements

Share purchase plans

Private Equity

External sources are from OUTSIDE the business

e.g. Bankse.g. Shareholders


EXTERNAL (equity)

Ordinary sharesNew issuesRights issuesPlacements

Share purchase plans

Private Equity

ADVANTAGES DISADVANTAGESDoesn’t increase debt levels Future profits have to be shared with more

investors (ownership is ‘diluted’)

No interest payments Change of ownership structure


Equity sources1. Ordinary shares

External sources of finance

INVESTORS PAY THE BUSINESS MONEY…… for: -‐ Share of OWNERSHIP -‐ Share of PROFITS through dividend payments RISKS: 1. The business may not make a profit. 2. The owners may decide to reinvest the profits instead of sharing them. -‐ VOTING RIGHTS BUT: Only according to number of shares

Just write ‘ordinary’ before the word shares(you don’t need to know the “not ordinary” type)




ADVANTAGES DISADVANTAGES

No interest payments The process of issuing shares (e.g. through an IPO) is expensive and takes longer than debt finance

Even though you CAN (and should) share future profits (‘dividends’), there is sIll a choice in paying (unlike loan repayments)

Not enough people might buy them – called ‘undersubscripIon’ (CS Facebook)

DiluIon of ownership (profits shared between more owners)

Sample from Finance -‐ HSC Business Studies CRAM App (available 26/07) www.Inyurl.com/financeCRAMLike the facebook page for the latest updates and giveaways -‐ www.Inyurl.com/HSCBusinessCRAM

http://www.tinyurl.com/financeCRAM


http://www.tinyurl.com/HSCBusinessCRAM




i. New issues ii. Rights issues iii. Placements iv. Share purchase plans


WAYS of issuing ordinary shares








i. New issues


ADVANTAGES DISADVANTAGESIf successful, gets the largest amount of funds Expensive and takes longer than debt finance

If it is ‘underwriben’, it is fairly safe (a business can agree to buy any unsold shares)

Not enough people might buy them – called ‘undersubscripIon’ (CS Facebook)

1. Issue a Prospectus(here’s everything you need to know about our business)

2. Sell shares on the ASXInitalPOfferingublic

At first, this is done through an



ii. Rights issues


AFTER the EXISTING SHAREHOLDERSget to buy

MORE SHARES at a

SPECIAL PRICE

ADVANTAGES DISADVANTAGESCheaper than the IPO Lower price

Faster than the IPO Less possible buyers



iii. Placements


PRIVATELY selling shares (NOT through an IPO)

ADVANTAGES DISADVANTAGESCheaper than an IPO May not raise as much as an IPO would

Faster than an IPO

Easier than an IPO












iv. Share purchase plans


Shareholders can choose to get

SHARES instead of DIVIDENDS

ADVANTAGES DISADVANTAGESQuick Probably at a lower price than offering new

shares

Cheap


Equity sources


2. Private Equity

There are ‘private equity’ firmsbusinesses that buy other businesses

(or part of them)

ADVANTAGES DISADVANTAGESAccess to enormous amounts of money Original owners lose a lot of control

Easier than an IPO Somegmes private equity firms are not interested in growing the business (they just want to cut costs or even shut down the business and sell its assets)

SomeImes the investors have good ideas for the business

2. INFLUENCES ON FINANCIAL MANAGEMENTExternal sources of finance

EXTERNAL (debt)





BORROWING

2. INFLUENCES ON FINANCIAL MANAGEMENTExternal sources of finance

EXTERNAL (debt)





BORROWINGADVANTAGES DISADVANTAGES

No change to ownership structure Interest payments

Faster and more straigheorward than an IPO Compulsory payments at set dates (unlike dividends)

Tax advantages Security might be required (e.g. mortgage may require using the property as collateral)


Debt sources


1. SHORT-‐term borrowing

< 1 yearShort-‐term

i. OverdraWii. Commercial bills

iii. Factoring

repay in


Debt sources


1. SHORT-‐term borrowingi. OverdraW

SHORT NOTICE short-‐term loan from a BANK (usually smaller amounts <$100,000)

ADVANTAGES DISADVANTAGESAvailable at short noIce Higher interest rate (and variable)

Flexible The bank can demand repayment at any Ime (usually don’t though)

Usually not secured against assets APP STORE LINK: www.Inyurl.com/financeCRAMFB PAGE LINK: www.Inyurl.com/HSCBusinessCRAM






Debt sources


1. SHORT-‐term borrowingii. Commercial Bills

SHORT TERM loan from a BANK or NBFI (usually LARGER amounts >$100,000) (usually 7-‐180 days)

ADVANTAGES DISADVANTAGESOnly interest is paid (unIl the end) Usually secured against assets

Flexible (length of Ime; amount of interest)







Debt sources


1. SHORT-‐term borrowingiii. Factoring

‘Accounts’ are when money is owed.

‘Accounts RECEIVABLE’ are when your business is

OWED money BY CUSTOMERS.

BALANCE SHEET


Debt sources



‘Accounts RECEIVABLE’ are when your business is

OWED money BY CUSTOMERS.

But what if they’re not paying on gme?

What if you need that money NOW?

You can SELL your ‘accounts receivable’ to a business (called a ‘Debt Factor’)

for a percentage of their total value.


Debt sources



You can SELL your ‘accounts receivable’ to a business (called a ‘Debt Factor’)

for a percentage of their total value.

ADVANTAGES DISADVANTAGESYour business gets cash straight away It’s usually only 80% of what you were owed

You save on Ime and effort chasing customers (legal bills too)

APP STORE LINK: www.Inyurl.com/financeCRAMFB PAGE LINK: www.Inyurl.com/HSCBusinessCRAM






Debt sources


2. LONG-‐term borrowing

> 1 yearLong-‐term

i. Mortgages ii. Debentures

iii. Unsecured Notesiv. Leasing

repay in


Debt sources


2. LONG-‐term borrowingi. Mortgage

LARGE loansfrom a bankSECURED AGAINSTthe business’s land/buildings ADVANTAGES

Access to large amounts of money (especially for SMEs)

“Unlocks” the value that the business has in its land/buildings (so the money can be used to grow the business)

DISADVANTAGESNot meeIng repayments might lead to foreclosure


Debt sources


2. LONG-‐term borrowingii. Debentures

LARGE loansSECURED AGAINSTthe business’s assetsFROM INVESTORS(instead of a bank)

The right to collect the money can be SOLD(so you won’t necessarily be paying back the same people)

but…


Debt sources


2. LONG-‐term borrowingiii. Unsecured notes

LARGE loansFROM INVESTORSNOT SECURED AGAINSTthe business’s assets

ADVANTAGES DISADVANTAGESNo security required Interest rate is usually higher (because of the

extra risk to the lender)

APP STORE LINK: www.Inyurl.com/financeCRAMFB PAGE LINK: www.Inyurl.com/HSCBusinessCRAM












https://www.facebook.com/HscBusinessStudiesCramApps

https://www.facebook.com/HscBusinessStudiesCramApps




Debt sources


2. LONG-‐term borrowingiv. Leasing

ADVANTAGES DISADVANTAGESTax advantages The business doesn’t own the asset

Gives the business access to property/equipment without the lump sum payment (which frees up money for other needs)

The total cost over the Ime will be higher than if they paid upfront.

LEASE (“rent”) assets e.g. equipment e.g. buildings

instead of buying them

Education

HSC Business Studies Notes