Topic 2: Finance Glossary

9.0 The Role of Financial Management Strategy: is the major tool adopted by a business to achieve its goals. Strategic plan: encompasses the strategies that a business will use to achieve its goals. Business objectives: break the business operations into achievable and manageable outcomes that can be measured and evaluated. Financial resources: are those resources in a business that have a monetary or money value. Financial management: is the planning and monitoring of a businesss 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). Profitability: is the ability of a business to maximise its profits. Growth: is the ability of the 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 a 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. 10.0 Influences on Financial Management 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 business activities (retained earnings). Owners equity: is the funds contributed by owners or partners to establish and build the business. External finance: is the funds provided by sources outside the business, including banks, other financial institutions, government, suppliers or financial intermediaries. With a bank overdraft, the 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. Mortgage: is a loan secured by the property of the borrower (business). Debentures: are issued by a company for a fixed rate of interest and for a fixed period of time. Unsecured note: is a loan for a set period of time but is not backed by any collateral or assets. Leasing: is a long-term source of borrowing for businesses. It involves the payment of money for the use of equipment that is owned by another party. Equity: refers to the finance (cash) raised by a company by issuing shares. Dividend: is a distribution of a companys profits (either yearly or half-yearly) to shareholders and is calculated as a number of cents per share. Australian Securities Exchange (ASX): is the primary stock exchange group in Australia.

Primary markets: deal with the new issue of debt instruments by the borrower of funds. Secondary markets: deal with the purchase and sale of existing securities. Global economic outlook: refers specifically to the projected changes to the level of economic growth throughout the world. Availability of funds: refers to the ease with which a business can access funds (for borrowing) on the international financial markets. Interest rates: are the cost of borrowing money. 11.0 Processes of Financial Management Capital expenditure: is what is spent on a businesss non-current or fixed assets. Planning processes: involve the setting of goals and objectives, determining the strategies to achieve those goals and objectives, identifying and evaluating alternative courses of action and choosing the best alternative for the business. Budgets: provide information in quantitative terms (facts and figures) about requirements to achieve a particular purpose. Operating budgets: relate to the main activities of a business and may include budgets relating to sales, production, raw materials, direct labour, expenses and cost of goods sold. Project budgets: relate to capital expenditure and research and development. Financial budgets: relate to financial data of a business and include the budgeted income statement, balance sheet and cash flows. Record systems: are the mechanisms employed by a business to ensure that data are recorded and the information provided by record systems is accurate, reliable, efficient and accessible. Financial risk: is the risk to a business of being unable to cover its financial obligations. Financial controls: are the policies and procedures that ensure that the plans of a business will be achieved in the most efficient way. Debt finance: relates to the short-term and long-term borrowing from external sources by a business. Equity finance: relates to the internal sources of finance in the business. Cash flow statement: is a financial statement that indicates the movement of cash receipts and cash payments resulting from transactions over a period of time. Income statement: shows the operating results for a period. It shows the revenue earned and expenses incurred over the accounting period with the resultant profit or loss. Balance sheet: represents a businesss assets and liabilities at a particular point in time, expressed in money terms, and represents the net worth of the business. Assets: are items of value owned by the business. Current assets can be turned into cash within 12 months, whereas non-current assets are not expected to be turned into cash within 12 months. Liabilities: are claims by people other than owners against the assets (items of debt), and represent what is owed by the business. Current liabilities must be repaid within 12 months, whereas non-current liabilities must be met some time after the next 12 months. Owners equity: represents the owners financial interest in the business or net worth of the business. Also referred to as capital. Accounting equation: which forms the basis of the accounting process, shows the relationship between assets, liabilities and owners equity. Analysis: involves working the financial information into significant and acceptable forms that make it more meaningful, and highlighting relationships between different aspects of a business.

Gearing: is the proportion of debt (external finance) and the proportion of equity (internal finance) that is used to finance the activities of a business. Gearing ratios determine the firms solvency. Debt repayments: refer to either money owed to the business or by the business. Audit: is an independent check of the accuracy of financial records and accounting procedures. Business activity statement (BAS): records a businesss claim for input tax credits and accounts for GST payable. 12.0 Financial Management Strategies Cash flow: is the movement of cash in and out of a business over a period of time. Current assets: are assets that a business can expect to convert into cash within 12 months. They usually include cash and accounts receivable. Working capital: is the funds available for the short-term financial commitments of a business. Net working capital: is the difference between current assets and current liabilities. It represents those funds that are needed for the day-to-day operations of a business to produce profits and provide cash for short-term liquidity. Current liabilities: are liabilities that a business must repay within the short term. They usually include overdraft and accounts payable. Working capital management: is determining the best mix of current assets and current liabilities needed to achieve the objectives of the business. Receivables: are sums of money due to a business from customers to whom it has supplied goods or services. Receivables are recorded as accounts receivable. Payables: are sums of money owed by the business to other businesses from whom it has purchased goods and services. Payables are recorded as accounts payable. Sale and lease-back: is the selling of an owned asset to a lessor and leasing the asset back through fixed payments for a specified number of years. Profitability management: involves the control of both the businesss costs and its revenue. Cost centres: are particular areas, departments or sections of a business to which costs can be directly attributed. Direct costs: are those that can be allocated to a particular product. Direct costs are also called variable costs. Indirect costs: are those that are shared by more than one product. The Foreign Exchange (forexor fx) market: determines the price of one currency relative to another. The Foreign Exchange Rate: is the ratio of one currency to another; it tells how much a unit of one currency is worth in terms of another. Appreciation: is an upward movement of the Australian dollar (or any other currency) against another currency. The payment in advance method: allows the exporter to receive payment and then arrange for the goods to be sent. A letter of credit: is a commitment by the importers bank, which promises to pay the exporter a specified amount when the documents proving shipment of the goods are presented. Clean payment (remittance): occurs when the payment is sent to, but not received by, the exporter before the goods are transported. The spot exchange rate: is the value of one currency in another currency on a particular day. Hedging: is the process of minimising the risk of currency fluctuations. Derivatives: are simple financial instruments that may be used to lessen the exporting risks associated with currency fluctuations.

A forward exchange contract: is a contract to exchange one currency for another currency at an agreed exchange rate on a future date, usually after a period of 30, 90 or 180 days. An option: gives the buyer (option holder) the right, but not the obligation, to buy or sell foreign currency at some time in the future. Currency Swap: is an agreement to exchange currency in the spot market with an agreement to reverse the transaction in the future. Credit risk: represents the risk of another party failing to complete the transaction as agreed.