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Chapter 7: Business finance - Coggle Diagram
Chapter 7: Business finance
Business finance
Why is business finance important?
1.1 How is business financed
Source
Debt financing
Equity finance
Combination of equity and debt
Levels of risk
Debt holders (lender) -- lower risk -- lower return
Equity holder (owners) -- higher risk -- higher return
1.2 Balancing short-term and long-term finance
Inmediate needs: to pay wages and day-to-day expenses
short-term needs: pay for goods and services bought on credit (payables)
medium-term: pay for
increase in inventory and receivables
and
pay tax on profits earned
long-term needs: pay for
non-current assets
1.3. Financing current assets
more short-term financing --> higher risk --> higher profit --> agressive approach
More long-term financing --> lower risk, lower return --> defensive approach
NOTE 1
: The cost of short-term (1.4): Short term finance -> usually cheaper than long term
-> the flexibility of short term may reduce it over cost
NOTE 2:
Making the decision between short-term and long-term finance
Banking system
2.1. Financial intermadiations
Benefits of financial intermediation
Risk is reduced as an individual's savings are not tied up with one individual borrower directly
Search costs are reduced as companies seeking loan finance can approach a bank directly rather than finding individuals to lend to them.
Short-term savings can be transferred into long-term loans.
Small amounts deposited by savers can be combined to provide larger loan packages to businesses
Definition:
middlemen providing finance for those that want loans from the deposits made by savers
2.2. Bank
Function of bank
Retail bank (clearing banks)
: take deposits from households and make loans to households and short term loans to businesses
C
ommercial and investment banks
provide a range of services to businesses and governments.
Arranging and underwriting the issue of new securities on behalf of their customer
Advice on strategic issues
Providing instruments for hedging and management
Bank of England
Monetary policy
Financial stability
NOTE 3:
Forms of money transmission
Faster Payments Scheme: Dùng phone/internet để thực hiện
Electronic Funds Transfer (EFT): dùng thẻ credit, debit card
Banks Automated Clearing System (BACS): giống EFT nhưng dùng lệnh, đặt lệnh ngày bn sẽ trả lương, trả điện tự động
Society for Worldwide Interbank Financial Telecommunication (SWIFT)
Payment gateways
Digital commerce platforms
General clearing
2.3 Bank/customer relationship
Financial market (money market; capital market)
Money market: Short-term --> investing
Treasury bills (tín phiếu kho bạc)
Deposits
Certificate of deposits (CDs)
Gilts
Capital market (long-term financing) - primary market/secondary market
National stock market
Banking system
Bond market
Leasing
Debt factoring
Source of finance
Source of equity finance
Retained earnigs: most important
Right issue
NOTE: Factors to be considered when making right issue
New share to public
Placing
Public offer
Source of debt financing
Overdraft
