Financial Management Study
Notes & Definitions – Sources of
Finance, Profit, Liquidity, Solvency
& Revenue Explained
Financial management - CORRECT ANSWER -This refers to the planning and
monitoring of a business's financial resources to enable the business to achieve its
financial objectives."
"Financial resources - CORRECT ANSWER -Resources in a business that have a
monetary or money value."
"Strategic role of financial management - CORRECT ANSWER -This refers to the
role finance managers have in making funds available for business activities and
ensuring that day-to-day transactions and operations run smoothly from a financial
perspective."
"Financial management objectives - CORRECT ANSWER -Financial management
has the short-term goals of ensuring that a business is sufficiently liquid and solvent,
while also aiming to boost long-term profitability, growth and efficiency."
"Conflict between short-term and long-term objectives - CORRECT ANSWER -This
refers to the conflicts between these objectives. Improving one financial objective
makes other financial objectives worse. For example, maintaining higher levels of
liquidity means sacrificing potential opportunities for growth and profitability."
"Efficiency - CORRECT ANSWER -This financial objective is the ability of a business
to minimise its costs and manage its assets so that maximum profit is achieved with
the lowest possible level of assets."
"Liquidity - CORRECT ANSWER -This financial objective is the extent to which a
business can meet its financial commitments in the short-term (less than 12 months).
A business must have sufficient cash flow to meet its financial obligations or be able
to convert current assets into cash quickly; for example, by selling inventory, to
finance current liabilities."
,"Profitability - CORRECT ANSWER -This financial objective is the ability of a
business to maximise its profits. It is determined by the level of revenues less total
costs. Increasing profitability involves either increasing revenues and/or reducing
costs."
"Solvency - CORRECT ANSWER -This financial objective is the extent to which the
business can meet its financial commitments in the longer term (more than 12
months). Solvency is particularly important to the owners, shareholders and creditors
of a business because it is an indication of the risks to their investment."
"Growth - CORRECT ANSWER -This financial objective is the ability of the business
to increase its size in the longer term and depends on its ability to develop and use
its asset structure to increase sales, profits and market share. It can expand by
acquiring more resources, merging with another business and acquiring another
business."
"Gearing - CORRECT ANSWER -This is related to the financial objective of solvency
and 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 firm's solvency."
"Revenue - CORRECT ANSWER -Quantity of goods sold multiplied by the selling
price.
TR = P x Q"
"Profit - CORRECT ANSWER -Total Revenue - Total Costs"
"Interdependence - CORRECT ANSWER -Refers to the mutual dependence that the
key functions have on one another. They key functions work best when they overlap
and employees work towards common goals. Each function area depends on the
support of the others if it is to perform at capacity."
"Influences on financial management - CORRECT ANSWER -This is the part of the
syllabus that focuses on the decisions that financial management must make that
are affected by a range of different factors, including the nature and availability of
different sources of finance, government decisions, and global market conditions."
"Sources of finance - CORRECT ANSWER -This refers to the different ways that
businesses can obtain money to perform business activities such as paying suppliers
and buying equipment. They can be classified as internal sources (eg retained
profits) and external sources (eg debt and equity)."
"Internal sources of finance - CORRECT ANSWER -This is a source of finance that
comes from within the business itself and do not require the business to turn to
, outside individuals or institutions. It can come from either the business's owners
(equity or capital) or from the outcomes of business activities (retained profits)."
"Owners' equity - CORRECT ANSWER -This is an internal source of finance and are
the funds contributed by owners or partners to establish and build the business."
"Retained profits (retained earnings) - CORRECT ANSWER -This is the most
common source of internal finance and are the funds that come from the profits of
the business that are not distributed, but are kept in the business as a cheap and
accessible source of finance for future activities."
"External sources of finance - CORRECT ANSWER -These are the funds provided
by sources outside the business, including banks, other financial institutions,
government, suppliers or financial intermediaries."
"Debt finance - CORRECT ANSWER -These are sources of finance that relate to the
short-term and long-term borrowing from external sources by a business."
"Debt finance (short term borrowing) - CORRECT ANSWER -This refers to the
external sources of finance that a business is expected to repay within one year. It is
provided by financial institutions through overdrafts, commercial bills and bank loans.
This type of borrowing is used to finance temporary shortages in cash flow or finance
for working capital."
"Overdraft - CORRECT ANSWER -This is a form of short term borrowing where 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 - CORRECT ANSWER -This is a form of short term borrowing that
are primarily short-term loans issued by financial institutions, for larger amounts
(usually over $100 000) for a period of generally between 30 to 180 days."
"Factoring (source of finance) - CORRECT ANSWER -This is a short-term source of
borrowing for a business that enables a business to raise funds immediately by
selling accounts receivable at a discount to a firm that specialises in collecting
accounts receivable. This is an important source of short-term finance because the
business will receive up to 90 per cent of the amount of receivables within 48 hours
of submitting its invoices to the company that has bought the accounts receivables."
"Debt finance (long term borrowing) - CORRECT ANSWER -This refers to the
external sources of finance a business has borrowed for periods longer than 12
months. It can be secured or unsecured, and interest rates are usually variable. It is
used to finance real estate, plant (factory/office) and equipment. Types includes
mortgages and debentures."
Notes & Definitions – Sources of
Finance, Profit, Liquidity, Solvency
& Revenue Explained
Financial management - CORRECT ANSWER -This refers to the planning and
monitoring of a business's financial resources to enable the business to achieve its
financial objectives."
"Financial resources - CORRECT ANSWER -Resources in a business that have a
monetary or money value."
"Strategic role of financial management - CORRECT ANSWER -This refers to the
role finance managers have in making funds available for business activities and
ensuring that day-to-day transactions and operations run smoothly from a financial
perspective."
"Financial management objectives - CORRECT ANSWER -Financial management
has the short-term goals of ensuring that a business is sufficiently liquid and solvent,
while also aiming to boost long-term profitability, growth and efficiency."
"Conflict between short-term and long-term objectives - CORRECT ANSWER -This
refers to the conflicts between these objectives. Improving one financial objective
makes other financial objectives worse. For example, maintaining higher levels of
liquidity means sacrificing potential opportunities for growth and profitability."
"Efficiency - CORRECT ANSWER -This financial objective is the ability of a business
to minimise its costs and manage its assets so that maximum profit is achieved with
the lowest possible level of assets."
"Liquidity - CORRECT ANSWER -This financial objective is the extent to which a
business can meet its financial commitments in the short-term (less than 12 months).
A business must have sufficient cash flow to meet its financial obligations or be able
to convert current assets into cash quickly; for example, by selling inventory, to
finance current liabilities."
,"Profitability - CORRECT ANSWER -This financial objective is the ability of a
business to maximise its profits. It is determined by the level of revenues less total
costs. Increasing profitability involves either increasing revenues and/or reducing
costs."
"Solvency - CORRECT ANSWER -This financial objective is the extent to which the
business can meet its financial commitments in the longer term (more than 12
months). Solvency is particularly important to the owners, shareholders and creditors
of a business because it is an indication of the risks to their investment."
"Growth - CORRECT ANSWER -This financial objective is the ability of the business
to increase its size in the longer term and depends on its ability to develop and use
its asset structure to increase sales, profits and market share. It can expand by
acquiring more resources, merging with another business and acquiring another
business."
"Gearing - CORRECT ANSWER -This is related to the financial objective of solvency
and 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 firm's solvency."
"Revenue - CORRECT ANSWER -Quantity of goods sold multiplied by the selling
price.
TR = P x Q"
"Profit - CORRECT ANSWER -Total Revenue - Total Costs"
"Interdependence - CORRECT ANSWER -Refers to the mutual dependence that the
key functions have on one another. They key functions work best when they overlap
and employees work towards common goals. Each function area depends on the
support of the others if it is to perform at capacity."
"Influences on financial management - CORRECT ANSWER -This is the part of the
syllabus that focuses on the decisions that financial management must make that
are affected by a range of different factors, including the nature and availability of
different sources of finance, government decisions, and global market conditions."
"Sources of finance - CORRECT ANSWER -This refers to the different ways that
businesses can obtain money to perform business activities such as paying suppliers
and buying equipment. They can be classified as internal sources (eg retained
profits) and external sources (eg debt and equity)."
"Internal sources of finance - CORRECT ANSWER -This is a source of finance that
comes from within the business itself and do not require the business to turn to
, outside individuals or institutions. It can come from either the business's owners
(equity or capital) or from the outcomes of business activities (retained profits)."
"Owners' equity - CORRECT ANSWER -This is an internal source of finance and are
the funds contributed by owners or partners to establish and build the business."
"Retained profits (retained earnings) - CORRECT ANSWER -This is the most
common source of internal finance and are the funds that come from the profits of
the business that are not distributed, but are kept in the business as a cheap and
accessible source of finance for future activities."
"External sources of finance - CORRECT ANSWER -These are the funds provided
by sources outside the business, including banks, other financial institutions,
government, suppliers or financial intermediaries."
"Debt finance - CORRECT ANSWER -These are sources of finance that relate to the
short-term and long-term borrowing from external sources by a business."
"Debt finance (short term borrowing) - CORRECT ANSWER -This refers to the
external sources of finance that a business is expected to repay within one year. It is
provided by financial institutions through overdrafts, commercial bills and bank loans.
This type of borrowing is used to finance temporary shortages in cash flow or finance
for working capital."
"Overdraft - CORRECT ANSWER -This is a form of short term borrowing where 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 - CORRECT ANSWER -This is a form of short term borrowing that
are primarily short-term loans issued by financial institutions, for larger amounts
(usually over $100 000) for a period of generally between 30 to 180 days."
"Factoring (source of finance) - CORRECT ANSWER -This is a short-term source of
borrowing for a business that enables a business to raise funds immediately by
selling accounts receivable at a discount to a firm that specialises in collecting
accounts receivable. This is an important source of short-term finance because the
business will receive up to 90 per cent of the amount of receivables within 48 hours
of submitting its invoices to the company that has bought the accounts receivables."
"Debt finance (long term borrowing) - CORRECT ANSWER -This refers to the
external sources of finance a business has borrowed for periods longer than 12
months. It can be secured or unsecured, and interest rates are usually variable. It is
used to finance real estate, plant (factory/office) and equipment. Types includes
mortgages and debentures."
