FIN111 Lecture Notes - Lecture 1: Corporations Act 2001, Information Asymmetry, Inventory Optimization
Week 1 – Introduction
Understanding finance, money and markets
• Money is simply a means of exchanging value between parties
• Markets are required to facilitate buyers and sellers interacting, agreeing on the
terms of a transaction and executing that transaction
• Finance is a broad term that is widely used in society. Refers to both the study of
how money is managed and the process of acquiring money
• Finance in society:
- The importance of finance in society is driven by the economic principle of
scarcity → there is only so much money available in the economy
- Scarcity means as individuals, businesses and governments need to use money
wisely and make decisions carefully in relation to the future acquisition and use
of money
- A key task of the financial system is to ensure this scarce resource is used
effectively
The financial system is complex, due to:
- Regulation changes
- Technological advancement is a major component → online banking, paying with
mobiles or smart watches, robot advice
- Ageing population is another issue → more retirees and fewer workers. Life
expectancy is increasing, placing further emphasis on industries like health
services, aged care and the superannuation sector
- Financial illiteracy → the combination of knowledge and behaviour that
udepis effetie fiaial deisio akig. Too a people aet euipped
in one or both of these areas. These people dot ko ho to popel aage
their money and will easily get scammed
- The financial system:
o evolves over time as the economy develops, regulation changes,
technology advances and other factors.
o is complex
• Importance of finance at different levels
- Governments → influence the fiscal position of the nation and the ability of the
government to provide services, thus influence our living standards
- Businesses → heavily influences profitability and long-term sustainability of the
enterprise
- Individuals → ability to make effective financial decisions and accumulate wealth
over the long term
• Finance in business:
- Finance is a key factor in the success of any business
- Businesses need finance to start up, operate and expand
- The size of a business and the nature of its ownership determine the finance
options available.
find more resources at oneclass.com
find more resources at oneclass.com
Business structures and finance ***tip for final exam***
• The owners of a business usually choose the structure that will help management to
maximize the value of the business entity
• Important considerations are:
- Size
- Taxation
- legal liability
- ability to raise cash for finance
Sole traders:
• Owned by one person, typically consisting of the trader and a handful of employees
• Advantages:
- Simplest type of business to start
- Least regulated
- Keep all the profits from the business
- Do not have to shae deisio‐akig authoit
- Business losses can be written off against the sole tades tax from other
employment under certain circumstances
• Disadvantages:
- Unlimited liability for all the business's debts and other obligations → creditors
can look beyond the assets of the business to the traders personal wealth for
payment
- The amount of equity capital that can be invested is limited to the oes
personal wealth, restricting the possibility for growth
- Difficult to transfer ownership of a sole trader because there are no shares or
other interests to sell
Partnerships:
• Two or more owners legally managing a business, larger than sole trader
• A formal partnership agreement is recommended → roles and authority of each
partner, how much capital they contribute, how decisions will be made, how the
profits are to be divided, who has limited liability, how the partnership will be closed
down and assets distributed, how disputes will be dealt with
• Advantages:
- Have access to more capital
- Pooling of knowledge, experience and skills
• Disadvantages
- Possible disputes can occur over profit sharing, administration and business
development
- Both partners liable for business debts and liabilities incurred by other partners
• Problem of unlimited liability can be avoided in a limited partnership → general and
limited partners → one or more general partners have unlimited liability and
manage the business while the limited partners are liable for business obligations
only up to the amount of capital they have invested
• Limited partners cannot be engaged in managing the business
Sole trader and partnership both have no separation of ownership & management
find more resources at oneclass.com
find more resources at oneclass.com
Companies:
• An independent legal entity able to do business in its own right → a peso distit
from its owners
• The owners of a company are its shareholders
• Those starting a company must set out a memorandum that details its powers and
articles of association to describe who can use these powers
• All companies registered with and regulated by ASIC
• Advantages:
- Shareholders have limited liability
- Professional managerial skills as they have separation of ownership and
management
- Access to public funds
• Disadvantages:
- Costlier that starting as a sole trader or partnership
- High compliance costs
- Stricter record keeping requirements
- Compliance of regulations and standards
- Directors and employees can be found personally liable (Corporations Act 2001)
→ fraud, negligent, reckless acts
• Public companies can list on the stock exchange (ASX) to attract investors
• Private companies owned by a small number of key managers and shareholders
• A piate opa a go puli oe it gos ad eeds oe apital
The financial goals of a business
• For business owners, it is important to determine the appropriate goal for financial
management decisions
What should management maximise?
• Depending on preferences and tolerance for risk, any goals can be set for the
business
• Fear of insolvency → focus on keeping costs as low as possible, pay low wages, avoid
borrowing, advertise minimally. HOWEVER, the profit will be low
• I.e. important to find balance
Why not maximize profits?
• Goal fo fiaial deisio‐akig is profit maximisation, BUT has serious drawbacks
• Potential problems:
- Had to defie pofit
- Doest consider the timing of cash flows
o The time value of money is one of the most important concepts in finance
- Ignores the uncertainty of cash flows
Summary: profit maximisation is not an appropriate goal because the concept is difficult to
defie ad it doest dietl aout fo the opas ash flos.
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Refers to both the study of how money is managed and the process of acquiring money: finance in society: The importance of finance in society is driven by the economic principle of scarcity there is only so much money available in the economy. Scarcity means as individuals, businesses and governments need to use money wisely and make decisions carefully in relation to the future acquisition and use of money. A key task of the financial system is to ensure this scarce resource is used effectively. Technological advancement is a major component online banking, paying with mobiles or smart watches, robot advice. Ageing population is another issue more retirees and fewer workers. Life expectancy is increasing, placing further emphasis on industries like health services, aged care and the superannuation sector. Financial illiteracy the combination of knowledge and behaviour that u(cid:374)de(cid:396)pi(cid:374)s effe(cid:272)ti(cid:448)e fi(cid:374)a(cid:374)(cid:272)ial de(cid:272)isio(cid:374) (cid:373)aki(cid:374)g. too (cid:373)a(cid:374)(cid:455) people a(cid:396)e(cid:374)(cid:859)t e(cid:395)uipped in one or both of these areas.
