Influences on financial management: internal and external sources of finance, financial institutions, government and global markets (HSC Business Studies)

What this dot point is asking

In the syllabus these points sit under influences on financial management: internal and external sources of finance, financial institutions, the influence of government (ASIC, company taxation) and global market influences (economic outlook, availability of funds, interest rates). Under processes, the syllabus adds debt and equity financing (advantages and disadvantages) and matching the terms and source of finance to business purpose, both covered here. A "students learn to" point asks you to "analyse the influence of government and the global market on financial management".

Internal source: retained profits

Retained profits are the profits kept in the business after tax and dividends. They are the cheapest and most convenient source: no interest, no repayments, no loss of control and no issue costs. Their limits are that they depend on past profitability, may be too small for major projects, and retaining profit means lower dividends for shareholders.

External sources: debt

Debt finance is borrowed from outside the business and must be repaid, with interest, by an agreed time.

Short-term borrowing (repaid within 12 months)

• Overdraft: permission from a bank to withdraw more than the account balance, up to a limit. Flexible; interest only on the amount used; suits temporary cash shortfalls. Interest rates are relatively high, and the bank can call it in.
• Commercial bills: short-term loans (commonly 90 to 180 days) for larger amounts, usually over $100,000. The borrower receives the money at a discount and repays the face value at maturity; often secured, and can be rolled over.
• Factoring: selling accounts receivable to a finance company (a factor) at a discount for immediate cash. It speeds up cash flow, and the factor may take over collection, but the business receives less than the full value of its debts (see cash flow and working capital).

Long-term borrowing (more than 12 months)

• Mortgage: a loan secured by a charge over property, repaid in regular instalments over a long period; used to buy land and buildings. Lower interest because of the security, but the lender can sell the property if repayments are not made.
• Debentures: fixed-interest loans raised from the public by a company, secured by a charge over the company's assets, for a fixed period, with the principal repaid at the end.
• Unsecured notes: loans from investors for a fixed period with no security; because investors carry more risk, the interest rate is higher.
• Leasing: a long-term agreement to use an asset (vehicles, equipment, property) in return for regular payments, without buying it. It frees cash for other uses and allows equipment to be upgraded, but total payments can exceed the purchase price.

External sources: equity

Equity finance is funds provided by the owners. For a company, it comes from issuing ordinary shares, which give the holder part-ownership, voting rights and a claim to dividends.

• New issues: a company sells shares for the first time, most visibly through an initial public offering (IPO) when it lists on a stock exchange such as the ASX. Issues require a disclosure document (prospectus) and are expensive to arrange.
• Rights issues: existing shareholders are offered the right to buy additional shares in proportion to their holdings, usually at a discount. Shareholders who take them up keep their percentage ownership.
• Placements: shares issued directly to selected institutional or sophisticated investors. Quick and cheaper than a public offer; under ASX Listing Rule 7.1 a listed company can generally issue up to 15 per cent of its capital in a 12-month period without shareholder approval.
• Share purchase plans (SPPs): offers allowing existing shareholders to buy a limited dollar amount of new shares at a set price, often alongside a placement so retail shareholders can participate.
• Private equity: funds from investment firms that buy stakes in private companies (or take listed companies private), usually aiming to improve the business and sell within several years.

Debt versus equity

Leverage. If a business earns a higher return on borrowed funds than the interest it pays, debt raises owners' returns; if returns fall below the interest rate, debt magnifies losses. That is why gearing that is safe in good times can be dangerous in a downturn or when interest rates rise.

Matching the terms and source of finance to business purpose

Funding long-term assets with short-term debt creates refinancing and liquidity risk; funding short-term needs with long-term debt means paying interest for longer than necessary.

Financial institutions

Influence of government

• Australian Securities and Investments Commission (ASIC): regulates companies, financial markets and financial services under the Corporations Act, including disclosure for share issues and prospectuses, financial reporting and directors' duties. Its rules shape how and at what cost companies raise capital (see ethical and legal aspects of finance).
• Company taxation: the company tax rate is 30 per cent, or 25 per cent for base rate entities (aggregated turnover under $50 million with no more than 80 per cent passive income). Tax reduces the profits available for retention and dividends, and interest being deductible makes debt relatively cheaper.
• Other policy: government grants, lending by bodies such as the National Reconstruction Fund Corporation, and the Reserve Bank's monetary policy (see below) all affect the availability and cost of funds.

Global market influences

• Economic outlook: when the global and domestic outlook is strong, businesses borrow and invest more and lenders and investors are more willing to supply funds; in a downturn, both become cautious.
• Availability of funds: global credit conditions determine how easily banks and companies can raise money. In a global financial shock, funding can dry up even for sound businesses, as many found during the 2008 global financial crisis.
• Interest rates: the cost of borrowing depends on the Reserve Bank's cash rate and on global rates, because Australian banks and large companies raise part of their funds overseas. The Reserve Bank raised the cash rate three times earlier in 2026 and held it at 4.35 per cent on 11 August 2026, which increases the cost of variable-rate business loans and overdrafts and makes equity and retained profits relatively more attractive.
• Exchange rates: businesses borrowing in foreign currencies face repayment costs that change with the Australian dollar, and may hedge (see global financial management).

How this dot point appears in the HSC

• Section I: classify a source (internal, short-term debt, long-term debt, equity) or identify a financial institution's role.
• Section II: distinguish two sources, discuss debt versus equity, or explain the influence of government or the global market (3 to 6 marks).
• Section III: recommend and justify sources of finance for a hypothetical expansion, matching each to its purpose.
• Section IV: evaluate financial management strategies, including financing decisions and the effect of interest rates.