CH11- Finance Flashcards
What is finance>
The management, creation and study of money, credit, banking, investment that make up the financial system
(Create value for shareholders)
4 types of ways to evaluate performance
Liquidity ratios
Assets management ratios
Leverage ratios
Profitability ratios
Liquidity ratio
how quickly are you able to pay off debt, converting asset into cash/ how strong are ur asset in relationship of your debt
Type of liquidity ratio
Current ratio
Current ratio and it’s formula
within a year, the larger the ratio the better (most companies like a 2:1 ratio). However it depends of the industry
Current assets/current liability
Asset management ratios
how well a firm uses their assets to generate revenues, it focus on efficiency (you can tell how efficient a business is)
Types of management ratios
Inventory turnover ratio
Inventory turnover ratio
relates to inventory, needs a tangible good (not services). We look how quickly a product is sol and replaced in a year
Cost of good sold/average inventory
Leverage ratio
How much capital comes in form of debt
Types of financial leverage
Debt to equity ratio
Debt ratio
Debt to equity ratio and formula
smaller number less risk, more people will want to invest in it
Total debt/ shareholder equity
Debt ratio
Total debt/ total asset
Profitability ratios
rate of return on an investment
Types of profitability ratio
Return on equity
Return on equity and formula
how efficiently a company manage the shareholders money (mostly look at common shares)
Net income/ shareholder equity
Financial planning
establish goals for a business or an individual in a financial stand point
2types of budgeted financial statement + cash budget
Budgeted income statement
Budgeted balance sheet
Cash budget
Budget income statement
Forecasts net income using sales and cost information (anticipate what will happen)
Budgeted balance sheet
Forecasts assets a firm will need for future plans
Cash budget
Timing of cash flow (cash crunches)
Types of managing current assets
Cash
Accounts receivable
Managing inventory
Managing current assets: CASH
- cash equivalent (commercial paper, treasury bills, mutual funds)
Allows cash to grow, very liquid
Managing current assets : ACCOUNT RECEIVABLE
Settling credit terms, establishing credit standards, deciding on collection
Not everyone pays right away their goods purchased (monthly payments), money owed from credit sale
Managing current assets; MANAGING INVENTORY
Industry that produce goods that are ready to be sold.
Inventory=value
Need managing so there isn’t a surplus or shortage (cost money)
Commercial paper
small loans (IOU) or a treasure bill from the gouvernment (IOU)
Mutual funds
lower risk investments, pull funds from people to make money grow.
Crédit terms
how long is your credit for? Should there be cash discounts (10% off if you pay in 30 days and not 60 —> less risky for business and allows them to invest faster)
Crédit standard
who are you going to issue your credit to. What credit does a business have to be eligible to your credit plan.
Types of short term financing
Spontaneous financing
Shot term bank loans
Factoring
Commercial paper
Short term financing
Funds that can be used to fund a business
Spontaneous financing (+ what does it include)
funds from business activity (from operating for day to day business).
+ trade credit
Trade credit
(important when credit is used). Supply product are delivered when you dont need to pay right away.
Shot term bank loans (what is included)
Line of credit
Revolving credit agreement
Line of credit
bank issues a pre approved amount of money that is accessible for you very quickly.
Revolving credit agreement
bank makes a formal legal binding agreement for a set amount of money
Factoring
we don’t want to have too many sales with credit because we want to have cash in hand. Business sales off their account receivable to a factoring business to obtain cash. The factoring business pays less than the amount of money in the account.
Commercial paper
you can issue out commercial papers.
Capital budgeting (long term)
Way of evaluating long term investment proposals and its liability
Why it matters: poor choices lead to long term consequences
Types: present value of cash flows
Time value of money
Net present value
Présent value of cash flows
comparing cash flow at different points in time
Time value of money
outlines that money received today is more valuable than any money received in the future
Net present values (NPV )
present value of all expected future cash flow. Looks at investment cost vs what we will be going from that investment
What are the sources of long-term capital
Debt and equity
LT capital: debt
- repayment takes priority over owner’s earnings
- fixed payements
- collateral requirement
- Tax deductible interest
- does not require addition shareholder investment
- covenants: restrictions on loans to protect lenders
LT capital: equity
Two sources: retained earnings and new stocks
Less risky and flexible
Fewer tax benefits
Financial leverage
