Chapter 17: Financial Management Flashcards
Finance
The function in a business that acquires funds for the firm and manages them within the firm
Financial management
The job of managing a firms resources to meet its goal and objectives
Financial managers (not management)
Managers who examine the financial data by accountants and reccomend strategies for improving the financial performance of the firm
3 reasons why a firm fails financially
Undercapitalization (insufficient funds)
Poor control over cash flow
Inadequate expense control
Time value of money
A dollar in hand today is worth more than a dollar promised at some time in the future
Financial planning 3 steps
1) forecasting a firms short term and long term financial needs
2) developing a budget to meet those needs
3) establishing financial control to see weather the company is achieving its goal
Short term forecast
Forecast that predicts revenue, costs, and expense for a period of one year or less
Cash flow forecast
Forecast that predicts the cash inflow and outflows in future periods, usually months or quarters
Long term forecast
Forecast that predicts revenue, cost, and expenses for a period longer than one year
Budget
Financial plan that sets forth managements expectations, and, on the basis of those expectations, allocates the use of specific resources throughout the firm
Capital budget
A budget that forecasts a firms spending plans for major asset purchases that often require large sums of money, like property, buildings, and equipment
Cash budget
A budget that estimates a firms cash inflows and outflows during a particular period (month or quarter)
Operating (master) budget
The budget that ties together all of a firms other budgets and summarizes the business proposed finances activities
Financial control
Process in which a firm periodically compares its actually revenue, costs, and expenses with its projected ones
Capital expenditures
Major investments in either tangible or long term assets, such as land, buildings, and equipment or intangible assets such as patents and trademarks
Debt financing
Funds raised through various forms of borrowing that must be repaid
Equity financing
Money raised from within the firm, from operations or through the sale of ownership in the firm
Short term financing
Borrowed funds that are needed for one year or less
Long term financing
Borrowed funds that are need for more than a year
Trade credit
The practice of buying goods and services now and paying for them later
Promissory note
A written contract with a promise to pay
Secured loan
Loan backed by collateral
You don’t pay us back we take your house
Unsecured loan
Loan that does not require any collateral
Line of credit
A given amount of unsecured funds a bank will lend to a business
