Chapter 19: Recognizing the Basics of Financial Management Flashcards
consists of all activities related to generating and raising money and using it effectively
financial management
must ensure that funds are available when needed, that they are obtained at the lowest possible cost, and that they are used efficiently
financial manager
profits of the company that are distributed to the shareholders
dividends
- money that is typically used to fund projects that are long-term in nature (more than 1 year)
- can seem “unreal”
long-term financing
money raised that will have to be repaid within 1 year
short-term financing
the movement of money into and out of an organization
cash flow
a short-term financing source where a company takes delivery of goods but pays for them at a later time
trade credit
even profitable companies can experience short-term cash shortages due to
- negative cash flow cycle
2. seasonality of revenues
a plan for obtaining and using the money needed to implement an organization’s strategic and operational plans
financial plan
a budget of expected revenue and expenses from ongoing operations
operating budget
a budget of expected investments in new assets (factories, equipment, etc.)
capital budget
is essentially a projected income statement
operating budget
used to create a projected balance sheet
capital budget
a business can raise external funds by:
- borrowing money
2. selling a portion of the company to investors
an estimate of cash receipts and expenditures over a specified time period
cash budget
2 basic funding options
- debt financing
2. equity financing
5 key factors impacting the financing choice
amount, term, cost, influence on company operations and external forces
- financing of all sizes
- both short and long term
- depends on interest rate. The higher the interest rate, the higher the debt servicing cost
- debt must be repaid
- economic conditions affect the level of interest rates and availability
Dept financing
- usually for raising larger amounts
- long term
- management can elect how to distribute profits
- does not need to be repaid
- economic conditions can affect the availability
equity financing
potential investors would want to know at a minimum
net worth and earnings
pledge of specific assets by the borrower to the lender that becomes the lender’s if the borrower defaults on the repayment of the loan
collateral
short-term loans from a bank or financing company that are not secured by collateral
unsecured loans
a flexible borrowing option between a financial institution and its customers that allow customers to access funds at any time
line of credit
short-term loans from a bank that are secured by collateral
secured loans
short-term financing options all fall under the category of
debt financing
short-term financing is usually easier to obtain than long-term financing for 3 reasons:
- shorter repayment period = less risk of default
- the $ amounts are usually lower
- a close working relationship exists between short-term borrower and lender
a company seeking short-term financing has 3 common options
trade credit, unsecured loans or secured loans
3 primary forms of long-term financing are
long-term loans, corporate bonds, and shares
a loan made by a bank or other financial institutions that must be repaid with interest
long-term loan
long-term debt obligations issued by corporations that promise to make payments over a specified period
corporate loans
a form of ownership in a company that can be sold to investors as a type of long-term financing
company stock (shares)
shares are sold directly to large institutional investors
private placement
where organizations raise large pool of money for private investors, and invest in companies that have the potential to become large/sucesful
venture capital
a corporation’s first sale of common shares to the general public
initial public offering (IPO)
an organization that assists corporations in raising funds
investment banker
