Finance Flashcards
What is financial management?
All activities related to generating and raising money, and using it effectively
What do financial managers and staff need to do?
Understand company plans
Convert plans into financial projections/plans
Calculate short-term or long-term financing needs
Balance risk and return
Why do companies need financing?
Cover costs of daily operations with incoming cash from revenue
Why might short-term financing be needed vs long-term financing?
Negative cash flow cycle due to trade credit or seasonality
Long term is needed for long-term investments
What are the characteristics of a financial plan?
Specific and measurable
What are the three types of budgets in a financial plan?
Operating (projected income statement), capital (projected balance sheet), and cash
What should be considered when selecting financing options?
Overarching goal is to provide necessary funds at lowest cost while meeting strategic needs of business
How does purpose impact financing options?
Cost is no longer only financial
What should be considered when selecting financing options?
Amount, term, cost, impact on operations, external factors
True or false: costs of financing for startups are lower
False, they are higher
What are financing impacts to consider on company operations?
Collateral and decision making
What is the difference between amount of funding for debt and equity?
Debt is all sizes of financing
Equity is larger amounts only
What is the difference between the term length for debt and equity?
Debt is short and long term
Equity is long term
What is the difference between cost of financing operations for debt and equity?
Debt depends on interest rates, interest can be deducted from profits to lower taxes
Equity can be distributed through dividends or reinvested; large one time legal and admin fees
True or false: dividends are not deductible
True
What is the influence of debt on company operations?
Interest and principle must be paid, some debt requires collateral, lenders have priority claim on assets
Managers don’t lose control
What is the influence of equity on company operations?
Does not have to be repaid, shareholders have voting rights and majority shareholders can exert pressure on decision making
What are external factors to consider between debt and equity?
Debt - interest rates, availability of debt financing, ability to repay interest
Equity - availability, and conditions for share price
What are the 5 types of short-term financing?
Seed financing Crowdfunding Trade credit Unsecured loan Secured loan
What is seed financing?
Loans or equity from family/friends or angel investors
What is an angel investor?
an individual who usually has generated own wealth through owning businesses, and invests in other businesses
What are the benefits of seed financing?
Low/no interest No collateral Less formal/contractual Flexible terms usually Less expensive to set up
What are the drawbacks of seed financing?
Lower amounts usually
Family/friends - strings attached
May give up some ownership
What is crowdfunding?
Use of small amounts of capital from a large number of individuals
What are the benefits of crowdfunding?
Interest free No collateral May be informal/less contractual Relatively inexpensive Provides access to larger, more diverse investors May help drive sales
What are the drawbacks of crowdfunding?W
Must follow rules/fees of platform
May have to return funding
May harm reputation if not meeting goals
What is trade credit?
When a company takes delivery of goods but pays later
What are the benefits of trade credit?
Interest free No collateral No contract or loan agreement Inexpensive to set up Discount for paying early Opportunity to earn strong reputation
What are the drawbacks of trade credit?
May take time to get good terms
Penalties for late payments
What is an unsecured loan?
Short-term loan from a bank of financing company that are not secured by collateral
What are the benefits of unsecured loans?
No collateral, interest rates based on credit, flexibility, inexpensive to set up
What are the drawbacks of unsecured loans?
Subject to interest rate fluctuations
Penalties for late payments
Limited amounts
What are secured loans?
Short term loans from banks or financing companies secured by collateral
What are the benefits of secured loans?
Opportunity for companies with less credit history or weaker to access funds
Inexpensive to set up
What are the drawbacks of secured loans?
Subject to interest rates
May require personal guarantee
Penalties for late payment
What are some extra considerations for startup financing?
Angel investors bring much more than money - also bring advice, connections, and expertise
Startups are hard to value
Intangibles matter
Startup needs to demonstrate desirability, viability, and feasibility
What are future trends for financing managers?
Pandemic pushed focus to crisis management
Increasing use of digital tech increasing focus on investor relations = greater communication with CEO
Reinforces need for strong communication
What is important to consider in sales forecasting?
Use past performance plus internal/external data to predict the future
Identify potential issues and make adjustments
Sales forecasting provides information for which decisions?
Procurement & operations scheduling
Hiring
Promotion and pricing
What is TAM?
Total available market = total market size if you could sell globally without competition or internal capacity limits
What is SAM?
Serviceable available market = market that fits within geographical reach (household or individual), type of client, purchase frequency
What is SOM?
Serviceable obtainable market = share of selected SAM that can be realistically obtained in the short term
Why can’t you just proceed with TAM?
It represents what you could sell, not what you can sell, because it is too optimistic
What is the bottom-up sales forecast good for determining?,
Operations capacity, marketing capacity, human resources capacity
What does the bottom up forecast show?
What is feasible
What should you compare bottom up and top down sales forecasts to?
Competitors sales/market share
Break-even point
Sales figures of recently launched businesses
For years 1 and 2, what forecast should you use?
Bottom-up
For year 3+ what sales forecast should you use?
Top-down
What does a cash budget use?
information from operating and capital budgets, sales forecasts, plus other company info
What is the cash budget used for?
estimate cash receipts and expenditures over a specified time period
What company didn’t consider their cash budget enough?
Evergrande
What is the format to build a cash budget?
Beginning cash balance Add: receipts Total cash available Less: purchase disbursements Total disbursements Cash excess/deficiency Min. cash balance desired Financing required Surplus cash Financing repaid Ending cash balance
What is the format of the cash worksheet?
Net sales Collections Total receipts Net purchases Payments Total disbursements for purchases
What info is needed to determine cost breakeven?
Revenue
Cash fixed costs
Cash variable costs
What are fixed costs?
Costs incurred regardless of volume of sales
Remain constant over a range of revenues for a specific period of time
What are variable costs?
Costs of producing or purchasing and selling one product, fluctuating with each unit
Often referred to as COGS (cost of goods sold)
What cost is constant as % of sales revenue?
Variable costs
What cost has a constant $ amount and varies as % of revenue?
Fixed costs
What is included in variable costs?
Manufacturing i.e. raw materials, running machinery, production labour per unit
Retailer/distributor i.e. inventory purchase costs, sales commissions, packaging materials
What is contribution?
If you sell a pair of shoes for 80, and COGS was 30, contribution is 50 to pay fixed costs
What is the calculation to determine break even?
x = CFC / Contribution
What is the calculation to determine CFC?
(Price - VC)x = CFC
or
Contribution(x) = CFC
How do you determine contribution percentage?
COGS/Net sales
How do you determine contribution in the breakeven calculation?
1 - contribution percentage
Should startups lower fixed costs or variable costs?
Fixed costs or variable costs
Should existing companies lower fixed costs or variable costs?
Variable costs
