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BU121 > Finance > Flashcards

Finance Flashcards

1
Q

What is financial management?

A

All activities related to generating and raising money, and using it effectively

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2
Q

What do financial managers and staff need to do?

A

Understand company plans
Convert plans into financial projections/plans
Calculate short-term or long-term financing needs
Balance risk and return

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3
Q

Why do companies need financing?

A

Cover costs of daily operations with incoming cash from revenue

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4
Q

Why might short-term financing be needed vs long-term financing?

A

Negative cash flow cycle due to trade credit or seasonality

Long term is needed for long-term investments

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5
Q

What are the characteristics of a financial plan?

A

Specific and measurable

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6
Q

What are the three types of budgets in a financial plan?

A

Operating (projected income statement), capital (projected balance sheet), and cash

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7
Q

What should be considered when selecting financing options?

A

Overarching goal is to provide necessary funds at lowest cost while meeting strategic needs of business

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8
Q

How does purpose impact financing options?

A

Cost is no longer only financial

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9
Q

What should be considered when selecting financing options?

A

Amount, term, cost, impact on operations, external factors

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10
Q

True or false: costs of financing for startups are lower

A

False, they are higher

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11
Q

What are financing impacts to consider on company operations?

A

Collateral and decision making

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12
Q

What is the difference between amount of funding for debt and equity?

A

Debt is all sizes of financing

Equity is larger amounts only

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13
Q

What is the difference between the term length for debt and equity?

A

Debt is short and long term

Equity is long term

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14
Q

What is the difference between cost of financing operations for debt and equity?

A

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

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15
Q

True or false: dividends are not deductible

A

True

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16
Q

What is the influence of debt on company operations?

A

Interest and principle must be paid, some debt requires collateral, lenders have priority claim on assets
Managers don’t lose control

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17
Q

What is the influence of equity on company operations?

A

Does not have to be repaid, shareholders have voting rights and majority shareholders can exert pressure on decision making

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18
Q

What are external factors to consider between debt and equity?

A

Debt - interest rates, availability of debt financing, ability to repay interest

Equity - availability, and conditions for share price

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19
Q

What are the 5 types of short-term financing?

A 
Seed financing
Crowdfunding
Trade credit
Unsecured loan
Secured loan
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20
Q

What is seed financing?

A

Loans or equity from family/friends or angel investors

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21
Q

What is an angel investor?

A

an individual who usually has generated own wealth through owning businesses, and invests in other businesses

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22
Q

What are the benefits of seed financing?

A 
Low/no interest
No collateral
Less formal/contractual
Flexible terms usually
Less expensive to set up
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23
Q

What are the drawbacks of seed financing?

A

Lower amounts usually
Family/friends - strings attached
May give up some ownership

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24
Q

What is crowdfunding?

A

Use of small amounts of capital from a large number of individuals

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25
Q

What are the benefits of crowdfunding?

A 
Interest free
No collateral
May be informal/less contractual
Relatively inexpensive
Provides access to larger, more diverse investors
May help drive sales
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26
Q

What are the drawbacks of crowdfunding?W

A

Must follow rules/fees of platform
May have to return funding
May harm reputation if not meeting goals

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27
Q

What is trade credit?

A

When a company takes delivery of goods but pays later

28
Q

What are the benefits of trade credit?

A 
Interest free
No collateral
No contract or loan agreement
Inexpensive to set up
Discount for paying early
Opportunity to earn strong reputation
29
Q

What are the drawbacks of trade credit?

A

May take time to get good terms

Penalties for late payments

30
Q

What is an unsecured loan?

A

Short-term loan from a bank of financing company that are not secured by collateral

31
Q

What are the benefits of unsecured loans?

A

No collateral, interest rates based on credit, flexibility, inexpensive to set up

32
Q

What are the drawbacks of unsecured loans?

A

Subject to interest rate fluctuations
Penalties for late payments
Limited amounts

33
Q

What are secured loans?

A

Short term loans from banks or financing companies secured by collateral

34
Q

What are the benefits of secured loans?

A

Opportunity for companies with less credit history or weaker to access funds
Inexpensive to set up

35
Q

What are the drawbacks of secured loans?

A

Subject to interest rates
May require personal guarantee
Penalties for late payment

36
Q

What are some extra considerations for startup financing?

A

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

37
Q

What are future trends for financing managers?

A

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

38
Q

What is important to consider in sales forecasting?

A

Use past performance plus internal/external data to predict the future
Identify potential issues and make adjustments

39
Q

Sales forecasting provides information for which decisions?

A

Procurement & operations scheduling
Hiring
Promotion and pricing

40
Q

What is TAM?

A

Total available market = total market size if you could sell globally without competition or internal capacity limits

41
Q

What is SAM?

A

Serviceable available market = market that fits within geographical reach (household or individual), type of client, purchase frequency

42
Q

What is SOM?

A

Serviceable obtainable market = share of selected SAM that can be realistically obtained in the short term

43
Q

Why can’t you just proceed with TAM?

A

It represents what you could sell, not what you can sell, because it is too optimistic

44
Q

What is the bottom-up sales forecast good for determining?,

A

Operations capacity, marketing capacity, human resources capacity

45
Q

What does the bottom up forecast show?

A

What is feasible

46
Q

What should you compare bottom up and top down sales forecasts to?

A

Competitors sales/market share
Break-even point
Sales figures of recently launched businesses

47
Q

For years 1 and 2, what forecast should you use?

A

Bottom-up

48
Q

For year 3+ what sales forecast should you use?

A

Top-down

49
Q

What does a cash budget use?

A

information from operating and capital budgets, sales forecasts, plus other company info

50
Q

What is the cash budget used for?

A

estimate cash receipts and expenditures over a specified time period

51
Q

What company didn’t consider their cash budget enough?

A

Evergrande

52
Q

What is the format to build a cash budget?

A 
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
53
Q

What is the format of the cash worksheet?

A 
Net sales
Collections
Total receipts
Net purchases
Payments
Total disbursements for purchases
54
Q

What info is needed to determine cost breakeven?

A

Revenue
Cash fixed costs
Cash variable costs

55
Q

What are fixed costs?

A

Costs incurred regardless of volume of sales

Remain constant over a range of revenues for a specific period of time

56
Q

What are variable costs?

A

Costs of producing or purchasing and selling one product, fluctuating with each unit
Often referred to as COGS (cost of goods sold)

57
Q

What cost is constant as % of sales revenue?

A

Variable costs

58
Q

What cost has a constant $ amount and varies as % of revenue?

A

Fixed costs

59
Q

What is included in variable costs?

A

Manufacturing i.e. raw materials, running machinery, production labour per unit
Retailer/distributor i.e. inventory purchase costs, sales commissions, packaging materials

60
Q

What is contribution?

A

If you sell a pair of shoes for 80, and COGS was 30, contribution is 50 to pay fixed costs

61
Q

What is the calculation to determine break even?

A

x = CFC / Contribution

62
Q

What is the calculation to determine CFC?

A

(Price - VC)x = CFC
or
Contribution(x) = CFC

63
Q

How do you determine contribution percentage?

A

COGS/Net sales

64
Q

How do you determine contribution in the breakeven calculation?

A

1 - contribution percentage

65
Q

Should startups lower fixed costs or variable costs?

A

Fixed costs or variable costs

66
Q

Should existing companies lower fixed costs or variable costs?

A

Variable costs

BU121 (7 decks)

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