Finance Flashcards
1
Q
Understand the activities related to financial management
A
- All activities related to generating and rasing money
- Finance managers and staff ensure the company has the financial resources it needs – make sure they have the right resources to meet the needs of the organization
- Understand the company plans
- Balance risk and return
2
Q
Understand the company plans
A
- business strategy, have to have the financial resources
- The strategy must align with the financial resources
- Convey plans into financial projections/ plans
- Calculate short-term or long-term financing needs
- Long-term – trying to acquire another company
3
Q
Balance risk and return
A
- risk and return trade-off
- risk tolerance and management preferences
- Risk or risk adverse
- Balance the needs of the company
4
Q
companies commonly need financing
A
- Cover all expenses and costs of doing business
- When they are not self-sustainting and they have to rely on external financing
- Long-term financing – needed to fund long-term investments
- Invest in new technology, more equipment – become more efficient
- Pay more upfront costs – reduce costs in the future
5
Q
Negative cash flow cycle
A
- trade credit
- seasonality
6
Q
Trade credit –
A
selling a product but the consumer does not pay right away
- Usually business to business
- Distribution channels
7
Q
seasonality
A
- Lawn mowers – in winter would have less sales
- Companies strock piling in the off season so they can have inventory on hand, in the short-term they will need additional financing when they are not self-sustanting
8
Q
Understand the characteristics of a financial plan
A
- specific
- measurables
9
Q
specific
A
- When you are collecting money – information that is based on the assumptions you are making
- Want to be as specific as possible
10
Q
measurables
A
- To measure your success want to have milestones and goals
- Want to have targets – elements you can measure to see if you are meeting all goals and key performance indicators
11
Q
3 primary types of budget used for a financial plan
A
- operating budget
- capital budget
- cash budget
12
Q
Operating budget
A
Projected income statement
13
Q
Capital budget
A
projected balance sheet – assets and liabilities
14
Q
Cash budget
A
in the middle of the operating budget and capital budget
15
Q
the key considerations for choosing a form of financing
A
- amount
- term
- cost
- external factors
16
Q
consider
A
- Overarching goal is to provide necessary funds at lowest cost while meeting strategic needs of the business
Want to be most cost effective - How financing will impact society, the environment, good governance
17
Q
amount
A
- how much is needed
18
Q
term
A
- When
- For how long
- Short term – less than a year
- Long-term – more than a year (buying a building, acquiring a company)
19
Q
cost
A
- Getting financing from investors and banks
- Carry? – have to pay interset
Interest rates – inflation increases, the bank will increase interest rates
Administer – going public, do not have interest but high administrative costs
Collateral – collateral can be assets
Decision making – when issuing debt you do not need to give up ownership
20
Q
external factors
A
- Economy – interest rates rising, variable loan/ fixed loan
- Competition – what the industry looks like, rivalry among competitors
- Stakeholder expectations – not about just finance, need to look at all stakeholders
21
Q
two types of financing
A
- debt
- equity
22
Q
debt
- amount of funding needed
A
- all sizes
23
Q
equity
- amount of funding needed
A
- Larger amounts
- It is expensive to go public
24
Q
debt
- terms of financing
A
Short and long term
25
equity
| - terms of financing
long term
26
debt
| - cost of financing
- Depends on the interest rates
| - Interest expenses can be deducted from profits which lowers taxes
27
equity
| - cost of financing
- Management choice to distribute profits through dividends or reinvest profits back into the business
- Dividends are not deductible
- Large one-time legal and admin fee
28
debt
| - Influence on company operations
- Interest must be paid and principle must be repaid
- Some debt requires collateral and lenders have priority claim on assets but do not have ‘voice’ in management decisions
29
equity
| - Influence on company operations
- Does not need to be repaid
Shareholders have voting rights and majority/ large
- shareholders can exert significant pressure
30
debt
| - external factors
- Interest rates
- Availability of debt financing
- Ability to repay interest
31
equity
| - external factors
- Availability of equity financing
| - Conditions for share price
32
common types of short term loans
- seed financing
- crowdfunding
- trade credit
- unsecured loan
- secured loan
33
seed funding
| - description
- Loans or equity from family/ friends or angel investors
- Ex – dragons den are angel investors
- Can be a loan or shared ownership
34
seed funding
| - benifits
```
- Low/ no interest
Often no collateral
- May be informal/ less contractual
- May be more generous/ patient
- Flexible terms
- Inexpensive to set up
```
35
seed funding
| - drawbacks
- Limited amounts
- Impacts relationships
- Give up ownership
- Not raising a lot of money, smaller capital that will get you to the next milestone within the company
36
Crowdfunding
| - description
- Use of small amounts of capital from a large number of people
- Ex – Go fund me
- Give money for no ownership, incentives through early access to products
37
Crowdfunding
| - benifits
- Interest free
- No collateral
- informal/ less contractural
- Inexpensive to set up
- Access to larger, more diverse investors/ supporters
- Help drive sales – if it is rewards based
38
Crowdfunding
| - drawbacks
- Must follow the rules/ fees of the crowdfunding platform
- May have to return funding is goals are not met
- May harm reputation
39
Trade Credit
| - Description
- Company takes delivery of goods but pays for them later
- Short term financing
- Offers breathing room to sell products to pay back
40
Trade credit
| - benefits
- Interest-free
- No collateral
- No contract or loan agreement
- Inexpensive to set up
- Opportunity to get discount by paying early – 2/30
41
Trade credit
| - drawbacks
- Take time to get on good terms
- If you do not have a good relationship they may be hesitant to invest – will not get access right way
- Penalties for late payments – financial, legal, reputational, loss of supplier
42
unsecured loan
| - description
Short-term loans from a bank or financing company that are not secured by collateral
43
unsecured loan
| - benefits
- No collateral
- Interrest rates based on credit rating
- Flexibility – revolving access after paying you back, sill have access to the loan as ling as their is credit room available
- Relativity inexpensive to set-up
44
unsecured loan
| - drawbacks
- Subject to interest rate fluctuations
- Penalties for late payments – financial, legal, reputational
- Limited amounts
45
secured loan
| - description
- Short-term loans from a bank or financing company that are secured by collateral
- Tied to collateral
- Tech companies with no assets may have use personal assets
46
secured loan
| - benifits
- Opportunity for companies with less credit history or weaker credit history to access funds
- Realtivly inexpensive to set up
- Businessess with poor credit – much risker and likely to default on payments
47
secured loan
| - drawbacks
- Subject to interest rate fluctuation
- May require personal guarantee
- Penalties for late payments – financial, legal, and reputational
- Business and personal being affected for one another
48
developing a sales forecast from both a top-down and
| bottom-up perspective
- Figure out the cash budget and the gaps and where it exists
- Driven by revenue streams block
What business type
- Leverage estimation for justification
- For existing businesses – use past performance data/ internal and external data
- External data – trends, economy and political environment
- Leverage digital technologies
49
top down
Use TAM SAM SOM to estimate market size
50
TAM
- total available market
| - total market size if you could sell globally without competition or internal capacity limits
51
SAM
- serviceable available market
- Market that fits within geographical reach, type of client, purchase frequency
- Ex – Focus on southern ontario, western
52
SOM
- service obtainable market
- Share or selected SAM that can be realistically obtained in the short term
- Customer readiness/ adoption patterns, purchase frequency, switching costs – further narrow down, people’s likelihood to adopt, switching costs – fee to switch, breaking contract
- Realistic geographic market you can reach
53
Bottom-up
- internal characteristics
- operations capacity
- more correct
54
internal characteristics
things you can control
55
operations capaicity
enough human resources
| - Supply chain and lead time
56
outsourcing
constraint and internal capacity
57
lead time
how long it takes to get the products on the shelves, how long to request more product
58
marketing capacity
- Brand awareness, recognition, loyalty
- How long to reach customers
- How long for customers to adopt product
59
Sales Call
Capacity contrasisnts from a marketing perspective
60
Channel agreements, shelf space
Incentive for suppliers to hold your product, how much room they have, capacity constraints for distributors and how much floor room they have, want to maximize
61
Service restrictions
Any restrictions that can impact sales
62
Human resources capacity
Staff availability
| Staff calls they can make per day, how many customers can they weigh on
63
what does bottom up show
- This shows what is feasible – helps guide strategic choices, identifies if you need to change your business model or seek external financing
- Shows what is actually possible, keep constraints into account
- Where you need to adapt, change the business model to increase ir where you need to start selecting and choosing
64
Compare results
- What the numbers mean, what are they telling me, and be able to compare them
- Review forecast numbers and compare to
65
Competitors sales/ market share
is it realistic to capture part of the market with the existing competition
66
Break even point
look at all costs, at which point do you cover all costs
67
cash budget
- All the cash coming in and all the cash coming out of the organization
- Uses information from operating and capital budgets, sales forecasts, plus other company info
- Tool to estimate cash and receipts and expenditures over a specified time period
- Timing of cash being received and going out
- Short on cash – determine what kind of external financing do you need
68
break even
- Cash breakeven – level of sales necessary to cover cash costs exactly, no profits but no losses
- Important to forecast break-even point ahead of time to ensure the idea is viable and you can handle the risk
- Allows you to identify issues and adjust proactively
- Proactive – take data and insights to find out how you can make tweaks early on
69
information needed for cash break-even
- revenue
- fixed costs
- variable costs
70
revenue
price per unit or total dollar sales
71
cash fixed costs
- constant regardless of the formula
- Do not change no matter what
- Ex – rent, wage, salaries, insurance
72
cash variable costs
- costs per unit or total variable costs, cost of goods sold
- Directly related to production/ delivery of product
- Ex – raw materials, running machinery, production labour
