Financial Management - Chapter 17 Flashcards
Finance
Function in a business that acquires funds for the firm & manages them within the firm.
Financial management
The job of managing a firm’s resources to meet its goals and objectives
Financial managers
They examine the financial data prepared by accountants and recommend strategies for improving the financial performance of the firm.
What are the 3 reasons why a firm fails financially?
- Undercapitalization
- Poor control over cash flow
- Inadequate expense control
Undercapitalization
Insufficient funds to start a business
Financial planning
Analyzing short-term and long-term money flows to and from a firm
Time value of money
A dollar in hand try is worth more than a dollar promised at some time in the future
Risk-return trade off
The principle that the level of return to be earned from an investment should increase as the level of risk increases and vice versa
What are the 3 steps of financial planning?
- forecasting a firm’s short term and long term financial needs
- developing budgets to meet those needs
- establishing financial control to see whether the company is achieving its goals
Short term forecast
Predicts revenues, costs, and expenses for a period of one year or less
Cash flow forecast
Forecast that predicts the cash inflows and outflows in future periods, usually months or quarters
Long term forecast
Predicts revenues, costs, and expenses for a period longer than one yr, and sometimes as long as 5 yrs
What are the 3 most common types of budgets?
- Capital budget
- Cash budget
- Operating or master budget
Capital budget
A budget that forecasts a firm’s spending plans for major asset purchases that often require large sums of money, like property, buildings, and equipment
Cash budget
Estimates cash inflows and outflows during a particular period, like a month or a quarter.
Operating (master) budget
Ties together the firm’s other budgets and summarizes the business’ proposed financial activities.
Financial control
Process in which a firm periodically compares its actual revenues, costs, and expenses w its budget
Capital expenditures
Major investments in either tangible long-term assets such as land, buildings, and equipment, or intangible assets, such as patents, trademarks, and copyrights
Debt financial
Refers to 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 (stock)
Short term financing
Refers to funds needed for one year or less
Long term financing
The funds needed for more than 1 yr
Trade credit
The practice of buying products now and paying for them later.
Most widely used source of short term funding, the least expensive, and the most convenient
Promissory note
Written contract w a promise to pay a supplier a specific sum of money at a definite time.
If entrepreneur decides to ask family/friends for financial assistance, important that both parties :
- agree to specific loan terms
- put the agreement in writing
- arrange for repayment in the same way they would for a bank loan
Secured loan
Backed by collateral, something valuable such as property If the borrower fails to pay the loan, the lender may take possession of the collateral.
Unsecured loan
More difficult to obtain bc it doesn’t require any collateral. Normally lenders give unsecured loans only to highly regarded customers - long standing businesses considered financially stable
Line of credit
Given amt of unsecured short term funds a bank will lend to a business, provided the funds are readily available.
Credit profile
Your financial reputation.
Reflects your financial track record based on your borrowing history
4 Cs of credit?
- Character
- Capacity
- Capital
- Conditions
Character
Factors such as business size, location, # of yrs in business, business structure, etc.
Capacity
Considers the ability of the business to pay its bills. Includes the structure of the company’s debt-whether secured or unsecured- and the existence of any unused lines of credit.
Capital
Assesses whether a company has the financial resources to repay its creditors.
Conditions
External factors surrounding the business under consideration, including influences such as market fluctuations, industry growth rate, etc.
Premium
The fee the insurance company charges, and it reps the cost of the policy to the insured.
Factoring
One expensive source of short term funds for a firm.
Commercial paper
Unsecured promissory notes, in amts of $100000 and up that mature in 270 days or less.
1.
Debt financing
borrowing money a company has legal obligation to repay
A term loan agreement
Promissory note that requires the borrower to repay the loan, w interest, in specified monthly or annual instalments.
Major advantage is that the loan interest is tax deductible.
Bond
Corporate certificate indicating that an investor has lent money to a firm or a gov.
Usually in units of $1000.
Principal
The face value of a bond, which the issuing company is legally bound to repay in full to the bondholders on the maturity date
Maturity date
The exact date the issuer of a bond must pay the principal to the bondholder.
Interest
The payment the bond issuer makes the bondholders for use of the borrowed money
Green bonds
Fixed income investments earmarked to raise money for climate and environmental objectives
Sustainable finance
The process of integrating environmental, social, and governance (ESG) criteria when making decisions in the financial sector and business decisions for the benefit of stakeholders and society
Unsecured bonds / denture bonds
Class of bond issued by a company that. Is not backed by any collateral, such as land or equipment
Secured bonds / mortgage bonds
Class of bond issued by a company that is backed by collateral, such as land or equipment
Sinking fund
Purpose is to ensure that enough money will be available to repay bondholders on the bonds maturity date
Callable bond
Permits the bond issuer to pay off the bond’s principal before its maturity date
Equity financing
Makes funds available when the owners of the firm sell shares of ownership to outside investors in the form of stock, when they obtain funds from venture capitalists, or when they reinvest company earnings in the business.
Stock (shares)
Rep ownership in a company.
What is IPO short for?
Initial public offering
IPO
The first time a corp offers to sell new shares to the general public, and is an example of a primary market.
Stock certificate
Rep stock ownership
Dividends
Part of firm’s profits that may be distributed to shareholders as either cash payments or additional shares of stock
Common stock
The most basic form of ownership in a firm
Preferred stock
Stock that gives its owners pref in the payment of dividends and an earlier claim on assets than common shareholders if the company is forced out of business and its assets are sold
Leverage
Raising funds through borrowing to increase the firm’s rate of return
