MANAGING THE FINANCE FUNCTION Flashcards by tine cahayon

Stated that financial management involves making financial decisions
that align organizational objectives with personal motivations.

Weston & brigham

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Stated that finance function encompasses the “acquisition and
administration of funds to achieve business objectives

Robert medina

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It is one of the three basic management functions with the other two as
production and marketing.

FINANCE FUNCTION

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It consists of raising, providing, and managing all the net, capital, or
funds of any kind to be used in connection with the business.

FINANCING

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He stated that finance function is the process of acquiring and utilizing
the funds of a business.

R.c. osborn

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These are necessary to keep the business running smoothly but are not
directly related to its core operations

Incidental finance function

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These are directly involved in the strategic decision-making of the
business.

Executive finance function

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This can significantly impact the long-term success of the business.

Executive finance function

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These decisions involve allocating capital to long-term projects that
promise to generate future returns and enhance the company’s
competitive position

investments

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This involves determining the portion of profits to distribute to
shareholders as dividends and the portion to retain for reinvestment.

Dividend decision

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Refers to the process of determining how to manage and allocate a
company’s resources to ensure it has enough liquid assets to meet its
short-term obligations and operational needs

LIQUIDITY DECISION

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It measures the relative profitability of an investment by comparing its
present value of future cash flows to its initial cost.

Profitability index

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This provides a framework in investment decisions.

CAPITAL BUDGETING

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It measures the time it takes for an investment to recover its initial cost.

PAYBACK PERIOD

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Serves as a vital early warning system for a company, indicating
whether it is experiencing a shortage of readily available funds.

Liquidity ratios

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Also called the working capital ratio, it measures your company’s
ability to generate cash to meet your short-term financial
commitments.

CURRENT RATIO

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This type of ratio does not take inventory into account, and it is
alternatively referred to as the acid test ratio.

QUICK RATIO

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Also called efficiency ratios, these are used to measure a company’s
ability to convert their production into cash or income.

Activity ratios

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It allows you to see how long it takes for inventory to be sold and
replaced during the year.

INVENTORY TURNOVER RATIO

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Measures how fast your company can convert its cash on hand into
inventory, and then convert inventory back into cash.

Cash conversion cycle

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They have a nominal or ‘face’ value, typically of $1 or 50 cents. The
market value of a quoted company’s shares bears no relationship to
their nominal value

ORDINARY SHARES

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Provides a way of raising new share capital by means of an offer to
existing shareholders, inviting them to subscribe cash for new shares
in proportion to their existing holdings.

Rights issues

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Refers to shares of common or preferred stock that are used as
collateral to secure a loan from another party. The loan earns a fixedinterest rate, much like a standard loan, and can be secured or
unsecured

LOAN STOCKS

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The amount of profit a company has left over after paying all its
direct costs, indirect costs, income taxes and its dividends to
shareholders

Retained earnings

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The process by which a financial institution provides funds to a borrower. Often called a lender, the institution typically receives interest in return for the loan

Bank lending

A contract between a borrower and the owner for the use of an asset where the borrower agrees to pay the owner a specific amount over a specific time to use the borrowed asset

LEASE

A form of instalment credit, similar to leasing, with the exception that ownership of the goods passes to customer on payment of the final credit instalment, whereas a lessee never becomes the owner of the goods.

HIRE PURCHASE

Where government provides finance to companies in cash grants and other forms of direct assistance, as part of its policy of helping to develop the national economy, especially in high technology industries and in areas of high unemployment.

GOVERNMENT ASSISTANCE

Method of expanding business on less capital than would otherwise be needed. For suitable businesses, it is an alternative to raising extra capital for growth.

FRANCHISING

Generally, an organization prefers options which are ______ and _____ rather than those which have restrictive provisions

FLEXIBLE, EASIER

There is the ______ in equity as the share capital must be repaid only at the time of winding up, and dividends need not be paid if there is no profit

LEAST RISK

he various sources of funds will have their own individual effects in the net income of the engineering firm. When the firm borrows, it must generate enough income to cover the cost of borrowing and still be left with sufficient returns for the owners

INCOME

A company decides whether it wants to sacrifice its ______ over the company before choosing the perfect source of funds.

CONTROL

The financial market has its ups and downs. This means that there are times when certain means of financing provide better benefits than at other times.

TIMING

Schall & Haley factor that must be considered that questions “Are there assets available as collateral?”

Collateral values

Schall & Haley factor that must be considered that questions “How much will it cost to issue bonds or stocks?

FLOTATION COST

Schall & Haley factor that must be considered that questions “How fast can the funds required be raised?

Speed

Schall & Haley factor that must be considered that questions “To what extent will the firm' be exposed to other parties?

EXPOSURE

Every source of funds involves some kind of _____.

RISK

Identification of investment opportunities is the _ step in capital budgeting.

1ST

Post-implementation review is the _ step in capital budgeting.

6TH

Capital rationing is the _ step in capital budgeting.

4TH

Project evaluation is the _ step in capital budgeting

2ND

Decision-making and implementation are the _ step in capital budgeting.

5TH

Risk analysis is the _ step in capital budgeting.

3RD

Incidental finance function involves activities like accounts payable and receivable management, payroll processing, cash flow management, financial reporting.

TRUE

Executive finance function ensures that the business has the financial resources it needs to operate.

FALSE

Executive finance function needs skills like attention to detail, accuracy, strong communication skills.

FALSE

To be assured of a continuous supply of funds, there is a need to manage properly the finance function.

TRUE

If the engineer manager is running the firm as a whole, he must not be concerned with the determination of the amount of funds required.

FALSE

Capital rationing involves estimating the costs and benefits associated with the project over its entire life.

FALSE

Risk analysis includes considering factors such as market conditions, competition, technological changes, and other external influences.

TRUE

Post implementation review involves prioritizing and selecting the most promising projects when there is limited available capital.

FALSE

Management makes decisions about which projects to undertake.

TRUE

Average days payable ratio looks at the average number of days customers take to pay for your products or services.

FALSE

Average collection period ratio measures the average number of days it takes for a company to pay its suppliers.

FALSE

Average days inventory indicates the average number of days it takes to sell your inventory.

TRUE

Broad classifications of finance function. Enumerate alphabetically.

Executive Incidental

Classifications of finance function. Enumerate alphabetically.

LONG TERM, SHORT TERM

Five types of activity ratios. Enumerate alphabetically.

Average collection period ratio Average days inventory Average days payable ratio Cash conversion cycle Inventory turnover ratio

Enumerate alphabetically the sources of funds for a company.

BANK BORROWING Business expansion scheme funds Capital markets Franchising. Government sources Loan stock Retained earnings Venture capital

Two forms of security of Loan Stocks. (Enumerate Alphabethically)

AMOUNT, PURPOSE

Factors of a banker when asked by a business customer for a loan or overdraft facility.

Fixed charge Floating chargE Repayment Security Term

Calculates how well the company’s various resources are being used.

Return on assets ratio

Is the amount of money a company has left after paying all the direct costs of producing or purchasing the goods or services it sells

Gross profit margin

Measures how well the business is doing in relation to the investments made.

Return on equity

It measures how much a company earns (usually after taxes) relative to its sales

Net profit margin

Measures the overall debt level of a business, as well as a business’s ability to repay new and existing loans.

Leverage ratios

It determines a company’s level of indebtedness, in other words, the proportion of its assets that is owned by its creditors.

Debt-to-asset ratio

Measures how much you are using debt to finance your business relative to equity

Debt-to-equity ratio

It is also referred to as the statement of operations, provides a summary of the firm's revenue, expenses, and net income/loss over a defined period

Income statement

It is also known as the statement of financial position, shows an overview of the company's assets, liabilities, and equity at a specific point in time.

BALANCE SHEET

This depicts how the company's cash and equivalents have changed over the same period.

Statement of changes in financial position

Refers to the potential for negative consequences or losses associated with a decision or action taken while conducting engineering projects.

RISK

Is a risk that has the potential for loss or damage, but not for gain

Pure risk

Is a risk that has the potential for both loss and gain.

Speculative risk

Refers to the systematic identification, evaluation, and mitigation of possible hazards and dangers to an enterprise's assets, profits, and operations.

Risk management

Method of shifting risk where a company registers with a state and becomes a legal entity

INCORPORATION

A method of shifting risk where a company delegates a portion of the duties and obligations of a contract to a third-party company.

SUBCONTRACTING

Is a strategy used in advanced risk management that aims to reduce or mitigate potential losses by taking an offsetting position in a related security or asset

Hedging

If loss occurs, the company is reimbursed by an insurer for the loss incurred subject to the terms of the pre-discussed policy

BUYING INSURANCE

Can be a financial risk to companies, especially those that rely on the timely payment of invoices to maintain cash flow.

Nonpayment of bills by customers