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Questions and Answers
What is the primary function of finance in a business?
What is the primary function of finance in a business?
What is the role of financial managers in a firm?
What is the role of financial managers in a firm?
What is a common reason for a firm's financial failure?
What is a common reason for a firm's financial failure?
What is the purpose of financial planning?
What is the purpose of financial planning?
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What is the third step in financial activities?
What is the third step in financial activities?
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What is a cash flow forecast used for?
What is a cash flow forecast used for?
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What is the primary purpose of a long-term forecast?
What is the primary purpose of a long-term forecast?
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What is the main difference between a secured loan and an unsecured loan?
What is the main difference between a secured loan and an unsecured loan?
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What is the primary purpose of a budget?
What is the primary purpose of a budget?
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What is the primary purpose of financial control?
What is the primary purpose of financial control?
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What is the primary purpose of capital expenditures?
What is the primary purpose of capital expenditures?
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What is the primary purpose of trade credit?
What is the primary purpose of trade credit?
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What is a promissory note?
What is a promissory note?
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What is the primary advantage of debt financing through loans?
What is the primary advantage of debt financing through loans?
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What is venture capital?
What is venture capital?
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What is the principle that governs the relationship between risk and return on investments?
What is the principle that governs the relationship between risk and return on investments?
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Study Notes
Finance and Financial Management
- Finance function in a business involves acquiring and managing funds within the firm
- Financial management involves managing a firm's resources to meet its goals and objectives
- Financial managers examine financial data and recommend strategies for improving financial performance
Financial Manager's Activities
- Obtaining funds
- Effectively controlling the use of funds
- Auditing
- Managing taxes
- Advising top management on financial matters
- Collecting funds (credit management)
- Controlling funds (funds management)
- Budgeting
- Planning
Reasons for Financial Failure
- Not enough capital
- Poor control over cash flow
- Inadequate expense control (overspending)
Financial Planning
- Involves analyzing short-term and long-term money flows to and from the company
- 3 key steps:
- Forecasting firm's short-term and long-term financial needs
- Developing budgets to meet those needs
- Establishing financial controls to see if the company is achieving its goals
Forecasting
- Short-term forecast: predicts revenues, costs, and expenses for a period of one year or less
- Cash flow forecast: predicts cash inflows and outflows in future periods
- Long-term forecast: predicts revenues, costs, and expenses for a period longer than one year
Budgeting
- Sets forth management's expectations and allocates the use of specific resources throughout the firm
- Depends on balance sheet, income statement, statement of cash flows, and short-term and long-term financial forecasts
- Guides financial operations and expected financial needs
Financial Control
- A process in which a firm periodically compares its actual revenues, costs, and expenses with its budget
- Key needs for operational funds in a firm include:
- Managing day-by-day needs of the business
- Controlling credit operations
- Acquiring needed inventory
- Making capital expenditures
Alternative Sources of Funds
- Debt financing: 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 or venture capital)
- Short-term financing: funds needed for a year or less
- Long-term financing: funds needed for more than a year
- Trade credit: the practice of buying goods and services now and paying for them later
Loans and Financing
- Promissory note: a written agreement with a promise to pay a supplier a specific sum of money at a definite time
- Secured loan: backed by collateral
- Unsecured loan: doesn't require any collateral
- Long-term financing loans generally come due within 3 to 7 years but may extend to 15 or 20 years
- Term-loan agreement: a promissory note that requires the borrower to repay the loan in specified installments
- Risk/return trade-off: the principle that the greater the risk a lender takes in making a loan, the higher the interest rate required
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Description
This quiz covers the basics of finance, including acquiring and managing funds, preparing budgets, and financial planning. It also explores the role of financial managers in examining financial data and recommending strategies for improvement.
