Finance Terms and Concepts

Definition of Terms

• Finance entails managing money, as per Gitman & Zutter (2012).
• Public Finance relates to government income, expenses, and economic impact.
• Private Finance involves personal, nonprofit (NPO), nongovernment (NGO), and business finance.
• Financial Management oversees a business's valuable resources to achieve objectives.
• Budgeting estimates income and expenses over time.
• Investments generate or increase future income.

Concerns of Finance

• Finance tackles decisions on spending, saving, and investing earnings, including securing additional needed funds, as noted by Gitman.
• Personal Finance involves managing one's own money.

Average Person's Financial Cycle

• Accumulation Phase occurs during early career years, marked by willingness to take risks, spend more, incur debt, and collect assets, potentially through loans.
• Consolidation Phase entails having fewer debts and sufficient assets, moderate investment risk, and planning for retirement.
• Spending Phase mainly occurs in retirement, where income primarily comes from pensions, insurance, and investments, focusing on capital preservation.
• Gifting Phase involves providing support to family, friends, and charities.

Basic Principles of Personal Finance

• Knowledge is key.
• Create a plan.
• Time value of money matters.
• Consider taxes, expenses, and management fees.
• Maintain enough liquidity for unexpected events.
• Wise spending and priorities are crucial.
• Protect against major disasters.
• Balance risk and return.

Financial Literacy

• Financial literacy is about managing finances efficiently and responsibly, requiring knowledge of money, inflation, interest, value, prices, future plans, and protection.
• It involves target and goal setting, lifestyle management, and making informed financial choices for gains.
• Knowing how to manage personal finance and grow wealth, managing credit, and seeking advice when uncertain is important.
• Financial literacy is crucial because high earners may still face savings challenges.

Financial Planning Process

• The Financial planning process includes objective setting, data gathering, data analysis, financial plan recommendation, plan implementation, and plan monitoring.
• Objective Setting involves quantifying monetary goals within specific timeframes and assessing them alongside individual resources and limitations.
• Data Gathering uses surveys, questionnaires, and interviews to collect quantitative and qualitative information.
• Data Analysis assesses the individual's financial situation, cash flows, legal documents, and objectives against available resources and economic conditions.
• Financial Plan Recommendation proposes financial products for consideration.
• Plan Implementation aids the individual in executing the financial plan, potentially involving other entities.
• Plan Monitoring reviews the financial plan regularly to evaluate changing market conditions and ensure goals are met.

Key Areas of Personal Financial Planning

• Financial Position assessment determines available resources by evaluating net worth (assets minus liabilities) and cash flow, assisting in establishing realistic timeframes for financial goals.

Key areas of Personal Financial Planning

• Adequate Protection entails analyzing protection needs against unforeseen risks, including liability, property, death, disability, health, and long-term care.
• Tax Planning manages tax payment timing and amounts, leveraging incentives, deductions, and rebates to manage personal finances effectively.
• Investment & Accumulation Goals plans to accumulates wealth for major purchases like houses or education, and plan for retirement, among other things.
• Retirement Planning helps to understand the cost of retirement and analyses cash flows to meet future costs.
• Estate Planning organizes asset distribution after death and avoid high estate taxes.

Habits for Personal Finance Success

• Save Money
• Spend less than you earn.
• Avoid Debt
• Invest
• Control your budget and invest at least 20% of your income in diverse investments.

Investment

• Investment involves acquiring an item or asset to generate income or appreciate in value.
• Finance involves buying assets with the expectation they will generate income, gain value, or be sold later for a profit.

Wealth Management

• Wealth Management focuses on how advisors make money for you.
• Wealth Management Managers: include bankers, fund managers, real estate specialists, consultants, lawyers, stock brokers, and financial planners.

Wealth Maximization

• Wealth Maximization grows company value by raising share price and value to maximize profit.
• Though money earns interest, inflation may offset buying power.
• Buying power equals interest rate minus inflation rate.

Inflation

• Inflation is a reduction in the purchasing power of money and value of money
• Inflation is an increase in general prices for goods & services
• Inflation Factors caused by : consumer spending, disposable income, market confidence, aggregate demand, low supply, and external influences.

Beating Inflation

• Use compounding interest
• Undertake investments
• Diversify
• Engage mutual funds
• Grow income faster than inflation.
• Live modestly
• Budget responsibly

Risk

• Risk is the chance than an investment's return will differ than expected.
• A risk is a game of chances.

Managing Risk

• Studies, research & information help with managing Non-reducible & Unavoidable risk through diversification, ex: interest rates, recession etc
• Labor strikes are an avoidable risk that can be minimized through studies and research.

Risk Tolerance

• Risk tolerance signifies how much uncertainty an investor can comfortably handle.

Risk Appetite

• Risk appetite is the level of risk an organization will accept to achieve objectives before acting to reduce risk.

Reducing or Removing Risk

• Diversification spreads investments to minimize risk.
• Beta (β) measures systematic risk.
• Standard deviation (σ) measures total (systematic + unsystematic) risk.
• Well-diversified portfolios can remove systematic risk.
• A Portfolio consists of assets like cash, stocks, and mutual funds.

Wealth Creation

• Get rid of debt
• Undertake investments
• Diversify
• Grow your income
• Spend wisely
• Let money work for you.

Generating Revenue

• Seek advice from experts for investing
• Create long term plans for investments,
• Make a budget
• Reduce living expenses
• Create multiple streams of revenue.

Facilitating Finances

• Financial institutions provide transfer and safekeeping of money, lending services, investment programs, and international money transfers.
• Banks earn from interest, commissions, fees, and client advice.

Investment Types: Currencies

• Invest in currencies is by buying when rates are low and selling when rates are high.

Stocks

• Stock indicates the percentage of ownership in a company.
• Stockholders own a portion of assets and earning from a company and also company value increases, stock value increases.

Types of Stocks

• Common stocks grant dividends, variable payments, voting rights, and preemptive rights.
• Preferred stocks offer higher, fixed dividends.

Classifications of Stocks by Voting Rights:

• Stocks without voting rights
• Stocks paid before common stockholders

Classifications of Stocks by Stability:

• Blue chip stocks come from well-established companies.
• Speculative stocks involve high risk and high returns.

Classifications of Stocks by Purpose:

• Growth stocks are for owners seeking cash, who sell a percentage of their stocks
• Liquidating stocks are designed for owners retiring or venturing into different businesses, who sell a percentage of ownership through stocks.

Factors that impact share prices:

• Dividends
• News
• Speculations
• Investors
• Economy
• Neighbors
• Weather
• Management
• CEO
• Basic demand, including supply

Bonds

• Bonds involves the Government or Corporation loans from investors.
• The issuer creates the bond.
• The holder loans money.

Treasury Bills (T-Bills)

• Treasury bills allow earnings through paying lower than the promised return or discounted compare to other borrowings
• They are borrowing over a short term.
• They are very popular and enjoy a higher degree of liquidity as issued by the government.

Real Estate

• Real Estate is for living, flipping, renting for income, selling or leasing for hobbies or long term investments.

Cryptocurrency

• Cryptocurrency is unregulated by the government and prone to underground activity.
• It is advised to avoid.

Types of Cryptocurrency

• Informal Digital Money has no interest but is monitored by the government. The best examples are GCash and PayMaya
• Informal Digital Money is advertised with dividends or interest, eg. Bitcoin and Ethereum

Alternative Investments

• Artworks are investments made because you buy low, auction at high or sell on museum. They are volatile because value is based on the success of the artist' reputation.

Insurance

• Insurance supports an individual or entity that receives financial protection against unforseen or possible losses.
• Variable Universal life insurance can be purchased.

Understanding Financial Management

• Financial Management deals with business decisions that maximize shareholders' wealth.
• This is done by improving managers.

Business Organizations: Sole Proprietorship

• This involves the ease of formation, control over operations, no sharing of profits, simplicity, and no taxation (only income tax). There are limited life, unlimited liability, difficulty in raising capital, and limited skills.

Business Organizations: Corporations

• Forming Corporation is either privately or publicly formed, also it involves Limited liability, indefinite life, no mutual agency, ease of obtaining capital, ease of transferring ownership interest, with a separate legal entity. Drawbacks include double taxation, more government control, higher organizational costs, more involved decision-making, and dilution of earnings and control.

Functions of Finance Manager

• Financing: includes long-term decisions, daily operations, and capital structure.

Operational Considerations

• Operational areas affected by sales, cash inflows, obligations, operating expenses

Investment Decisions

• Investing: requires supporting long-term plans with capital budgets, forecasts, and available funds.
• Cost of Investment: requires understanding of the viability and feasibility of pursuing specific decisions, financial parameters must be met.

Financial Parameters

• Must satisfy financial parameters

Operations Strategy

• Financial managers deal with day-to-day expenses, salaries, and inventories, utilies. It requires sources of funds and usage of short-term debt to finance operations.

Dividends

• Dividends considers whether or not to pay, how much should be paid, can it be afforded and how frequent
• Companies consider investment availability when choosing to declare dividends.

Share Price Factors

• The value of a share is influenced by how much someone joins and depends when the individual is joined to the company.

Shareholder Wealth

• Wealth must have enough cash to pay obligations and stay within regulations to measure shareholder wealth.
• Wealth of Shareholders measured by current market price of the share.

Factors of Market Price

• Profitability depends on Controllable by Management, measures financial performance over time and determines success.

Performance Metrics

• Controllable by management:Profit serves as revenue minus expenses
• Profitability determines if one is a failure of success and measures the ability of a company or business to earn an income.

Liquidity

• Having good liquidity supports reasonable leverage positions
• The level and type of liabilities is a major component.

Operational Efficiency

• Competent management must be decisive, visionary, people-oriented, inspiring, innovative, respectful and experienced.
• Must improve with corporate planning with solid understanding of business prospects

External Factors

• External Factors: macroeconomics, politics and prospects of the industry must be controlled.

Financial Systems

• Key Basic elements in Finance is private placements, sales, investor groups etc

Intermediaries

• Intermediaries channel the investments of the governments that go into loans

Commercial Banks

• Commercial Banks offer loans to firms and purchase from security agencies

Insurance Companies

• Insurance Companies purchase insurance to customers, they offer premium

Mutual and Pension Funds

• Mutual and Pension funds enable small investments to provide diverse investments
• Organized forums in which funds make a difference.

Funding Availability

• Financial Management: offers direct sales to investors to bring in Public offerings. Funding in Management of investments and the sales of prior sales requires money.

Considerations for Finances

• Market and Capital financial sales make differences in money venues.

Financial Instruments

• In Financial instruments, documents are a legal agreement involving monetary value.
• These Agreements must comply on time.

Terms for Instruments

• Cash is the legal instrument of value.

Contractual Rights

• Financial Stability is a Financial liability

Basic Functions

• Finance promotes savings, payment and production against savings and risks. A means to make it available.

Ratios for Quantitative Analysis

• Important considerations are ratios for analysing financial investments, data and other things.
• It is helpful to see one thing compared to each other.

Banking Analysis

• Data Analysis happens through Banks and investors Monitoring trends make for key decision making in stock holders

Types of Financial Statements:

• Statement of Financial Position is the statement of one's current wealth at the moment
• Statements exist for the measure of cashflow and the changes.

Business Ratios

• Allows to have easy and quick decision making Easy to compare different aspects

Analysing Financials

• Investors must analyse specific parts of the financial investment.

Measurements

• Quick assets quickly assets helps to tell cash is liquid Example: Investments and savings account.
• Liquidity ratio
• The easier to convert to cash is liquid

Profitability

• Current assets should be above average and this ratio should above the total.

Business Objectives

• Used to measure the earnings on a business/objective
• This business statement shows on how well can manage and sell profit

Investments

• NPAT and the stocks measures net income.

Balance Sheet

• Net income is found in income

Operating Metrics

• Return on assets means to know earnings in a company and better allocate the assets.

Operational Metrics

• Managing and knowing how much efficiency
• The better of the profit is good.

Expenses Metric

• It should be measured.
• Gross profit is key

Metrics Before Taxes

• It's before interest expenses and taxes.

Net Metrics

• This is a normal percentage in sales

Leverage

• Can relate to the company.

The Role of Debt in Companies

• The company needs debt with equity.

Important Considerations

• All the important considerations and notes for businesses exist in debt.

Development Stages

• If there is bad conditions then it can be more difficult from banks. The banks usually can check on the financials from the company.

Business Cycle

• If the Business gets a good economy it's a little easier and quicker to work.

Business Stocks

• Better to stay on the easier side to save on funds and other sources.
• The Stock conditions must be checked for sales.

Flexibility

• Should be flexible to work with those goals