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Questions and Answers
What is the primary purpose of a budget in a firm?
What is the process of comparing actual revenues with budgeted revenues called?
What is a major investment in tangible or intangible assets called?
What type of financing is used to raise funds through borrowing?
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What type of financing is used to raise funds from within the firm or through the sale of ownership?
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What is a term-loan agreement in the context of long-term financing?
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What is an advantage of loan interest in debt financing?
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What type of financing is used to meet financial needs for a year or less?
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What is the principle that relates to the risk a lender takes in making a loan?
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What type of bond is backed only by the reputation of the issuer?
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What is venture capital?
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How long do long-term financing loans generally come due?
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What is the primary purpose of ensuring a business has enough cash available?
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What is the typical preference of commercial banks when it comes to lending short-term money?
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What is a key consideration when seeking short-term financing from family and friends?
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What is a promissory note?
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What is the primary difference between a secured loan and an unsecured loan?
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What is the term 'time value of cash' referring to?
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What is the primary role of financial control in a firm?
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What is the primary consideration when setting long-term financing objectives?
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What is the primary advantage of debt financing through borrowing from lending institutions?
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What is the primary role of trade credit in a firm's financial operations?
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What is the primary difference between secured and unsecured bonds?
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What is the primary goal of long-term forecasting in a firm?
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What is the primary role of a firm's budget?
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What is the primary role of financial managers in a firm?
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What is the primary advantage of equity financing from retained earnings?
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What is the main reason behind a firm's financial failure?
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What is the primary consideration when setting short-term financing objectives?
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What is the primary objective of financial planning in a firm?
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What is the primary function of cash flow forecasting?
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What is the term for predicting revenues, costs, and expenses for a period of one year or less?
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What is the primary responsibility of financial managers in terms of funds management?
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What is the primary goal of financial management in a firm?
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What is the primary step in financial planning?
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What is the primary role of financial planning in achieving a firm's goals?
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What is the primary outcome of ineffective financial management?
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Study Notes
Finance in Business
- Acquires funds for the firm and manages those funds within the firm
- Activities include preparing budgets, cash flow analysis, and planning for expenditures
Financial Management
- Managing a firm's resources to meet its goals and objectives
- Financial managers examine financial data and recommend strategies for improving financial performance
- Responsible for obtaining funds, controlling use of funds, collecting funds, advising top management, managing taxes, and auditing
Reasons for Financial Failure
- Not enough capital
- Poor control over cash flow
- Inadequate expense control (overspending)
Financial Planning
- Analyzing short-term and long-term money flows to and from the company
- 3 key steps: forecasting financial needs, developing budgets, and establishing financial controls
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 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
- 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 borrowing that must be repaid
- Equity financing: money raised from within the firm or through the sale of ownership
- 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
- Often comes with terms such as 2/10, net 30
- Promissory note: an agreement to pay a supplier a specific sum of money at a definite time
Banks and Loans
- Prefer to lend short-term money to larger, established businesses
- Bank loans can virtually disappear during difficult economic times
Short-Term Loans
- Secured loan: backed by collateral
- Unsecured loan: doesn't require collateral
Long-Term Financing Objectives
- 3 questions to ask: what are the organization's long-term goals, what funds are needed, and what sources of funding are available
Debt Financing by Borrowing
- Long-term financing loans generally come due within 3 to 7 years
- Term-loan agreement: a promissory note that requires the borrower to repay the loan in specified installments
- Loan interest is tax-deductible
- Risk/return trade-off: the greater the risk, the higher the interest rate required
Debt Financing by Issuing Bonds
- Secured bond: a bond issued with some form of collateral
- Unsecured (debenture) bond: a bond backed only by the reputation of the issuer
Equity Financing
- Selling stock: raising money from within the firm or through the sale of ownership
- Retained earnings: equity financing from within the firm
- Venture capital: money invested in new or emerging companies with high profit potential
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Description
Learn about short-term financing options, trade credit, and its terms, as well as promissory notes and the importance of cash flow management.
