Podcast
Questions and Answers
What is the primary purpose of a budget in a firm?
What is the primary purpose of a budget in a firm?
- To compare actual revenues with projected revenues
- To allocate resources and guide financial operations (correct)
- To make capital expenditures
- To acquire needed inventory
What is the process of comparing actual revenues with budgeted revenues called?
What is the process of comparing actual revenues with budgeted revenues called?
- Financial planning
- Budgeting
- Financial control (correct)
- Forecasting
What is a major investment in tangible or intangible assets called?
What is a major investment in tangible or intangible assets called?
- Capital expenditure (correct)
- Short-term financing
- Operating fund
- Debt financing
What type of financing is used to raise funds through borrowing?
What type of financing is used to raise funds through borrowing?
What type of financing is used to raise funds from within the firm or through the sale of ownership?
What type of financing is used to raise funds from within the firm or through the sale of ownership?
What is a term-loan agreement in the context of long-term financing?
What is a term-loan agreement in the context of long-term financing?
What is an advantage of loan interest in debt financing?
What is an advantage of loan interest in debt financing?
What type of financing is used to meet financial needs for a year or less?
What type of financing is used to meet financial needs for a year or less?
What is the principle that relates to the risk a lender takes in making a loan?
What is the principle that relates to the risk a lender takes in making a loan?
What type of bond is backed only by the reputation of the issuer?
What type of bond is backed only by the reputation of the issuer?
What is venture capital?
What is venture capital?
How long do long-term financing loans generally come due?
How long do long-term financing loans generally come due?
What is the primary purpose of ensuring a business has enough cash available?
What is the primary purpose of ensuring a business has enough cash available?
What is the typical preference of commercial banks when it comes to lending short-term money?
What is the typical preference of commercial banks when it comes to lending short-term money?
What is a key consideration when seeking short-term financing from family and friends?
What is a key consideration when seeking short-term financing from family and friends?
What is a promissory note?
What is a promissory note?
What is the primary difference between a secured loan and an unsecured loan?
What is the primary difference between a secured loan and an unsecured loan?
What is the term 'time value of cash' referring to?
What is the term 'time value of cash' referring to?
What is the primary role of financial control in a firm?
What is the primary role of financial control in a firm?
What is the primary consideration when setting long-term financing objectives?
What is the primary consideration when setting long-term financing objectives?
What is the primary advantage of debt financing through borrowing from lending institutions?
What is the primary advantage of debt financing through borrowing from lending institutions?
What is the primary role of trade credit in a firm's financial operations?
What is the primary role of trade credit in a firm's financial operations?
What is the primary difference between secured and unsecured bonds?
What is the primary difference between secured and unsecured bonds?
What is the primary goal of long-term forecasting in a firm?
What is the primary goal of long-term forecasting in a firm?
What is the primary role of a firm's budget?
What is the primary role of a firm's budget?
What is the primary role of financial managers in a firm?
What is the primary role of financial managers in a firm?
What is the primary advantage of equity financing from retained earnings?
What is the primary advantage of equity financing from retained earnings?
What is the main reason behind a firm's financial failure?
What is the main reason behind a firm's financial failure?
What is the primary consideration when setting short-term financing objectives?
What is the primary consideration when setting short-term financing objectives?
What is the primary objective of financial planning in a firm?
What is the primary objective of financial planning in a firm?
What is the primary function of cash flow forecasting?
What is the primary function of cash flow forecasting?
What is the term for predicting revenues, costs, and expenses for a period of one year or less?
What is the term for predicting revenues, costs, and expenses for a period of one year or less?
What is the primary responsibility of financial managers in terms of funds management?
What is the primary responsibility of financial managers in terms of funds management?
What is the primary goal of financial management in a firm?
What is the primary goal of financial management in a firm?
What is the primary step in financial planning?
What is the primary step in financial planning?
What is the primary role of financial planning in achieving a firm's goals?
What is the primary role of financial planning in achieving a firm's goals?
What is the primary outcome of ineffective financial management?
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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