ABM-12 Business Finance Reviewer PDF

BUSINESS FINANCE MIDTERMS 12 – ACCOUNTABILITY/ 1 SEMESTER st centuries and long before money was CHAPTER 1: INTRODUCTION TO invented. People exchanged services and B...

BUSINESS FINANCE MIDTERMS 12 – ACCOUNTABILITY/ 1 SEMESTER st centuries and long before money was CHAPTER 1: INTRODUCTION TO invented. People exchanged services and BUSINESS FINANCE goods for other services and goods in return. - Today, bartering has made a LESSON 1: THE CONCEPT AND comeback using techniques that are DEVELOPMENT OF MONEY more sophisticated to aid in trading; for instance, the Internet. Money is defined as… - In ancient times, this system involved - something generally accepted as a people in the same area, however medium of exchange, a measure of today bartering is global. The value of value, or a means of payment. bartering items can be negotiated with - anything authorized by law to be the other party. generally accepted as a legal tender, - Bartering doesn't involve money as a medium of exchange, and a which is one of the advantages. You standard of value in payment of goods can buy items by exchanging an item and services. you have but no longer want or need. Generally, trading in this manner is Origin of the Word “Money” done through online auctions and - Derived from the Latin word moneta, swap markets. surname of the Roman goddess Juno, Moneta refers to a mint or a place for Coinage coining money. In 6th Century BCE Greek poet - According to the etmonline.com, it Xenophanes, quoted by the historian also comes from the Old French Herodotus, ascribed the invention of metal monole and the Modern French coinage to the Lydians. In 600 BCE, Lydia's monnale, meaning money coin, King Alyattes minted what is believed to be currency or change. the first official currency, the Lydian stater. Barter Trade - In August 2021, Chinese - Barter is defined as the exchange of archaeologists with the State things for other things. For example, University of Zhengzhou discovered rice was traded for fish or meat; the world’s oldest known, securely coconut was traded for sugar or dated coin minting site. The facility, coffee. located in Guanzhuang in Henan - It was the system used by means to Province, China, began striking spade get the goods they wanted in coins sometime around 640 BCE, one exchange of what they had before of the first standardized forms of money was developed. It is the metal. exchange of a good or service for - The use of metals as money proved to another good or service. be insufficient for the needs of society. One of the problems was BARTER SYSTEM is an old method of determining the purity of metal used exchange. This system has been used for as money. For gold, the use of BUSINESS FINANCE MIDTERMS 12 – ACCOUNTABILITY/ 1 SEMESTER st touchstone helped. The simplest and the Philippine Constitution (Miranda oldest tool to determine the purity of 2004), it became an exclusive gold was the touchstone used in the prerogative of the Government of the 16th century. Republic of the Philippines and - A gold coin (of unknown purity) is hence, the symbol of the state or rubbed against a dark stone creating a government issuing the said coin. steak. Then more steaks are made with pieces of gold with known - Coin is an ingot of metal, the weight amounts of silver (or copper), and the and fineness of which are certified by colors of the steaks are compared the integrity of the design on its until an exact color matched to the surface or by the power of the issuing unknown is obtained. authority. Only the government, specifically the central bank of a country, is given the power to mint coins and print bills or paper money. - In the Philippines, Bangko Sentral ng This match indicates that both are of the same Pilipinas, which has its own mint, is purity. The discovery of the touchstone, a the only government agency solely machine used to test the purity of metal and vested with the power to mint coins. the total content of a particular lump paved It means the process of manufacturing the way to metal-based commodity for metals in to certain shapes to maintain money and coinage. As a result, the concept uniformity in all the coins of the same of using standard coinage was developed. kind. In the old ages gold and silver metals were commonly used as a media of exchange. - There were many problems in the transactions of metals. So to remove these problems the government has taken over the sole power of coinage money. Now, the government converts the metal into standard coins. Nowadays it is the very easy Coinage is the conversion of metals into medium of exchange and tempering coins. The place where metals are made into with metallic currency is very coins is known as mint. Metals were made difficult. into coins of a fixed weight with coinage. - Money in the form of coins became a Kinds of Coinage convenient commodity for exchange 1. Free Coinage or Gratuitous transactions and, later, a convenient Coinage - This system whereby tool for comparing and storing values. metals are bought to the government Still, at a later period as provided in mint and converted into standard BUSINESS FINANCE MIDTERMS 12 – ACCOUNTABILITY/ 1 SEMESTER st money without any change for used in the Tang Dynasty, called kai minting except for the delay involved yuans. in the process. 2. Brassage - A charge made to an HISTORY OF MONEY IN THE individual under a system of free PHILIPPINES coinage for the minting of any gold or silver brought to the mint and usually Pre-Hispanic Era (10th- 11th Century) calculated to cover various costs - Traded among the early Filipinos and 3. Seigniorage - The government allows with traders from the neighboring people to bring their precious metals lands like China, Java, Borneo, and like gold (gold bullions or bars) to be Thailand was conducted through minted. The government revenue barter. from the manufacture of coins - The inconvenience of the barter calculated as the difference between system led to the adoption of a the face value and the metal value of specific medium of exchange – the the coins cowry shells. 4. Limited Coinage - Government - Since the Philippines is naturally rich converts metals into coins only at its in gold, it was used in ancient times option. There is no privilege of free for barter rings, personal adornment, coinage in such a case. The jewelry, and the first local form of government buys precious metals in coinage called Piloncitos. These had the open market and mints them as a flat base that bore an embossed coin money or the standard medium inscription of the letters “MA” or of exchange at face value higher than “M” similar to the Javanese script of the material content to facilitate trade the 11th century. - It is believed that this inscription was Paper Money the name by which the Philippines - Paper bills were first used by the was known to Chinese traders during Chinese, who started carrying folding the pre-Spanish time. money during the Tang Dynasty (A.D. 618-907) - Mostly in the form of privately issued bills of credit or exchange notes - Used it for more than 500 years before the practice began to catch on in Europe in the 17th century. - Took another century or two for paper money to spread to the rest of the world, Spanish Era (1521-1897) - Another not-so-well-known fact: the - The cobs or macuquinas of colonial word cash was originally used to mints were the earliest coins brought describe the type of round bronze in by the galleons from Mexico and coins with square holes commonly other Spanish colonies. These silver BUSINESS FINANCE MIDTERMS 12 – ACCOUNTABILITY/ 1 SEMESTER st coins usually bore a cross on one side American Period (1900-10941) and the Spanish royal coat-of-arms on - Modern banking, currency and credit the other. systems were instituted making the - The Spanish dos mundos were Philippines one of the most circulated extensively not only in the prosperous countries in East Asia. Philippines but the world over from - Instituted a monetary system for the 1732-1772. It features twin crowned Philippine based on gold and pegged globes representing Spanish rule over the Philippine peso to the American the Old and the New World, hence the dollar at the ratio of 2:1. The US name “two worlds.” Congress approved the Coinage Act for the Philippines in 1903. - The coins issued under the system bore the designs of Filipino engraver Due to the shortage of fractional coins, the and artist, Melecio Figueroa. barrillas, were struck in the Philippines as ordered by the Royalty of Spain. The The renaming of El Banco Espanol Filipino barrilla, a crude bronze or copper coin worth to Bank of the Philippine Islands in 1912 about one centavo, was the first coin struck in paved the way for the use of English from the country. The Filipino term “barya”, Spanish in all notes and coins issued up to referring to small change, had its origin in 1933. barrilla. The Japanese Occupation (1942-1945) The pesos fuertes, issued by the country’s first bank, the El Banco Espanol Filipino de The Japanese Occupation Forces issued war Isabel II (BPI), were the first paper money notes in high denominations. These war notes circulated in the country. had no back up reserves, thus, Filipinos dubbed it “Mickey Mouse” money. (JOKE Revolutionary Period (1898-1899) MONEY) - The Philippine Republic of 1898 under General Emilio Aguinaldo During the worst inflation in Philippine issued its own coins and paper history, Filipinos would go to the market currency laden with bayongs of Mickey Mouse bills, - Two types of two-centavo copper since one duck egg cost 75 pesos, and a box coins were struck. of matches more than 100 pesos. - One peso and five peso revolutionary notes printed as Republika Filipina Guerrilla Notes or Resistance Currencies Papel Moneda de Un Peso and Cinco which are in low denominations, were issued Pesos were freely circulated. by different provinces - These were handsigned by Pedro Paterno, Mariano Limjap and Telesforo Chuidian. BUSINESS FINANCE MIDTERMS 12 – ACCOUNTABILITY/ 1 SEMESTER st The Philippine Republic (1946-Present) Establishment of the Central Bank of the Philippines in 1949 The first currencies issued were the English series notes printed by the Thomas de la Rue & Co., Ltd. in England and the coins minted at the US Bureau of Mint. The “Filipinization” of the Republic coins and notes began in the late 60’s Ang Bagong Lipunan (ABL) series Credit Card notes were circulated, which were - Allows owner to buy products on printed at the Security Printing Plant credit from different stores and starting 1978. establishment, in lieu of cash or Flora and Fauna Coin Series initially money, except that is has a credit issued in 1983. limit, that is, the maximum amount The New Design Series of banknotes that can be charged to the credit card. issued in 1985 replaced the ABL - Holders of a credit card are not series. allowed to charge anything beyond Ten years later, a new set of coins and their credit limit. notes were issued carrying the logo of - Credit card can also be used to pay for the Bangko Sentral ng Pilipinas. services if the company rendering the service has a credit card terminal, a machine needed to execute the transaction. Debit card - the account is maintained issues the Plastic Money debit card. Unlike credit card, a term used to represent the hard- payments using a debit card are plastic cards used in day to day life in immediately charged to the place of actual banknotes. cardholder’s bank account, instead of They come in several forms such as paying the card at a later date. debit cards, credit cards, store cards - the account is maintained issues the and prepaid cash cards. debit card. Unlike credit card, The plastic cards began to be used payments using a debit card are widely after 1970 when the specific immediately charged to the standards were set for a magnetic cardholder’s bank account, instead of strip. In 1981, the concept of Credit paying the card at a later date. cards was introduced in India and was on the verge of an exceptional boom. BUSINESS FINANCE MIDTERMS 12 – ACCOUNTABILITY/ 1 SEMESTER st Cash Card the transfer of property from one - Only allows withdrawal of money owner to another. through an Authorized Teller Machine (ATM). In short, it is used Characteristics of Money for ATM transactions only. 1.) Scarcity - means rare or hard to find. - Can be used as a debit card as well, it The harder a thing is to find, the more is convenient in that the holder need valuable that thing becomes. not stay in line inside the bank to 2.) Divisibility - Quality of being broken withdraw money. down into small units. 3.) Portability - ease in handling or FUNCTIONS OF MONEY carrying. 1. Medium of Exchange - use of money 4.) Durability - Quality of lasting long. to facilitate the transfer of goods and services and settle obligations has LESSON 2: INTRODUCTION TO made money the basic medium of FINANCE exchange. 2. Standard of Value - money Finance defined measures the relative worth of goods - Oyekanmi (2003) defined finance “as and services. In short, money is the money affairs or money matters”. common denominator, the basis of - According to Hornby (2001), finance comparison. is the money needed or needed to 3. Store of Value - The excess of support an activity, project, income over expenses is usually programme etc. and or the saved. Our savings, usually in the management of money. form of money, is stored either in the - The word “finance” is derived from bank or at home for future use-that is the Latin word finer meaning “to end” the idea of store value. The value to “to pay”. needed in the future stored. - Finance is the management of money 4. Means of Deferred Payment - As a which can include investing, renting, legal tender, money is acceptable in saving, lending, budgeting, etc. payments of debts or liabilities. If payment is to be made in the future, Nature of Finance money becomes a means of deferred - Finance may be defined as the payment. Deferred means postponed provision of money at the time it is or held for the future use. So long as required. Every person responsible prices remains stable, the amount for finance, whether it is for a owned is what is paid, and the creditor corporate organization or private is able to buy the same amount of household, money is confronted with goods or services. prospects of inflow receipts on the 5. Conveyance - refers to the means of one hand, and outflow payments on transport or transfer. In law (which the other. The inflows are expected to finance uses) conveyance means the be arranged in such a way that fund process of or the document affecting BUSINESS FINANCE MIDTERMS 12 – ACCOUNTABILITY/ 1 SEMESTER st (money) is always available to make government affairs—managing the necessary payments as they arise. government’s sources and uses of funds. Role of Finance - Public finance is concerned with - Without money (finance), an government revenues, like taxes, and enterprise cannot function; hence, government expenses, like paying understanding the role of finance and salaries of government employees. its ability to measure the progress of a Government spending and business is essential for effective government borrowing are all public management. finance. CLASSIFICATION OF FINANCE 2. Private Finance As to Form of Negotiations: - All finance, other than public, is private finance. All individuals 1. Direct Finance borrowing money from another - Direct finance is a finance involved in individual are doing private finance. direct borrowing. - Examples: A company borrowing - Examples: a company going to a bank from a financial institution, a to obtain a loan, a friend borrowing company issuing shares of stock and money from another, a corporation or bonds. selling shares to its incorporation 3. Personal Finance 2. Indirect Finance - Refers to finance conducted by - Indirect Finance involves financial individual consumers. intermediaries in the real sense of the - A family spending for their food, word. clothing, shelter, recreation, - Financial intermediaries act as education, among others is personal middlemen when they buy securities finance. A father giving his son for resale or simply facilitate the sale allowance, a sister borrowing money from the original issuers to the final from another sister and an aunt buyers. supporting his niece in her studies are - This is when a business borrows all examples of personal finance. money from a third party, such as a bank, rather than directly from 4. Finance of Nonprofit investors. The company pays the third Organizations party interest, which in turn pays - Involves those conducted by interest to its investors or depositors. charitable, civic, religious organizations, among others. These As to User: organizations are not for profit, 1. Public Finance meaning they do not aim to gain profit - Public finance deals with the revenue and increase wealth. and expenditure pattern of the government. It is concerned with the BUSINESS FINANCE MIDTERMS 12 – ACCOUNTABILITY/ 1 SEMESTER st 5. Business Finance thus: Efficiency + Effectiveness= - Deals with financing for business Productivity. firms or for commercial use, the goal of which is to make profit Scope of Finance - When a certain company buys stocks The other two elements that will combine to of another company because it has strike a balance in order to enhance the excess funds, or borrows money from optimum utilization of resources of the the bank to buy land, building, or business are: production and marketing. machinery, business finance come into play The business cycle explains financial (fund) activities and how they are FINANCING IN THE BUSINESS related to the enterprise’s other WORLD activities: Business Manufacturing /operation activities - any lawful economic activity that provide goods/services to customers. involves rendering service, buying They sell their goods or services to and selling goods, converting raw earn profit. material into finished products and They raise funds to acquire selling the same, borrowing and manufacturing and other facilities. lending money, acquiring funds and investing the same, extracting mineral TYPES OF FINANCE resources constructing buildings, 1. Internal Finance road, and infrastructure, providing - also known as equity fund/finance is insurance for a sense of peace, and referred to as Equity. This is solely serving the public like public utilities, owned/contributed by the transportation, and communication stakeholders (within) and is referred entities. to as an internally generated fund. 2. External Finance Efficiency - This is called borrowed fund/finance - all about saving time, money, or and is referred to also as debt. The effort. It is the relationship between stakeholders source this from outside. input and output. Efficiency is a This could be through direct loans, measure of quality. It is all about shares, etc. getting the job done and attaining objectives. THE FINANCE FUNCTIONS - Effectiveness is a measure of quality. It is, at times, used interchangeably 1. Investment Function with efficacy. Producing the desired - Investment decisions involve capital result is effective, thus the old cliché, expenditures which are referred to as “Effectiveness is doing the right capital budgeting decisions. This is things and efficiency is doing things the decision of allocating capital to right.” If we combine efficiency and long-term assets that will bring in effectiveness, we obtain productivity, BUSINESS FINANCE MIDTERMS 12 – ACCOUNTABILITY/ 1 SEMESTER st beneficial yield (cash inflow) in the - Current assets if properly/efficiently future. managed would safeguard the - There are two important aspects of business organization against risk of investment decisions: illiquidity. The firm needs to invest The evaluation of the prospective sufficient funds in current assets in profitability of new investment; and order to become liquid. It would lose The measurement of a rate against the profitability, if more of available prospective return of new investments current assets are not utilized to earn could be compared. any revenue. 2. Financing Function Financial Procedures - This is another vital function in an - Financial procedures involve a lot of enterprise. The financial manager has measures to achieve effective to identify the time, place and the execution of finance functions. Some technique for acquiring adequate important routine finance functions funds to meet the enterprise’s are: investment needs. The central issue - Supervision of cash receipts and here is the determination of the payments and cash balances appropriate proportion of internal safeguarding. (equity) and external (debt) finance - Custody and safeguarding of required by the enterprise. The mix of securities, insurance policies and the two is known as the capital other valuable papers. structure of the business organization. - Taking care of the mechanical details 3. Dividend Function of new outside financing. Record - This is the other major financial keeping and reporting. decision which affects the shareholders and the business as a RISKS OF FINANCE whole – the decision to distribute all 1. Physical Risks and Finance - These profits or retain the same. The are risks that some accident may proportion of distribution of profit destroy or spoil some physical goods and the balance retained is subject to created by the work financed. the firm’s policy, decision of the For example: board of directors or economic A stock of food may go bad or be situation as applied. eaten up by insects or animals, 4. Liquidity Function A house (premises) may be destroyed - Liquidity and profitability affect by fire, investment in current assets in A ship may be wrecked or sunk. business organizations. Liquidity of an enterprise is affected by the level 2. Technical Risks and Finance of management of current assets. Risk - These are those risks that arise from of illiquidity (lack of liquidity), in the fact that the producer’s skill or extreme situations, can lead to a that of the subordinates may not be up business insolvency. to the expected level for the plan, BUSINESS FINANCE MIDTERMS 12 – ACCOUNTABILITY/ 1 SEMESTER st hence it may fall short of achieving Rent Act, which can affect the status the intention. If at all it is achieved, it of workers who are tenants if it is not may fall below the standard; i.e. the favourable; corporate tax can affect end product, at disposal may the profit margin of an enterprise and consume, in its construction, more this may in turn have effect on the resources than permitted in making finances of the organization. the plans. 5. Avoidance of Risk 3. Economic Risks and Finance There are three ways of avoiding or reducing This category of risks is usually the risk. These are as follows: greatest and closely related to finance. Appropriate measures involving They remain; even though the additional expenditure; physical object created suffers no Turn into regular costs by pooling unexpected damage. It is found them with large numbers of similar possible to construct these physical risks; objects with the resources assumed to Combining them with other risks be available. operating in the opposite direction. There are four main kinds of this risk: Mitigating Risks The risk of an inadequate supply of 1. Prioritize the resources needed to make the - what is necessary. The needs, things product planned. that will help to improve on finances The risk of fall in demand for the more. product once it has been made. - make plan or a budget The risk of a failure of the demand for - Spend according to your means a product is increased when that - Apply the 50-30-20 rule product is itself highly durable. - 50= needs, 30= wants, 20= savings, The risk that potential purchasers may investments, payment debts be prevented from buying by a - Income - SID = Expenses shortage of finance. 2. Buy Insurance 3. Liit Liability/Obligations 4. Political Risk and Finance - The more we’re liable, its a burden to - These are risks of losses as the result us. of unforeseen intervention by 4. QA Program (Quality Assurance) governments. May particularly affect - Employ strategies (FIFO the enterprise operating in or STRATEGY) First in, First Out exporting to a foreign country, where 5. Limit High-Risk Customers government laws discriminate. This 6. Risk Management may have untold frustration in the quest for achievement of the expected CHAPTER 2: BUSINESS FINANCE return on capital investment. Example includes: LESSON 1: FLOW OF FUNDS IN A BUSINESS ENTERPRISE BUSINESS FINANCE MIDTERMS 12 – ACCOUNTABILITY/ 1 SEMESTER st a college setting aside money CONCEPT OF FUNDS to award a scholarship Different Interpretations an insurance company that sets aside ❖ Cash Fund: “the amount of Cash” in money to pay its customers’ claims. a conservative or narrow sense, as it is synonymous with Cash (i.e. How Funds Work? cash on hand plus demand deposits at - Individuals, businesses, and the bank). governments all use funds to set ❖ Short-Term Monetary Assets: It aside money. Individuals might represents cash and other establish an emergency fund—also assets which can immediately be called a rainy-day fund—to pay for converted into cash. So, short- unforeseen expenses or a trust fund term investments, quickly to set aside money for a specific realizable debtors are also taken person. into consideration. ❖ Net Monetary Assets Fund: the Examples include mutual funds, which gather amount of cash, bank and marketable money from numerous investors and invest it securities, short-term receivables, and in a diversified portfolio of assets, which secondary cash reserves. invest the assets of high-net-worth individuals (HNWI) and institutions in a way ❖ Capital Fund: the total amount of that is designed to earn above-market returns. resources employed in the business. It is considered as purchasing or TYPES OF FUNDS spending power or as all financial Emergency funds - personal savings resources arising, as several writers vehicles created by individuals used have pointed out, from external rather to cover periods of financial than internal transactions of the firm. hardship, such as job loss, prolonged In short, this fund includes the illness, or a major expense. financial resources other than College funds are usually tax- working capital. advantaged savings plans set up by ❖ Working Capital Fund: Still others families to allocate funds for their are of the views that the amount of children’s college expenses. Net Working Capital or the excess Trust funds - legal arrangements set of current assets over current up by a grantor who appoints a liabilities should be considered as trustee to administer valuable assets ‘Fund’, particularly for the purpose for the benefit of a listed beneficiary of preparing Funds Flow Statement. for a period of time. Retirement funds are savings FUND is …. vehicles used by individuals saving a pool of money that is allocated for a specific for retirement. Retirees receive purpose. monthly income or pensions from a city government setting aside retirement funds. money to build a new civic center BUSINESS FINANCE MIDTERMS 12 – ACCOUNTABILITY/ 1 SEMESTER st Mutual funds are investment funds Investment funds are used by managed by professional investors to pool capital and managers who allocate the funds generate a return. received from individual investors College funds are usually set up into stocks, bonds, and/or other by parents to contribute money to assets. a child's future college Money-market funds are highly education. liquid mutual funds purchased to earn interest for investors through What are the sources of funds? short-terminterest-bearing securities, Sources of Funding Available for such as Treasury bills and Companies commercial paper Hedge funds are investment vehicles 1. Retained Earnings- This is the most for high-net-worth individuals or basic source of funds for any institutions designed to company and, hopefully, the primary increase the return on investors’ method that brings in money to the pooled funds by incorporating firm. The net income left over after high-risk strategies such as expenses and obligations is known as short selling, derivatives, and retained earnings (RE). leverage. Government bond funds are for investors looking to put their money away in low-risk investments through Treasury securities—such as Treasury bonds—or agency- issued. Debt-service funds are allocated to 2. Debt Capital - Comes in the form of repay the government’s debt. traditional loans and debt issues. Capital projects fund resources are Debt issues are known as corporate used to finance the capital projects of bonds. They allow a wide number of a country, such as purchasing, investors to become lenders or building, or renovating equipment, creditors to the company. Just like structures, and other capital assets consumers, companies can reach out to banks, other financial institutions, What is a Purpose Fund? and other lenders to access the capital they need. The purpose of a fund is to set aside a certain amount of money for a specific need. An emergency fund is used by individuals and families to use in times of emergency. BUSINESS FINANCE MIDTERMS 12 – ACCOUNTABILITY/ 1 SEMESTER st that can be borrowed, repaid, and Debt Financing borrowed again. - involves borrowing money and Home Equity Line of Credit paying it back with interest. The (HELOC) - are the most common most common form of debt type of secured LOC. A financing is a loan. HELOC is secured by the market value of the home minus the Some sources of debt financing are: amount owed, which becomes the 1. Term loans - are commonly granted to basis for determining the size small businesses that need cash to purchase of the LOC. equipment, a new building for their Business Line of Credit - production processes, or any fixed assets to Businesses use these to borrow on an keep their businesses going. as-needed basis instead of taking out a fixed loan. Short-term loans: These types of Demand Line of Credit - This term loans are usually offered to type can be either secured or firms that don't qualify for a line of unsecured but is rarely used. With a credit. They generally run less than a demand LOC, the lender can call the year, though they can also refer to a amount borrowed due at any time. loan of up to 18 months. Payback (until the loan is called) can Intermediate-term loans: These be interest only or interest plus loans generally run between one to principal, depending on the terms of three years and are paid in monthly the LOC. installments from a company’s cash Securities-Backed Line of Credit flow. (SBLOC) - This is a special secured- Long-term loans: These loans last demand LOC, in which collateral is anywhere between three to 25years. provided by the borrower’s They use company assets as securities. Typically, an SBLOC lets collateral and require monthly or the investor borrow anywhere from quarterly payments from profits or 50% to 95% of the value of assets in cash flow. their account. 2. Line-of-credit (LOC) is a preset 3. Business credit card is a credit card borrowing limit that can be tapped into at any intended for use by a business rather than for time. The borrower can take money out as an individual’s personal use. Business credit needed until the limit is reached. As money is cards are available to businesses of all sizes repaid, it can be borrowed again in the case and can help them build a credit profile to of an open line of credit. improve future borrowing terms. Types of Lines of Credit 4. Personal loan is an amount of money Personal Line of Credit - This you can borrow to use for a variety of provides access to unsecured funds purposes. For instance, you may use a personal loan to consolidate debt, pay for BUSINESS FINANCE MIDTERMS 12 – ACCOUNTABILITY/ 1 SEMESTER st home renovations, or plan a dream wedding. purpose for the investment goes beyond Personal loans can be offered by banks, simply acquiring an interest in the company credit unions, or online lenders. and moves on to actually taking control of the business. 3. Equity Capital - A company can raise capital by selling off ownership 4. Initial Public Offering (IPO) refers to stakes in the form of shares to the process of offering shares of a private investors who become stockholders. corporation to the public in a new stock This is known as equity funding. issuance for the first time. An IPO allows a Private corporations can raise capital company to raise equity capital from public by offering equity stakes to family investors. and friends or by going public through an initial public offering Equity Financing vs. Debt Financing (IPO). Is Debt Financing or Equity Financing Riskier? - It depends. Debt financing can be riskier if you are not profitable as there will be loan pressure from your lenders. However, equity financing can be risky if your investors expect you to turn a healthy profit, which Some Sources of Equity Financing they often do. If tehy are unhappy, 1. Angel Investor (also known as a private they could try and negotiate for investor, seed investor or angel funder) is a cheaper equity or divest altogether. high-net-worth individual who provides financial backing for small startups or What is Funds Flow? entrepreneurs, typically in exchange for Fund flow is the cash that flows into ownership equity in the company. Often, and out of various financial assets for angel investors are found among an specific periods of time. entrepreneur's family and friends. It's usually measured on a monthly or quarterly basis. 2. Venture Capital (VC) - is a form of Fund flow doesn't measure the private equity and a type of financing performance of any asset. that investors provide to startup companies and small businesses that are believed to For example, with mutual funds, fund flow have long-term growth potential. measures the cash involved in share Venture capital generally comes from well- purchases, or inflows, and the cash resulting off investors, investment banks, and any from share redemption, or outflows. It doesn't other financial institutions. say anything about how well or badly a fund performed. 3. Corporate Investor - incorporated business that chooses to invest in another Net inflow occurs when more cash company. In some cases, the underlying flows into, say, the mutual fund than BUSINESS FINANCE MIDTERMS 12 – ACCOUNTABILITY/ 1 SEMESTER st out of it. A net inflow creates excess cash for managers to invest. Theoretically, this then creates demand for securities such as stocks and bonds. A net outflow would indicate that more cash was taken from the mutual fund than was invested in it. Understanding Fund Flow Fund flow focuses on the movement of cash only and reflects the net flow after measuring inflows and outflows. Inflows can include the money retail investors put into mutual funds. Outflows can include payments to investors or payments made to a company in exchange for goods and services. Fund Flow Statement A fund flow statement discloses the types of inflows and outflows a company experiences. The fund flow statement can highlight fund flow that might be out of the ordinary, such as a higher-than- expected outflow due to an irregular expense. Further, it often categorizes the various transaction types and sources to help track any fund flow activity changes.