Bus151 Chapter #18 Financial Management

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Finance

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The function in a business that acquires funds for the firm and manages those funds within the firm.

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Financial Management

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The job of managing a firm's resources so it can meet its goals and objectives.

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Financial Managers

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Managers who examine financial data prepared by accountants and recommend strategies for improving the financial performance of the firm.

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Short-term Forecast

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Forecast that predicts revenues, costs, and expenses for a period of one year or less.

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Cash Flow Forecast

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Forecast that predicts the cash inflows and outflows in future periods, usually months or quarters.

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Capital expenditures

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Major investments in either tangible long-term assets such as land, buildings, and equipment or intangible assets such as patents, trademarks, and copyrights.

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Long-term Forecast

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Forecast that predicts revenues, costs, and expenses for a period longer than a year, and sometimes as far as five years or even 10 years into the future.

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Budget

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A financial plan that sets forth management's expectations and, on the basis of those expectations, allocates the use of specific resources throughout the firm.

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Capital Budget

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A budget that highlights a firm's spending plans for major asset purchases that often require large sums of money

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Cash Budget

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A budget that estimates cash inflows and outflows during a particular period like a quarter or a month.

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Operating (or Master) Budget

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The budget that ties together the firms other budgets and summarizes its proposed financial activities.

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Financial Control

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A process in which a firm periodically compares its actual revenues, costs, and expenses with its budget.

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Debt Financing

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Funds raised through various forms of borrowing that must be repaid.

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Equity Financing

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Money raised from within the firm, from operations or through the sale of ownership in the firm (stock or venture capital).

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Short-term Financing

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Funds needed for a year or less.

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Long-term financing

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Funds needed for more than a year; usually 2-10 years.

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Trade Credit

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The practice of buying goods and services now and paying for them later. A form of short-term financing.

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Promissory Note

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A written contract with a promise to pay a supplier a specific sum of money at a definite time. A form of short-term financing.

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Secured Loan

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A short-term loan; a loan backed by collateral, something valuable such as property.

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Unsecured Loan

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A short-term loan; a loan that doesn't require any collateral.

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Line of Credit

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A short-term loan; a given amount of unsecured short-term funds a bank will lend to a business, provided the funds are readily available.

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Revolving Credit Agreement

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A short-term loan; A line of credit that's guaranteed but usually comes with a fee.

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Commercial Finance Companies

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Organizations that make short-term loans to borrowers who offer tangible assets such as collateral.

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Factoring

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The process of selling accounts receivable for cash.

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Commercial Paper

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Unsecured promissory notes of $100,000 and up that mature (come due) in 270 days or less.

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Term-Loan Agreement

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A promissory note that requires the borrower to repay the loan in specified installments.

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Risk/Return Trade-off

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The principle that the greater the risk a lender takes in making a loan, the higher the interest rate required.

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Indenture Terms

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The terms of agreement in a bond issue.

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Secured Bond

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A bond issued with some form of collateral.

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Unsecured Bond

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A bond backed only by the reputation of the issuer; also called a debenture bond.

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Venture Capital

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Money that is invested in new or emerging companies that are perceived as having great profit potential.

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Leverage

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Raising needed funds through borrowing to increase a firms rate of return.

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Costs of capital

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The rate of return a company must earn in order to meet the demands of its lenders and expectations of its equity holders.