Understanding Business Chapter 18

Flashcard maker : Lily Taylor
finance
the function in a business that acquires funds for the firm and manages those funds within the firm
financial management
the job of managing a firm’s resources so it can meet its goals and objectives
financial managers
managers who examine financial data prepared by accountants and recommend strategies for improving the financial performance of the firm
short-term forecast
forecast that predicts revenues, costs, and expenses for a period of one year or less
cash flow forecast
forecast that predicts the cash inflows and outflows in future periods, usually months or quarters
long-term forecast
forecast that predicts revenues, costs, and expenses for a period longer than 1 year, and sometimes as far as 5 or 10 years into the future
budget
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
capital budget
a budget that highlights a firm’s spending plans for major asset purchases that often require large sums of money
cash budget
a budget that estimates cash inflows and outflows during a particular period like a month or quarter
operating (or master) budget
the budget that ties together the firm’s other budgets and summarizes its proposed financial activities; estimates the costs and expenses needed to run a business, given projected revenues
financial control
a process in which a firm periodically compares its actual revenues, costs, and expenses with its budget
capital expenditures
major investments in either tangible long-term assets such as land, buildings, and equipment or intangible assets such as patents, trademarks, and copyrights
debt financing
funds raised through various forms of borrowing that must be repaid
equity financing
money raised from within the firm, from operations or through the sale of ownership in the firm (i.e. stock)
short-term financing
funds needed for a year or less
long-term financing
funds needed for more than a year (usually 2 to 10 years)
trade credit
the practice of buying goods and services now and paying for them later
promissory note
a written contract with a promise to pay a supplier a specific sum of money at a definite time
secured loan
a loan backed by collateral, something valuable such as property
pledging
accounts receivable are used as collateral for a loan; a percentage of the value of a firm’s accounts receivable pledged (usually 75%) is advanced to the borrowing firm- as customers pay off their accounts, the funds received are forwarded to the lender in repayment of the funds that were advanced
unsecured loan
a loan that doesn’t require any collateral
line of credit
a given amount of unsecured short-term funds a bank will lend to a business, provided the funds are readily available; this speeds up the borrowing process because the firm doesn’t need to apply for a new loan every time it needs funds
revolving credit agreement
a line of credit that’s guaranteed but usually comes with a fee
commercial finance companies
organizations that make short-term loans to borrowers who offer tangible assets as collateral; since these companies usually assume higher degrees of risk, they also usually charge higher interest rates
factoring
the process of selling accounts receivable for cash; not a loan, but a sale of a firm’s asset
factor
a market intermediary (usually a financial institution like CIT Group or a commercial bank) that agrees to buy the firm’s accounts receivable, at a discount, for cash
commercial paper
unsecured promissory notes of $100,000 and up that mature (come due) in 270 days or less; states a fixed amount of money the business agrees to repay the lender (investor) on a specific date at a specified rate of interest
debt financing
borrowing money the company has a legal obligation to repay; firms can borrow by either getting a loan from a lending institution or issuing bonds
term-loan agreement
a promissory note that requires the borrower to repay the loan in specified installments
risk/return trade-off
the principle that the greater the risk a lender takes in making a loan, the higher the interest rate required
indenture terms
the terms of agreement in a bond issue
secured bond
issued with some form of collateral, such as real estate, equipment, or other pledged assets
unsecured bond (debenture bond)
a bond backed only by the reputation of the issuer
equity financing
funds available when the owners of the firm sell shares of ownership to outside investors in the form of stock, when they reinvest company earnings in the business, or obtain funds from venture capitalists
stock
stockholders become owners in the organization
initial public offering (IPO)
the first time a company offers to sell its stock to the general public
retained earnings
the profits the company keeps and reinvests in the firm
venture capital
money that is invested in new or emerging companies that are perceived as having great profit potential
venture capitalists
people who invest in a business in return for part ownership of the business
leverage
raising needed funds through borrowing to increase a firm’s rate of return
cost of capital
the rate of return a company must earn in order to meet the demands of its lenders and expectations of its equity holders
Chief Financial Officer
This is the senior manager who is responsible for overseeing the financial activities of an entire company. This includes signing checks, monitoring cash flow, and financial planning
The Functions of a Financial Manager
planning, budgeting obtaining funds, controlling funds, collecting funds, auditing, managing taxes, advising top management on financial matters

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