Chapter 18 Financial Management

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.

Line of Credit

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

Revolving credit Agreement

A line of credit that's guaranteed but usually comes with a fee.

Secured Loan

A loan backed by collateral, something valuable such as property.

Unsecured Loan

A loan that doesn't require any collateral.

Financial Control

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

Term-loan Agreement

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

Promissory Note

A written contract with a promise to pay a supplier a specific sum of money at a definite time.

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.

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.

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).

Debt Financing

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

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.

Financial Managers

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

Equity Financing

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

Venture Capital

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

Commercial Finance Companies

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

Retained Earnings

Profits the company keeps and reinvests in the firm.

Leverage

Raising needed funds through borrowing to increase a firm's rate of return.

Operating (or master) Budget

The budget that ties together the firm's other budgets and summarizes its proposed financial activities.

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 it's goals and objectives.

Trade Credit

The practice of buying goods and services now and paying for them later.

Risk/return Trade-off

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

Factoring

The process of selling accounts receivable for cash.

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.

Indenture Terms

The terms of agreement in a bond issue.

Commercial Paper

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

Unsecured Bond

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

Secured Bonds

A bond issued with some form of collateral.

Cash Budget

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

Capital Budget

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