Understanding Business Chapter 18

financial planning process:

1 - forecasting firms financial needs 2 -developing budgets 3 - establishing financial controls

Unsecured Bond

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

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.

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. - a tool for financial planning - 3 types of budgets:capital, cash & budgeting

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.

Promissory Note

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

Secured Bond

Bond issues with some form of collateral.

The term used for unsecured notes of $100,000 and up that are due in no more than 270 days is

Commercial Paper

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

Which statements are true about factoring accounts?

It is the accounts receivable of a firm sold for a discount. The firm that buys the accounts receivable collects the amount due. Small businesses often use it for financing in the short term.

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. A firm that makes a major investment in a long-term asset

Financial Managers

Managers who examine financial data prepared by accountants and recommended strategies for improving the financial performance of the firm. - focus on the management of a firm's resources.

time value of money

Money is considered to have a time value because money has more value in your possession today than at a later point in the future

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

Which of the following are true about commercial paper?

Only large, stable firms offer it. It is a short term source of funds.

Leverage

Raising funds through borrowing to increase the 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 its goals and objectives. collection of money due to the firm arranging for funding from a bank limiting of bad debts

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

The amount a business borrows and for how long depends on which of the following?

The type of business and industry it is in How quickly it can resell the merchandise it purchases with the funds

Which statements about commercial finance companies are true?

They want borrowers to offer tangible assets as collateral. They charge higher rates than banks. They make short-term loans.

Commercial Paper

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

Which are questions financial managers ask when considering long-term financing?

What are the organization's long-term goals and objectives? What funds do we need to achieve the firm's long-term goals and objectives? What sources of long-term funding (capital) are available, and which will best fit our needs?

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

In pledging, the firm uses its ______ as collateral for a loan.

accounts receivable

It is better to go to banks instead of family and friends for business loans because ______.

banks can assist the business in analyzing problems loans from family can hurt family relationships

Why can loans obtained from families and friends be problematic?

because all parties may not understand cash flow

What are the three most common types of budgets in a firm's financial plan?

capital budget master budget cash budget

Advantages of using a credit card in small business financing include that:

cards are accepted in many places they save time

Commercial _______________ companies are different from banks because they do not accept deposits, but they do make short-term secured loans at higher interest rates.

finance

operating funds

funds needed to keep the doors to the firm open and in business. are typically needed to manage day to day needs of a business as well as acquiring needed inventory. needs: acquiring needed inventory making capital expenditures controlling credit operations

Determinants of how much money a firm should borrow include:

how quickly they can generate funds using the borrowed cash cash flow forecasts

What inventory management procedure helps a firm to control inventory costs?

implementing a just-in-time inventory control method

Careful control of a firm's ______ costs allows it to maintain correct levels of stock and product.

inventory

trade credit

is the practice of buying goods or services now and paying for them later. statements are true regarding trade credit- It is used by large and small businesses It is usually more convenient than bank loans It is the most widely used source of short-term funds

Which are forms of debt financing?

issuing bonds getting a loan from a bank

When considering _____________________-_____________________ financing options a financial manager must consider the organization's financial goals and objectives.

long term

Commercial finance companies take ______ risks than banks and charge ______ interest rates.

more; higher

Commercial Finance Companies

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

When borrowing against accounts receivable so when the account receivable is paid, the money is forwarded to the lender is the process of ______.

pledging

Is it more common for a firm to fail due to lack of sales or poor financial management?

poor financial management

Accepting credit cards can be useful to small businesses by:

providing ease of payment for customers providing the business with payment more quickly

Small business managers are more concerned with ______-term funds.

short

Short-term financing is more important to a small business than long-term financing because ______.

small businesses are more concerned with funding day to day operations

credit cards

the merchant accepts payment immediately from the bank and the customer agrees to repay the bank

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. A financial institution or commercial bank that purchases a business' accounts receivable at a discount and then keeps what they collect.

Indenture Terms

the terms of agreement in a bond issue

The______________________ value of money is the idea that money in your possession today is worth more than money that will be in your possession in the future.

time

What three promises are included in the issuance of a bond?

to repay on a certain date to pay a certain interest rate to repay the amount owed

What are the three most common reasons firms fail financially?

undercapitalization inadequate expense control poor control over cash flow

Because a majority of small business are rejected for traditional business loans, many ______ for short-term financing.

use credit cards