BUS 101 - financial capital intro
Terms in this set (32)
what is capital in the BUS 101 context?
managing financial capital involves two broad aspects:
Claims to Stuff
what is the "stuff" aspect of capital?
Capital is the funds or other financial resources needed to operate the business:
effectively (achieve goals)
efficiently (cost effectively)
what is the "claims to stuff" aspect of capital?
Capital is the source of the funds or other financial resources
what are funds?
Funds and other financial resources:
primarily cash (life blood of the business; "cash is king")
other liquid (cash-like) resources, e.g., working capital
credit facilities, e.g., line of credit at the bank*
equity facilities, e.g., potential owner contributions*
* existing facility; readily available source of cash
line of credit at bank
what is risk?
Financially speaking - uncertainty as to the outcome:
what is reward?
Gain from an investment over a specified period of time
what is the risk-return trade-off?
Optimal balance between the expected payoff from an investment and the investment's risk.
Based on the risk-return trade-off, who should have the lowest cost of funds?
what are the primary responsibilities of a financial function?
(of funds and other financial resources)
what are other responsibilities of a financial function?
financial planning & analysis (strategic planning, budgeting)
tax planning & compliance
credit & collections
what are the two primary perspectives of a financial plan?
a strategic plan is a _______ year plan
3 to 5
an annual budget is a ______ month plan
(first year of strategic plan)
what does a strategic plan entail?
- top level,"10,000 ft" view of the business
- identifies major uses and sources of funds
- identifies timing of major financial resource requirements
- financial plan must support company's strategic objectives
what does an annual budget entail?
- detailed financial statement projections (balance sheet, income statement, cash flow)
- month-by-month detail of uses and sources of funds
- actual vs. budget comparisons help control the business
what are operating activities?
revenue, expense & related activities
what is the most important component of operating cash flow?
insufficient operating cash flow
can't attract debt capital
can't attract equity capital
can't afford capital investments
business eventually fails
what are investing activities?
long-term asset activities
what are financing activities?
financial resources activities; needed when operating cash flow is not sufficient
The profit of a business would be included in which section of the Statement of Cash Flows ?
what is debt financing?
what are examples of short-term debt?
Trade credit (from suppliers and other business partners)
Bank loans - promissory notes
Other financial institutions loans - credit facilities from non-banking lenders, e.g., insurance companies
what are examples of long-term debt?
Bank loans - promissory notes; pay principal and interest periodically
Other financial institutions - promissory notes, e.g., pension funds; pay principal and interest periodically
Bonds* - pay interest periodically; pay principal at maturity
long-term debt financial appropriate for...
what is the good of using debt?
1. Tax deductibility of interest (+)
2. Debt does not dilute control of the firm (+)
3. Lower cost (of capital) of funds (+)
what is the bad of using debt?
1. Increases probability of financial distress (-)
2. Uses up potential debt capacity (-)
what is equity financing
owner supplied funds
what are long-term examples of equity financing?
Issue capital stock* - owner contributed capital; common or preferred stock
Retained earnings - profits retained in business; available for reinvestment in business or distribution to owners
Venture capital - private equity capital invested in businesses that can't borrow due to risk;
long-term financing appropriate for...
equity holders are..
owners of the company
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