Medina Chapter 12

This set of flashcards covers key terms and concepts related to managing the finance function in engineering firms.

Finance Function

The management responsibility for procurement and administration of funds to achieve business objectives.

Fund Requirements

The specific amounts of funds needed for daily operations, credit services, inventory purchases, and major assets.

Short-term Funds

Funds required for repayment in less than one year, often used for daily operations and expenses.

Long-term Funds

Funds required for repayment over a period greater than one year, typically used for capital investments.

Absolute Importance of Finance Function

Critical for any engineering firm as it ensures timely availability of funds for operations.

Sources of Funds

Various avenues from which a firm can obtain financing, including cash sales, loans, and equity contributions.

Cash Inflows

The money received by a firm from sales, collection of receivables, and other financing sources.

Credit Extension

The process of allowing customers to buy products or services and pay for them later.

Inventory Financing

Funds utilized to purchase and maintain adequate inventory levels necessary for operations.

Procurement of Funds

The process of acquiring the required financial resources for business activities.

Wages and Salaries

Regular payments to employees, requiring continuous funding to maintain operations.

Advertising Expenses

Costs incurred for marketing efforts to promote products or services.

Operating Expenses

Recurring costs for daily operations, including rent, utilities, and administrative fees.

Collateral

Assets pledged against a loan to secure funding, reducing lender risk.

Term Loans

A type of long-term debt provided by banks with specified repayment terms.

Bonds

Marketable securities issued to raise funds from borrowers, typically repaid with interest.

Common Stocks

Equity financing where ownership is sold in exchange for capital without repayment obligations.

Retained Earnings

Profit reinvested in the company instead of distributed as dividends.

Financial Flexibility

The ability to adapt financing strategies without constraints from initial capital sourcing.

Risk Management

Strategies employed to identify, evaluate, and mitigate financial losses within a firm.

Pure Risk

Risk that only presents possibilities of loss, not gain, and can be insured.

Speculative Risk

Risk that presents opportunities for both loss and gain, typically not insurable.

Insurance

A contractual mechanism to transfer risk from an individual or business to an insurer.

Risk Avoidance

The strategy of eliminating exposure to risk by avoiding the activity that generates it.

Risk Retention

The acceptance of risk where a firm chooses to bear the financial consequences of potential loss.

Hazard Reduction

Measures taken to minimize the exposure to potential risks.

Loss Reduction

Strategies aimed at lessening the impact of losses when they occur.

Risk Shifting

Transferring the risk to another party through contracts, insurance, or other mechanisms.

Liquidity

The ability of a firm to meet its short-term obligations when they come due.

Efficiency

A measure of how well a firm utilizes its assets and resources to generate income.

Financial Leverage

Using borrowed funds to amplify potential returns on investment.

Profitability

The ability of a firm to generate profit relative to its revenue, assets, or equity.

Balance Sheet

A financial statement that provides a snapshot of a firm's financial position at a specific time.

Income Statement

A financial statement showing revenue and expenses over a specific period, indicating profit or loss.

Statement of Changes in Financial Position

A report summarizing the changes in cash and cash equivalents over a period.

Operating Capital

Funds required for day-to-day operations of the business.

Financial Objectives

Goals set by the firm concerning profitability, growth, and sustainability.

Risk Factors

Elements that may cause unexpected financial damages or losses to a firm.

Working Capital Management

Efficient management of short-term assets and liabilities for ongoing operations.

Creditors

Entities or individuals to whom a firm owes money, often due to credit arrangements.

Vendor Financing

A method of financing where suppliers allow delayed payment for goods and services.

Financial Markets

Platforms for trading financial instruments, such as stocks and bonds.

Equity Financing

Raising capital through the sale of shares, providing ownership interests to investors.

Debt Financing

Raising funds by borrowing from lenders, to be repaid with interest.

Market Position

A measure of a company's competitiveness and role within its industry.

Cash Flow

The net amount of cash being transferred into and out of a business.

Budgeting

The process of creating a plan to spend a firm's resources.

Financial Strategy

A plan to manage assets, liabilities, revenues, and capital for a business.

Financial Analysis

Assessment of a firm's financial information to make informed business decisions.

Insurance Coverage Types

Different categories of protection against potential losses, like fire, theft, and liability.

Risk Assessment

The process of identifying and evaluating risks to mitigate potential impacts.

Investor Relations

Managing communication between a company and its investors.

Financial Reporting

The process of presenting financial results to stakeholders.

Compliance Regulations

Laws and guidelines governing financial practices and disclosures.

Market Risk

The possibility of an investor experiencing losses due to market fluctuations.

Financial Ratios

Key indicators that analyze a company's financial health and performance.

Conservative Financing

Approach focusing on low-risk funding sources and avoiding high debts.

Aggressive Financing

Funding strategy emphasizing high-risk, high-return financing options.

Return on Investment (ROI)

A measure used to evaluate the efficiency of an investment.

Break-even Analysis

Determining the sales volume at which total revenues equal total costs.

Discount Rate

The interest rate used to discount future cash flows back to their present value.

Asset Liquidity

The ease with which an asset can be converted into cash.

Gross Profit Margin

Revenue minus cost of goods sold, divided by revenue, expressed as a percentage.