BUS 121 - Chapter 16

Financial Management

Planning for a firm’s money needs and managing the allocations and spending of funds

Risk/return trade-off

The balance of potential risks against potential rewards

Financial Plan

A document that outlines the funds needed for a certain period of time, along with the sources and intended uses of those funds

Accounts Receivable

Accounts that are currently owed to a firm

Accounts Payable

Amounts that a firm currently owes to other parties

Budget

A planning and control tool that reflects expected revenues, operating expenses, and cash receipts and outlays

Financial Control

The process of analyzing and adjusting the basic financial plan to correct for deviations from forecasted events

Zero-based Budgeting

A budgeting approach in which each year starts from zero and must justify every item in the budget, rather than simply adjusting the previous year’s budget amounts

Debt Financing

Arranging funding by borrowing money

Equity Financing

Arranging funding by selling ownership shares in the company, publicly or privately

Capital Structure

A firm’s mix of debt and equity financing

Short-term Financing

Financing used to cover current expenses (generally reapid within a year)

Long-term Financing

Financing used to cover long-term expenses such as assets (generally repaid over a period of more than one year)

Cost of Capital

The avergae rate of interest a firm pays on its combinations od debt and equity

Leverage

The technique of increasing the rate of return on an investment by financing it with borrowed funds

Trade Credit

Credit obtained by a purchaser directly from a supplier

Secured Loans

Loans backed up with assets that the lender can claim in case of default, such as piece of property

Collateral

A tanginle asset a lender can claim if a borrower befaults of a loan

Unsecured Loans

Loans that require a good credit but no collateral

Line of Credit

An arrangement in which a financial institution makes money available for use at any time after the loan has been approved

Commercial Paper

Short-term promissory notes, or contractual agreements, to repay a borrowed amount by a specified time with a specified interest rate

Factoring

Obtaining funding by selling accounts receivable

Lease

An agreement to use an asset in exchange for regular payment, similar to renting

Bonds

A method of funding in which the issuer borrows from an investor and provides a written promise to make regular interest payments and repay the borrowed amount in the future

Private Equity

Ownership assets that aren’t publicly traded

Stock Exchanges

Organizations that facilitate the buying and selling of stock

Bond Market

The collective buying and selling of bonds; most bond trading is done over the counter, rather than in organized exchanges

Money Market

An over-the-counter marketplace for short-term debt instruments such as Treasury bills and commercial paper

Derivatives

Contracts whose value is derived from some other entity (usually an asset of some kind, but not necessarily); used to hedge against or speculate on risk

Derivatives Market

A market that includes exchange trading (for future and some options) and over-the-counter trading (for all other derivatives, at least currently)

Bull Market

A market situation in which most stocks are increasing in value

Bear Market

A market situation in which most stocks are decreasing in value

Investment Portfolios

Collections of various types of investments

Asset Allocation

Management of a portfolio to balance potential returns with an acceptable level of risk

Broker

A certified expert who is legally registered to buy and sell securities on behalf of individual and institutional investors.

Smart Contact

Digital agreement in a distributed ledger such as blockchain that automatically executes when its criteria are fulfilled by incoming data