L6M2 Chapter Four: Financial Aspects of Procurement and Supply

Comprehensive vocabulary flashcards covering financial objectives, cost classifications, sources of finance, and risk management strategies for global commercial procurement.

Company valuation

A financial objective concerned with increasing the worth or value of the company to make it attractive to potential investors, primarily considering assets and liabilities.

Maximization of shareholder wealth

A private sector objective focused on achieving a significant return on investment and increasing stock prices to enhance the net worth of the owners.

Maximization of profits

An objective emphasizing the reduction of operational costs to increase total profit, which in turn increases return on investment for shareholders.

Stakeholder view

A perspective concerned with balancing the competing views and claims of various stakeholders; tools like the mendelow power/interest matrix help in this analysis.

Direct material costs

The costs of materials used directly in the production of a company's goods, including raw materials from external suppliers.

Direct labor costs

The costs associated with paying employees specifically involved in the manufacturing of a product.

Manufacturing overheads

Indirect costs such as electricity bills, utilities, and MRO supplies required for day-to-day business operations.

Working capital

The operating capital or immediate funds a company has to run day-to-day operations and meet short-term financial obligations.

Account receivable

The concept representing the time it takes for a company's customers to pay for products and services.

Accounts payable

The concept representing the time it takes for a company to pay the money it owes to its suppliers.

Working capital cycle

The time it takes for a company to convert its current assets into cash to meet short-term financial obligations.

Overdrafts

A bank facility allowing a company to withdraw more money than is in their account, necessitating repayment with pre-agreed interest.

Trade credit

A source of funding where a company obtains goods from a supplier and pays at an agreed future date, allowing them to sell products before paying.

Factoring

A process where a company sells its invoices to a factor company to gain immediate access to cash instead of waiting for customer payments.

Equity

Money invested by the owners of the company used for funding working capital; it does not require debt repayment.

Aggressive approach

A working capital strategy (restricted approach) relying on short-term borrowing that carries high risk as it does not assume spontaneous needs can be met.

Moderate approach

A working capital strategy that matches assets and liabilities with their maturities to find a middle ground between aggressive and conservative policies.

Conservative approach

A relaxed approach where current assets are kept at high levels to ensure a smooth operating cycle and minimize bankruptcy risk.

Credit insurance

A method used to protect accounts receivables and mitigate the risk of non-payment due to customer insolvency or cash flow issues.

Project funding

A long-term source of finance, typically for projects lasting over $15$ years, where debt is repaid from the income generated by the completed infrastructure.

Special purpose vehicle (SPV)

A separate entity established to undertake a specific project, isolating the parent company from financial risk exposure.

Gearing

The level of a company's debt in relation to the equity invested by its shareholders.

Ordinary shares

A form of equity funding that gives voting rights and part-ownership but does not commit the organization to future debt repayment.

Debenture

A marketable security issued to obtain long-term financing that does not require collateral or result in dilution of ownership.

Venture capital

Pooled investment funds that take private equity stakes in start-up companies and small-to-medium enterprises with strong growth potential.

Exchange rate

The comparison of the value of one currency against the value of another currency.

Fixed exchange rates

Rates set by the government against another currency or group of currencies, preventing free fluctuation to minimize risk and aid planning.

Floating exchange rates

Variable exchange rates determined by market forces of demand and supply, including interest rates and inflation.

Forward contracts

Private, unregulated over-the-counter agreements to buy or sell currency at a specified price and date in the future, with no minimum lot sizes.

Future contracts

Regulated agreements on a centralized exchange to buy or sell currency at a specified price and date using minimum lot sizes.

Currency options

A derivative tool providing the right, but not the obligation, to buy or sell an asset at a future date for a predetermined price and a premium fee.

Contract for difference (CFD)

A derivative product where the buyer and seller exchange the price difference of an asset between contract opening and closing without physical delivery.