Introduction to Financial Management

Vocabulary flashcards covering key concepts, definitions, and roles from the video notes on Introduction to Financial Management.

Financial management

The management of the finances of a business to achieve financial objectives; key elements include financial planning, financial control, and financial decision-making.

Business finance

The art and science of money management in a business; ensures adequate funds are available to operate and that spending and investing are wise.

Budgeting

The act of projecting revenue and expenditures over a period of time.

Profit maximization

The goal of generating the highest possible profit for the year, either by increasing revenue or reducing costs; Profit = Revenue – Expenses.

Revenue

Income from sales; used to generate profit.

Profit

The financial gain = Revenue minus Expenses.

Time value of money

The concept that money today is worth more than the same amount in the future due to its earning potential.

Net present value (NPV)

The difference between the present value of a decision's benefits and the present value of its costs; a positive NPV increases shareholder wealth.

Shareholders’ wealth maximization

Maximizing the net present value of a firm’s decisions to increase shareholders’ wealth, using discounting of future cash flows.

Discount rate

A rate used to discount future cash flows to their present value, reflecting risk.

Positive NPV

A decision whose discounted benefits exceed costs, thereby increasing shareholder wealth.

Social responsibility

The obligation of an organization to act in ways that benefit not only shareholders but also employees, clients, society, and the environment.

Business ethics

Standards of conduct or moral actions guiding a company’s treatment of stakeholders; fairness and honesty in dealings.

Growth

An objective to expand the business, sometimes via projects with negative NPV to gain economies of scale.

Financial planning

Ensuring funds are available when needed in the short, medium, and long term, often using budgeting and forecasting.

Financial control

Monitoring whether assets are used efficiently, assets are secure, and management acts in shareholders’ best interests.

Financial decision-making

Decisions involving investments, financing, and dividends.

Capital structure

The mix of debt and equity financing used to fund a company’s assets.

Financing

Decisions on how to fund long-term investments and working capital, determining the appropriate capital structure.

Investing

Allocating excess cash to profitable opportunities; includes short-term and long-term investments.

Capital budgeting

Analysis used to evaluate long-term investments for profitability and viability, often to reassure lenders.

Short-term investments

Investments made with excess cash that can be quickly converted to cash.

Long-term investments

Investments intended to be held for a long period and typically evaluated via capital budgeting.

Working capital

Funds used for day-to-day operations, including financing accounts receivable and inventories.

Liquidity risk

The risk of not being able to meet short-term obligations or to sell investments quickly.

Dividend policy

The plan for when and how cash dividends are paid to shareholders.

Cash dividends

Cash payments to shareholders based on shareholdings, contingent on earnings and cash availability.

Retained earnings

Profits kept in the company to fund operations and future investments rather than distributed as dividends.

Dividend declaration conditions

Two prerequisites for declaring cash dividends: sufficient retained earnings and available cash.

Board of Directors (BOD)

The highest policy-making body elected by shareholders; sets policies and oversees management.

Shareholders

Owners of the company who elect the Board of Directors; each share represents a voting right.

One vote per share

One voting right is granted for each share held.

President (CEO)

Oversees operations and implements board-approved strategies; manages planning, organizing, staffing, directing, and controlling.

VP for Marketing

Responsible for marketing strategy, directing sales, market/competitor analysis, and researching new opportunities.

VP for Production

Ensures production meets demand, minimizes costs, plans production, and sources materials.

VP for Administration

Coordinates administrative, finance, and marketing functions; assists in hiring and payroll; space planning and cost control.

VP for Finance

Manages financing, investing, and working capital; determines capital structure and liquidity management.

Capital budgeting analysis

Tool to assess long-term investment profitability and feasibility, important for debt financing and lender confidence.

Lenders

External parties that provide debt financing and require assurance that investments will be profitable.