cht 16-foundations to business

Financial Management

The process of planning

Current Assets

Assets expected to convert to cash or be used within one year.

Long-Term Assets

Assets expected to provide value for more than one year

Liabilities

Financial claims against a company’s assets that the business owes to others.

Current Liabilities

Debts that must generally be paid within one year

Long-Term Liabilities

Debts due more than one year in the future

Owners’ Equity

Owner's equity is the net financial stake an owner has in their business…
The owners’ financial claim on the business after liabilities are subtracted from assets. It includes owner investments and retained earnings.

Assets−Liabilities=Owners′ Equity

Accounting Equation

The basic financial equation: Assets = Liabilities + Owners’ Equity.

Cash Flow Management

The process of making sure a business has enough cash to pay bills while avoiding excess unused cash.

Transaction Balances

ideal amount of money a business keeps on hand to cover everyday expenses

Liquidity

A company’s ability to quickly access cash to pay short-term obligations.

Accounts Receivable (AR)

Money owed to a business from customers who purchased something on credit.

Accounts Payable (AP)

Money a business owes to suppliers for purchases made on credit.

Trade Credit

Credit extended between businesses where payment is delayed until a later date.

AR Discounts

Discounts businesses offer customers for paying invoices early

Factoring Accounts Receivable

Selling accounts receivable to another company for immediate cash.

Inventory Management

The process of balancing inventory levels to avoid lost sales from too little inventory or extra costs from too much inventory.

Too Little Inventory

Can result in lost sales and unhappy customers because products are unavailable.

Too Much Inventory

Can lead to spoilage

Marketable Securities

Short-term investments made with excess cash for periods up to one year.

Treasury Bills (T-Bills)

Short-term government securities issued by the U.S. Treasury that repay principal plus interest.

Certificates of Deposit (CDs)

Investments where money is deposited for a set time and repaid with interest at maturity.

Commercial Paper

Short-term unsecured loans usually made between companies.

Line of Credit

is a revolving loan that allows you to borrow up to a set limit, withdraw funds as needed, and only pay interest on the money you actually use.

Secured Loan

A loan backed by collateral such as property

Unsecured Loan

A loan that does not require collateral and is based mainly on the borrower’s creditworthiness.

Fixed Assets

Long-term assets used in business operations

Capital Budgeting

The process businesses use to evaluate and choose long-term investments and fixed assets.

Leasing vs. Buying

• Leasing: A business rents or pays to use an asset without fully owning it.

• Buying: A business purchases the asset and owns it permanently.

Business Risk

a financial decision that may negatively impact a company’s profits

Bonds

Long-term contracts where companies borrow money and promise repayment of principal plus interest.

Bond Principal

The original amount borrowed that must be repaid to bondholders

Fixed-Rate Bonds

Bonds that pay the same interest rate over the entire life of the bond.

Variable-Rate Bonds

Bonds where the interest rate can change over time.

AAA Bonds

Very safe bonds with low risk of default and lower interest rates.

Junk Bonds

High-risk bonds that offer higher interest rates because has a greater chance of default.

Retained Earnings

The profits a company keeps after paying distributions

Securities Markets

Markets where stocks and bonds are bought and sold.

Stock

A share of ownership in a company.

Primary Market

The market where new securities are sold to investors for the first time.

Initial Public Offering (IPO)

The first sale of a company’s stock to the public.

Investment Bankers

Financial professionals who help companies issue and sell securities during IPOs.

Secondary Market

A market where investors trade previously issued stocks and bonds with each other.

Stock Exchange

An organized marketplace where securities are traded.

Price-to-Earnings Ratio (P/E Ratio)

A measure calculated by dividing stock price by earnings per share. It reflects investor expectations about future growth.

Dividend Payout Ratio

The percentage of earnings paid out to shareholders as dividends.

Dividend Yield

A measure of investment return calculated by dividing annual dividends by stock price.

Securities Trade on Expectations

Stock prices are based more on future expectations than past performance.

New York Stock Exchange (NYSE)

The largest physical stock exchange in the United States

NASDAQ

A virtual stock exchange focused heavily on technology companies.

Over-The-Counter (OTC) Market

an electronic market where smaller or less-regulated securities are traded.

Penny Stocks

Low-priced

Stock Index

A measurement that tracks the performance of a group of stocks over time.

S&P 500

A stock index made up of 500 large U.S. companies used to measure overall market performance.

Dow Jones Industrial Average

A stock index tracking 30 major “blue-chip” U.S. companies.

Blue-Chip Stocks

Stocks of large

NASDAQ Composite

A stock index focused largely on technology and growth companies.