Lecture Notes Flashcards

Loans Working Capital

• Definition: A loan used to finance a company’s everyday operations, not for long-term assets or investments, but for short-term operational needs.
• Ways to Get Working Capital Financing:
  1. Traditional Bank Loans
  2. Lines of Credit
  3. Invoice Factoring
  4. Inventory Financing
  5. Supplier Credit
• Types of Working Capital Loans:
  1. Short Term Loans: One-time use, paid within a year or less. Can be secured or unsecured.
  2. Invoice Financing: Submit invoices to advance cash against future invoice payments.
  3. PO Financing: Finances specific working capital need, requires a purchase order.
  4. Credit Line Loans: Businesses given a credit limit and can take out a loan within that limit at any time.
  5. Equipment Loans: Used to purchase equipment.

Loan Interest

• Definition: Percentage of interest relative to the principal. It is either what lenders charge borrowers or what is earned from deposit accounts.
• Classification

Simple Interest

• Definition: Interest charge that borrowers pay lenders for a loan, calculated using the principal only, without compounding interest.
• Formula: \text{Simple Interest} = P \times R \times T, where P is the principal, R is the rate, and T is the time.

Compound Interest

• Definition: Interest that applies not only to the initial principal but also to the accumulated interest from previous periods. Earning or owing interest on your interest.
• Formula: A = P(1 + \frac{r}{n})^{nt}, where A is the amount after interest, P is the principal, r is the annual interest rate, n is the number of times interest is compounded per year, and t is the number of years.

Loan Payment

• Definition: Amount of money a borrower pays periodically to a lender to repay a loan, including both principal and interest. Consistency is required between the interest rate per period and the number of payment periods.
• Formula: M = P \frac{i(1+i)^n}{(1+i)^n - 1}, where M is the monthly payment, P is the principal loan amount, i is the monthly interest rate, and n is the number of payments.

Project Management

• Definition: Planning and organizing a company’s resources to move a specific task, event, or duty toward completion.
• Process: A dynamic process that utilizes the appropriate resources of the organization in a controlled and structured manner to achieve clearly defined objectives identified as needs.
• Steps:
  1. Project Initiation: Define the project’s purpose, scope, and objectives. Identify key stakeholders and create a project charter.
  2. Project Planning: Create a project plan, create a work breakdown structure, and develop a risk management strategy.
  3. Project Execution: Start working on the project plan, build workflows, assign tasks to team members, and keep everyone in the loop.
  4. Project Monitoring and Controlling: Do regular reviews, monitor progress against KPIs, apply changes when needed.
  5. Project Closure: Complete all project deliverables, discuss failures and successes, and document lessons learned.

Financial Forecasting

• Definition: Prediction of financial results based on adjusted non-GAAP income statements, balance sheets, and cash flow statements.
• Importance:
  1. Informs business decision-making regarding hiring, budgeting, predicting revenue, and strategic planning.
  2. Helps maintain a forward-focused mindset.
  3. Reduction cost.
  4. Attract investors.
  5. Annual budget planning.
  6. Establishing realistic business goals.
  7. Identifying problem areas.
• Annual budget: A budget represents your business' cash flow, financial positions, and future goals and expectations for a set fiscal period. Financial forecasting and planning work in tandem, as forecasting essentially offers insights into your business' future; these insights help make budgeting accurate.

Types of Financial Forecasting:

1.  **Sales Forecast:** Projects sales for at least three fiscal years.
2.  **Expenses Forecast:** Shows expected expenses that businesses incur performing their normal business operations.
3.  **Top-Down Forecast:** Takes the market outlook as a whole to project future estimates of the company.
4.  **Bottom-Up Forecast:** Takes the historical data of the company and works up to the whole market outlook.

• Goals:
  1. Recognize the patterns in your business.
  2. Understand the drivers of your income.
  3. Decide on a time horizon.
  4. Define interim goals.
  5. Convert everything into quarterly metrics.
  6. Get control over cash flow variability.
  7. Develop KPIs that help identify problems early on.
  8. Look at longer-term trends.

Proforma Statements

• Pro forma statements focus on a business's future reports, which are highly dependent on assumptions made during preparation, such as expected market conditions.
• Definition of proforma: Refers to projections or forecasts; pro forma statements apply to any financial document including:
  • Income statements.
  • Balance sheets.
  • Cash flow statements.

Financial Forecasting Methods

1. Straight Line:
   • Use: Constant growth rate.
   • Math Involved: Minimum level.
   • Data Needed: Historical data.
2. Moving Average:
   • Use: Repeated forecast.
   • Math Involved: Minimum level.
   • Data Needed: Historical data.
3. Simple Linear Regression:
   • Use: Compare one independent with one dependent variable.
   • Math Involved: Statistical knowledge required.
   • Data Needed: A sample of relevant observations.
4. Multiple Linear Regression:
   • Use: Compare more than one independent variable with one dependent variable.
   • Math Involved: Statistical knowledge required.
   • Data Needed: A sample of relevant observations.