Financial Management and Securities Markets

Financial Management and Securities Markets

Overview of Finance

• Definition: The study of how money is managed by individuals, companies, and governments.
• Key Aspects: Managing money/assets and liabilities; securing funds.
• Basic Accounting Equation:
  \text{Assets} = \text{Liabilities} + \text{Owner's Equity}

Managing Current Assets and Liabilities

• Working Capital Management:
  • Short-term assets and liabilities are regularly handled by organizations.
  • Current Assets: Includes cash, investments, accounts receivable, and inventory (resources owned by the company).
  • Current Liabilities: Includes accounts payable, salaries owed, taxes owed, and short-term debt (claims against assets).

Managing Current Assets

1. Managing Cash:

   • Idle cash generates no income.
   • Transaction Balance: Cash needed for daily operations (wages, bills).
   • Lockbox: A facility for receiving payments to expedite collections.

2. Investing Idle Cash:

   • Excess cash can be invested in liquid securities.
   • Marketable Securities: Investments in Treasury bills, CDs, and commercial papers.
   • Treasury Bills (T-Bills): Risk-free short-term government debt instruments.

3. Accounts Receivable Management:

   • Money owed by customers is crucial as many sales are credit-based.
   • Discounts for early payment can lower profits.
   • Factoring: Selling accounts receivable to improve cash flow.

4. Optimizing Inventory:

   • Balance between excess inventory (tying up capital) and shortages (losing customers).
   • Inventory needs depend on production methods.

Managing Current Liabilities

1. Accounts Payable:

   • Trade credits often offer early payment discounts (e.g., "1/10 net 30").

2. Bank Loans:

   • Line of Credit: A loan agreement allowing specified amounts to be borrowed.
   • Secured Loans: Loans backed by collateral.
   • Unsecured Loans: Based only on the borrower's creditworthiness.
   • Term Loans: Repaid in regular installments.

3. Nonbank Liabilities:

   • Short-term loans from financial institutions and other obligations (e.g., taxes owed).

Managing Fixed Assets

• Long-Term Assets: Expected to last many years; require careful planning and funding.
• Capital vs. Operating Lease:
  • Capital Lease: Long-term lease recognized as an asset and liability.
  • Operating Lease: Short-term lease not reported on the balance sheet.

Capital Budgeting

• Analyzing and selecting assets to maximize value.
• Continual reevaluation against the company’s needs is necessary.

Financing with Long-Term Liabilities

• Types of Long-Term Financing:
  1. Equity Financing: Attracting new owners through share sales.
  2. Long-Term Debt Financing: Obligation to pay back over years, including bonds.
  3. Bonds: Corporate IOUs for raising long-term funds.
  • Types of Bonds:
  • Unsecured Bonds: Not backed by collateral.
  • Secured Bonds: Backed by specific collateral.
  • Serial Bonds: Series of small issues.
  • Floating-Rate Bonds: Interest rates vary with market.
  • Junk Bonds: High-yield but carry higher risk.

Owners’ Equity

• Represents ownership in a corporation through shares.
• Retained Earnings: Profits reinvested back into the company.

The Securities Market

• Definition: Platforms for buying and selling securities, providing liquidity.
• Key Markets:
  • Primary Market: Where firms raise initial capital (IPOs).
  • Secondary Market: Includes stock exchanges (e.g., NYSE, NASDAQ).

Measuring Market Performance

• Importance of performance measures (averages and indexes) for investors and managers.
  • Indexes: Compare current prices to a base period.
  • Key Index: Dow Jones Industrial Average, which tracks 30 prominent stocks.

Risk Assessment in Investment

• Risk varies by type of investment; longer-term investments typically higher risk.
• Continuous evaluation needed for risk mitigation strategies.

Discussion Points

1. Speeding up cash flow: Importance and methods.
2. Types of marketable securities: Their roles in finance.
3. Utilization of equity for operations and growth.
4. Causes of economic recessions: Historical context and analysis.