AFM 132 - Chp 11: financial management Flashcards
(56 cards)
define compound interest
the principle where the interest also earn interest
define financial literacy
having the knowledge, skills, and confidence to make informed financial decision
what are the 4 “C”s in creditworthiness for a business
Character - company size, location, business structure, media coverage, number of year in the business
Capacity - cash flow + ability to pay bills/existing debt
capital - resources available to repay any debts
conditions = external factors that may impact the business (industry growth rates, political factors, currency rates)
why is financial planning important for a company?
to ensure that they can mange day-to-day operations and plan for the future
what are the 3 steps in financial planning?
- developing forecasts
- developing budgets
- establishing financial controls
what’s the importance in developing forecasts?
aim to make informed predictions on future revenue + expenses - brings clarity to future sales volumes = help a company plan their production schedule to manage their resources + avoid supply chain shortages
what info is needed to prepare forecasts
past performance
new sales contracts or contracts that might not be renewed
product offerings + customer growth, along with prediction for changes in the market or economy that could impact sales
changes to key expenses
define short-term forecasts
predict revenue + expenses for a period of 1 year or less
define a long-term forcast
aims to predict revenue = expenses beyond 1 year - used to plan for large investments + purchases
what’s a caveat to long-term forecast?
forecast accuracy drops further into the future you try to project since the business environment can quickly change
what’s the importance of budgets?
allocate money for the day-to-day operations + can also plan for large purchases or investment in the future - they take into account management’s expectation for revenue and then allocate the use of specific resources in the company
define operating budget
includes operating expenses in a year = make allocations for ongoing expenses (salaries, supplies, advertising, rent)
define cash budget
anticipates planned cash inflows/outflows for a period = a company can plan to borrow if they will run low on funds in a period or can make investments if they anticipate that they’ll have excess cash
define capital budget
considers a period longer than a year to play for major asset purchases (new equipment)
which departments are involved in the budgeting process?
finance, each key business function, product line, or geographic unit of a company may contribute to budget development
define financial control
process of comparing actual results to what was projected to identify any differences (variances)
what may be some reasons for discrepancies in financial controls?
change in the cost of raw materials, labour costs, quantity produced or quality issues
what are 2 common ways for small businesses to fail
- undercapitalization
- poor management of cash flow
define undercapitlization
not having enough capital to support its operations
what does it mean to have proper cash management
ensures that money is always immediately available - money is not completely tied up in fixed assets or inventories
what are some strategies that businesses use to manage how quickly they can get customers to pay those bills
- invoice immediately - billing customers as soon as a product or service is provided
2, follow-up - send email reminders of amounts owing before they’re due - reward early payment - offer discounts to the customers if paid early
what’s the companies strategy when it comes time ot pay their bills
strategically pay as late as possible without incurring any penalties or missing out on any discounts for early payment
effective cash management traditionally involves;
speeding up cash collection and slowing down cash payments
what are some day-to-day operations that companies have to pay for?
salaries, utilities, raw materials needed in production
