A Explanation Of Different Financial Terms Finance Essay

A Explanation Of Different mo elucidateary Terms Finance EssayThe main accusative of the Finance Manager is to manage coin in such(prenominal) a way so as to en incontestable their optimum utilization and their procurement in a manner that the risk, cost and control considerations argon properly balanced in a given over situation. To achieve the objective the Finance Manager per practices the pursual functions in the following argonas-The need to estimate/forecast therequirement of cashfor both the short precondition (working ceiling requirements) and the long term purpose ( dandy indueings). prognosticate the requirements of bloodlines involves the use of bud countenanceary control and long-range planningHelps to decide what character reference of expectant structurethe smart set necessarily to call for return whether these funds would be raised from loans/borrowings or from familiar source (sh atomic number 18 ceiling)To raise sufficient long term funds to finance fixed summations and other long term investments and to provide for the needs of working neatInvestment DecisionIn projects using the various cracking budgeting tools like contri just noweback method, accounting step of return, internal rate of return, net bring out value.Assets management policies are to be laid down regarding the various items of current assets like accounts receivable by coordinating with the gross sales personnel, inventory with productionDividend DecisionTaking into consideration, earnings trend, share grocery price trend, fund requirement for future growth, cash in flow situation and others.fiscal negotiationPlays a genuinely important billet in carrying out negotiations with the various pecuniary institutions, imprecates and public depositors for raising funds on favourable terms. property ManagementThe finance manager needs to ensure the cater of adequate, durati just and cheap fundto the various p artifices of the organization.That there is no excessive cash idling around.Evaluating financial performanceTo need to constantly review the financial performance of the various units of organization generally in terms of ROI (return on investment. such review assists management in seeing all the funds rescue been utilized in the various divisions and what can be d matchless to improve it. dealings with relevant parties in the Financial MarketsWhere the company is a listed entity, the need to interact with the Stock ExchangeTo deal with capital food grocery stores and capital marketplaces for financing or investment of idling fundsTo foster relationships with bankers, investors, underwriters of equity and bond issuances and other government regulatory bodies.For those who are uninformed, they tend to think the sole function of this position is that of the soul of Accounts Payable and Accounts Receivable, but it goes far beyond that capacity. In fact, the finance manager is in charge of anyfinancingand accounting func tion throughout the company.The role of this position involves that of not only financing functions such as Accounts Payable, Accounts Receivable, and Billing, but it likewise involves that of budget projections and working with the Chief Financial Officer to make sure that the companys funds are stable and assisting with any budget cuts that become necessary.The finance manager is the head of both the Accounts Payable and Accounts Receivable areas of the company. As such, he leave be the unrivaled to set policy and direct procedures for both areas ofbusiness. That includes hiring rung establish upon need, following budget guidelines for expenses including staffing, assuring that procedures are followed by all staff members, setting reasonable quota system to assure work is completed in a whilely fashion, and interacting with department supervisors on a regular basis in order to stay abreast of happenings deep down the department.The finance manager will in addition compile reports that show all of the conditions within his department including expenditures, open invoices, production standards, quality control standards, and timeliness of both recompense of invoices and processing of payments. The finance manager is also responsible for the billing operation of the Accounts Receivable Department and devising sure that guidelines for timely billing are followed as well.The finance manager also is the one who will work with other executives in order to overhaul the budget for each year. He will work with the Chief Finance Officer and Chief Executive Officer in order to develop an just solution for each years expenditures in both staff, office supplies, and any other needs that the company has including training, business trips, out of town meetings, and staff delight expenses. The finance manager has a very important position within a company, and his decisions will confine the financial stability of the company, at least within the areas that fall under his control. It is also his job to make certain that other departments and areas of the company follow their budgets and make the most use of the companys specieby avoiding superficial expenses.Nature of Financial ManagementFinancial management is that part of total management which is concerned primarily with the financial affairs of an organization and the translation of actions, both past and proposed, into meaningful and relevant information for use in the management process. It includes the functions of budgeting, accounting, reporting, and the analysis and interpretation of the financial significance of past events and future plans. It sometimes also includes other related functions such as internal auditing, management analysis, and others. It is not primarily concerned with the technical procedures and methodology of those individual functions. Rather, it is characterized by the coordination and correlation of those functions into an good and broad system of financi al control that will assure that they, collectively more than individually, become an integral part of the management of the organization.Financial management involves the art of interrelating data to obtain a perspective of the total financial situation that will assist managers in program planning and decision- make. A very unprejudiced operating program whitethorn require only a minimum of financial management, and this, in some models, can be provided by the manager himself.Financial Management is also an important field of Management Sciences. It is a combination of Managerial Finance and Corporate Finance. Managerial Finance concerns with the managerial use of financial techniques, whereas on the other hand, corporate finance deals with corporate financial decisions.In both the cases, it is extremely important for Managers in an organization. Financial Management is used to determine the best way to use themoneyavailable to an organization in order to improve the future oppo rtunities toearnmoney. Thus the financial managers use techniques such as Valuation, Portfolio management, Hedging and capital structure etc for better decisions about the future of an organization.On the other hand, it is also used to interpret financial results in a given year or time level using financial analysis techniques. This helps in judging the developed performance of an organization in that time period. Financial management helps in proper allocation of costs, anticipate future expense, and budgeting for the future.Retained EarningsThe accumulated net income that has been retained for reinvestment in the business preferably than being paid out in dividends to stockbearers. Net income that is retained in the business can be used to acquire additional income-earning assets that result in increased income in future years. Retained earnings are a part of the owners equity section of a firms balance sheet.Retained earnings also called retention ratio or retained surplus, i t is the percentage of net earnings not paid out as dividends but retained by the company to be reinvested in its core business or to pay debt.Retained earnings are one component of the corporations net worth and increase the supply of cash thats available for acquisitions, repurchase of outstanding shares, or other expenditures the board of directors authorizes. It is recorded under shareholders equity on the balance sheet. It is calculated by adding net income to or subtracting any net losses from germ retained earnings and subtracting any dividends paid to shareholders, as shown hereSmaller and faster-growing companies tend to have a high ratio of retained earnings to fuel research and development plus invigorated product expansion. Mature firms, on the other hand, tend to pay out a higher percentage of their profits as dividends. In most cases, companies retain their earnings to invest them in areas where the company can progress to growth opportunities, such as spoiling new machinery or spending the money on research and development. If a net loss is greater than beginning retained earnings, retained earnings can become negative, creating a deficit.debenture bondA debenture is a debt instrument, which is not support by collaterals. Debentures are backed by the opinionworthiness and reputation of the debenture issuer. Besides, a debenture is a long-term debt instrument issued by governments and big institutions for the purpose of raising funds. The debenture has some similarities with bonds but the terms and conditions of securitization of debentures are different from that of a bond. A debenture is regarded as an unsecured investment because there are no pledges (guarantee) or liens available on particular assets. Nonetheless, a debenture is backed by all the assets which have not been pledged otherwise.Normally, debentures are referred to as let loosely negotiable debt instruments. The debenture holder functions as a lender to the issuer of the d ebenture. In return, a specific rate of interest is paid to the debenture holder by the debenture issuer similar to the case of a loan. In practice, the differentiation between a debenture and a bond is not observed everytime. In some cases, bonds are also termed as debentures and vice-versa.If a bankruptcy occurs, debenture holders are treated as general creditors. The debenture issuer has a substantial advantage from way out a debenture because the particular assets are kept without any encumbrances so that the option is open for issuing them in future for financing purposes. Usually, debentures are categorized into the following parts and their definitions are also given belowConvertible DebentureConvertible bondsor bonds that can be converted into equity shares of the issuing company after a shape period of time. Convertibility is a feature that corporations may add to the bonds they issue to make them more attractive to buyers. In other words, it is a special feature that a corporate bond may carry. As a result of the advantage a buyer gets from the ability to convert convertible bonds normally have get off interest rates than non-convertible corporate bonds.Non-convertible debenture Simply regulardebenture cannot be converted into equity shares of the liable company. They are debentures without the convertibility feature attached to them. As a result, they normally carry higher interest rates than their convertible counterparts.Corporate Debenture Debentures issued by companies and they are insecure in nature.Bank DebentureThis type of debentures is issued by banks.Government DebentureThis includes Treasury Bond (T-Bond) and Treasury Bill (T-Bill) issued by the government. They are usually regarded as risk-free investments.Subordinated DebentureThis is a particular type of debenture, which ranks below regular debentures, senior debt, and in some instances below specific general creditors.Corporation DebentureCorporation debentures are issued by var ious corporations.Exchangeable DebentureThey are like convertible debentures, but this debenture can only be converted to the common stock of a subsidiary company or affiliated company of the debenture issuer.Seed CapitalSeed capital way of life the initial capital used to derail a business.Seed capital a lot comes from the company founders personal assets or from friends and family.The substance of money is usually relatively small because the businessis still in the idea or conceptual stage.Such a contingencyis generallyat a pre-revenue stage and spill capital is needed forresearch development, to masking piece initial operating expensesuntil a product or service can start generatingrevenue, and to attract the attention of contingency capitalists.Seed capital is needed to get most businesses off the ground. Itis considered a high-risk investment, but one that can reap major rewards if the company becomes a growth enterprise. This type of funding is often obtained in exchang e for an equity stake in the enterprise, although with less formal contractual overhead than standard equity financing.Banks and venture capital investors view seed capital as an at risk investment by the promoters of a new venture, which represents a meaningful and tangible commitment on their part to making the business a success. Frequently,capital providerswillwant to wait until a business is a little more mature before making the big investments that typify the early stage financing of venture capital funding.Seed capital in other words can be said as money used as the initial investment for a new product or service launch. Seed capital enables businesses to launch a new product or service without depending fully on a business loan. The funds for this form of financing are typically provided by private investors who are looking for a high return on their investment of at least 30 percent. The investors look to invest in an industry with a market of at least $1 billion, and the y also want an industry with few competitors for the business. Businesses that typically obtain seed capital are young companies around one year of age that have not produced a product or service for commercial-grade sale yet. The companies are so new, so it can be difficult to obtain a regular commercial loan that is sufficient for covering all of the related start up expenses. capital Credit and OverdraftCash creditisa short-term cash loan to a company.A bank provides this type of funding, butonly after the required security is given to secure the loan. Once a security for reciprocatement has been given, the businessthat receives the loan can continuously draw from the bank up to a certain contract amount. This type of financing is similar to a line of credit.Furthermore, cash credit is a facility to withdraw the amount from the business account even though the account may not have enough credit balance. The limit of the amount that can be withdrawn is sanctioned by the bank ba sed on the business cycle of the client and the working capital gap and the drawing power of the client. This drawing power is determined, based on the stock and sustain debts statements submitted by the borrower at monthly intervals against the security by hypothecating of stock of commodities and/ or book debts. The excess withdrawal of cash is made generally on contain from the customer and the customer has to pay interest on the excess amount he/she has withdrawn. The cash credit facility is quite useful to those businesses where cash payment like wages, transportation, cash purchases are to be made and the receivables are not realized in time.An overdraft facility is a formal arrangement with a bank which allows an account holder to draw on funds in excess of the amount on deposit. Overdraft facility financing is most commonly used by businesses as a way of making theirworking capitalmore flexible, although it can also be available to individuals. Banks which offer this servi ce typically have a number of expectations from customers who use it, and it is important to be aware of these expectations before entering an overdraft facility agreement.The idea behind overdraft facility agreements is that sometimes one needs a bit more money than is available on deposit to deal with various expenses. For example, a business which is always slow in marching music and April might like to use its overdraft facility to makepayrolland keep current with all accounts and creditors. Or, a business might need to make a big one-time expense which exceeds the funds on deposit. With an overdraft facility, people can repay the funds at their convenience. The bank may charge an overdraft fee for accessing the overdraft facility, and theinterest ratecan be higher than that for other types of loans. The bank also has the right to demand repayment in full. Balancing an overdraft facility wisely can free up capital and make people more stable financially, but unwise use can lea d people into a spiral of debt which may be difficult to escape.The amount of an overdraft facility is also curbed people are not allowed to continually take money out and not repay it. The amount of the overdraft is usually pegged to account history and financial information, with the goal of ensuring that people do not end up borrowing more than they can realistically repay through an overdraft facility. The agreed limit can be negotiated with the bank, and some banks are willing to reevaluate if customers feel that their circumstances have changed.Similar to personal overdraft facilities, a business overdraft is a prearranged spending limit with your bank. Many businesses find an overdraft useful for those times when cash flow is a problem for a short period of time. Overdrafts are not a good option for funding larger needs, such as capital or expansion expenses. For these needs it is less big-ticket(prenominal) to obtain a separate business loan. Business overdraftsmay also be subject to more fees than a personal overdraft. Examples include fees to open the overdraft, to transmigrate the overdraft, or sometimes even a fee for not using the overdraft. When used judiciously, overdraft facilities can be a great help in managing the effortless financial shortfall.Commercial PaperCommercial paper is a form of financing that consists of short-term, unsecured promissory notes issued by firms with a high credit standing. Generally, only large firms of unquestionable financial soundness are able to issue commercial paper. Most commercial paper issues have maturities ranging from 3 to 270 days. Although there is no set denomination, such financing is generally issued in multiples of $100,000 or more. A large portion of the commercial paper today is issued by finance companies manufacturing firms account for a smaller portion of this type of financing. Businesses often purchase commercial paper, which they hold as marketable securities, to provide an interest-earn ing reserve of runniness. Commercial paper is interchange at a discount from its par, or face, value. The size of the discount and the length of the time to maturity determine the interest paid by the issuer of commercial paper. The actual interest earned by the purchaser is determined by certain counts.Commercial paper is notusually backed by any form of collateral, so only firms with high-quality debt ratings will easily find buyers without having to offera substantial discount (higher cost) forthe debt issue. For the most part, commercial paper is a very unspoilt investment because the financial situation of a company can easily be predicted over a few months. Furthermore, typically only companies with highcredit ratingsand credit worthiness issue commercial paper. Over the past 40 years, there have only been a handful of cases where corporations have defaultedon their commercial paper repayment. in that location are two methods of issuing paper. The issuer can market the sec urities directly to abuy and holdinvestor such as most money market funds. Alternatively, it can sell the paper to a dealer, who then(prenominal) sells the paper in the market. The dealer market for commercial paper involves largesecuritiesfirms and subsidiaries ofbank belongings companies. Most of these firms also are dealers inUS Treasury securities. Direct issuers of commercial paper usually are financial companies that have frequent and copious borrowing needs and find it more economical to sell paper without the use of an intermediary. In the United States, direct issuers save a dealer fee of approximately 5 basis points, or 0.05% annualized, which translates to $50,000 on every $100 million outstanding. This saving compensates for the cost of maintaining a permanent sales staff to market the paper. Dealer fees tend to be lower outside the United States.Bridge FinanceBridge financingis a method offinancing, used to maintainliquiditywhile waiting for an anticipated and reasona bly expectedinflow of cash. Bridge financing is commonly used when the cash flow from a sale of an asset is expected after the cash outlay for the purchase of anasset. For example, when selling ahouse, the owner may not receive the cash for 90 days, but has already purchased a new home and must pay for it in 30 days. Bridge financing covers the 60 day gap in cash flows. other type of bridge financing is used by companies before theirinitial public offering, to obtain necessary cash for the maintenance of operations. These funds are usually supplied by theinvestment bankunderwritingthe new issue. As payment, the company acquiring the bridge financing will give a number ofstocksat adiscountof the issue price to the underwriters that equally offset the loan. This financing is, in essence, a forwarded payment for the future sales of the new issue.Bridge financing may also be provided bybanksunderwritingan offering ofbonds. If the banks are unsuccessful in selling a companys bonds to qua lified institutional buyers, they are typically required to buy the bonds from the issuing company themselves, on terms much less favourable than if they had been successful in finding institutional buyers and acting as pure intermediaries.There are 2 types of bridging finance which are closed bridging and open bridging.Closed bridging finance is where there is a date for the exit of the bridging finance and is sure that the bridging finance can be repaid on that date. This is less risky for the lender and thus the interest rate charged is lower.Open bridging is higher risk for the lender. This is where the borrower does not have an exact date for the bridging finance exit and may be looking for a buyer of the property or land.Capital MarketA capital market is a market where both government and companies raise long term funds to trade securities on the bond and the stock market. It consists of both the particular market where new issues are distributed among investors, and the uno riginal markets where already existent securities are traded.In the capital market, mortgages, bonds, equities and other such investment funds are traded. The capital market also facilitates the procedure whereby investors with excess funds can channel them to investors in deficit. The capital market provides both overnight and long term funds and uses financial instruments with long maturity periods. The financial instruments are traded in this market such as foreign exchange instruments, equity instruments, insurance instruments, credit market instruments, derivative instruments, and hybrid instruments.The primary role of the capital market is to raise long-term funds for governments, banks, and corporations while providing a platform for the trading of securities.This fundraising is regulated by the performance of the stock and bond markets within the capital market. The member organizations of the capital market may issue stocks and bonds in order to raise funds. Investors can t hen invest in the capital market by purchasing those stocks and bonds.The capital market, however, is not without risk. It is important for investors to understand market trends before fully investing in the capital market. To that end, there are various market indices available to investors that reflect the present performance of the market.Every capital market in the world is monitored by financial regulators and their respective governance organization. The purpose of such regulation is to protect investors from fraud and deception. Financial regulatory bodies are also charged with minimizing financial losses, issuing licenses to financial service providers, and enforcing applicable laws.Capital market investment is no longer confined to the boundaries of a single nation. Todays corporations and individuals are able, under some regulation, to invest in the capital market of any country in the world. Investment in foreign capital markets has caused substantial enhancement to the b usiness of international trade.The capital market is also dependent on two sub-markets the primary market and the secondary market. The primary market deals with newly issued securities and is responsible for generating new long-term capital. The secondary market handles the trading of previously-issued securities, and must remain highly liquid in nature because most of the securities are sold by investors. A capital market with high liquidity and high transparency is predicated upon a secondary market with the same qualities.Money MarketThemoney marketis a component of thefinancial marketsfor assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involvesTreasury bills,commercial paper,bankers acceptances, certificates of deposit, federal funds, and short-livedmortgage-backed andasset-backed securities.It providesliquidityfunding for theglobal financial system. The money market consists offinanc ial institutionsand dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in short-termfinancial instrumentscommonly called paper. This contrasts with thecapital marketfor longer-term funding, which is supplied by bondsandequity. The core of the money market consists of banks borrowing and lending to each other, usingcommercial paper,repurchase agreementsand similar instruments.The money market is a subsection of thefixed incomemarket. We generally think of the term fixed income as being synonymoustobonds. In reality, a bond is just one type of fixed income security. The difference between the money market and the bond market is that the money market specializes in very short-term debt securities (debt thatmatures in less than one year). Money market investments are also called cash investments because of their short maturities. Money market securities are essentiall y IOUs issued by governments, financial institutions and large corporations. These instruments are veryliquidand considered extraordinarily safe. Because they are extremely conservative, money market securities offer significantly lower returns than most other securities.One of the main differences between the money market and the stock market is that most money market securities trade invery high denominations. This limits accessfor the individual investor. Furthermore, the money market is a dealer market, which means that firms buy and sell securities in their own accounts, at their own risk. Compare this to the stock market where a broker receives commission to acts as an agent, while the investor takes the risk of holding the stock. Another characteristic of a dealer market is the lack of a central trading floor orexchange. Deals are transacted over the phone or through electronic systems. casualty Capital FundsVenture capital(also known asVCorVenture) is a type ofprivate equity capital typically provided for early-stage, high-potential,growthcompanies in the interest of generating a return through an eventual realization event such as anIPOortrade saleof the company. Venture capital investments are generally made as cash in exchange for shares in the invested company. It is typical for venture capital investors to identify and back companies in high technology industries such as biotechnology and ICT (information and communication technology).Aventure capital fundrefers to apooled investmentvehicle that primarily invests thefinancial capitalof third-party investors in enterprises that are too risky for the standardcapital marketsorbank loans. Venture capital funds mean an investment fund that manages money from investors seeking private equity stakes in inaugural andsmall- and medium-size enterprises with strong growth potential. These investments are generally characterized as high-risk/high-return opportunities. Theoretically, venture capital funds give individual investors the ability to get in early at a companys startup stage orin special situationsin which there isopportunity for explosive growth. In the past,venture capital investments were only accessible to professional venture capitalists. While a fund structure diversifies risk, these funds are inherentlyrisky.Mostventure capital fundshave a fixed feel of 10 years, with the possibility of a few years of extensions to allow for private companies still seeking liquidity. The investing cycle for most funds is generally leash to five years, after which the focus is managing and making follow-on investments in an existing portfolio. This model was pioneered by successful funds inSilicon Valleythrough the eighties to invest in technological trends broadly but only during their period of ascendance, and to cut exposure to management and marketing risks of any individual firm or its product.In such a fund, the investors have a fixed commitment to the fund that is initially unfu nded and subsequently called down by the venture capital fund over time as the fund makes its investments. There are substantial penalties for a Limited Partner (or investor) that fails to participate in a capital call.It can take anywhere from a month or so to several years for venture capitalists to raise money from limited partners for their fund. At the time when all of the money has been raised, the fund is said to be closed and the 10 year lifetime begins. Some funds have partial closes when one half (or some other amount) of the fund has been raised. Vintage year generally refers to the year in which the fund was closed and may serve as a means to stratify VC funds for comparison. Thisfree database of venture capital fundsshows the difference between a venture capital fund management company and the venture capital funds managed by them.Present ValuePresent value means thecurrent worthof a future sum of moneyor stream of cash flowsgiven a specified rate of return. Future cas h flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows.Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they are earnings or obligations. The calculation of discounted or present value is extremely important in many financial calculations.For example, net present value, bond yields, spot rates, and pension obligations all rely on the principle of discounted or present value.If offered a choice between $100 today or $100 in one yearceteris paribus, a rational person will choose $100 today. This assumes a positive interest rate for the time period. This is described by economists as time Preference. Time Preference can be measured by auctioning off a risk free security like a US Treasury bill. If a $100 note, payable in one year, sells for $80, then the present value of $100 one year in the future is $80. This is because you ca