The main techniques and sectors of the financial industryMain article: Financial servicesAn entity whose income exceeds its expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower, a financial intermediary such as a bank, or buy notes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary pockets the difference.A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays the interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity. Banks are thus compensators of money flows in space.A specific example of corporate finance is the sale of stock by a company to institutional investors like investment banks, who in turn generally sell it to the public. The stock gives whoever owns it part ownership in that company. If you buy one share of XYZ Inc, and they have 100 shares outstanding (held by investors), you are 1/100 owner of that company. Of course, in return for the stock, the company receives cash, which it uses to expand its business in a process called "equity financing". Equity financing mixed with the sale of bonds (or any other debt financing) is called the company's capital structure.Finance is used by individuals (personal finance), by governments (public finance), by businesses (corporate finance), as well as by a wide variety of organizations including schools and non-profit organizations. In general, the goals of each of the above activities are achieved through the use of appropriate financial instruments, with consideration to their institutional setting.Finance is one of the most important aspects of business management. Without proper financial planning a new enterprise is unlikely to be successful. Managing money (a liquid asset) is essential to ensure a secure future, both for the individual and an organization.Personal financeMain article: Personal financeQuestions in personal finance revolve around How much money will be needed by an individual (or by a family) at various points in the future? Where will this money come from (e.g. savings or borrowing)? How can people protect themselves against unforeseen events in their lives, and risk in financial markets? How can family assets be best transferred across generations (bequests and inheritance)? How do taxes (tax subsidies or penalties) affect personal financial decisions? How does credit affect an individual's financial standing? How can one plan for a secure financial future in an environment of economic instability? Personal financial decisions may involve paying for education, financing durable goods such as real estate and cars, buying insurance, e.g. health and property insurance, investing and saving for retirement.Personal financial decisions may also involve paying for a loan.Corporate financeMain article: Corporate financeManagerial or corporate finance is the task of providing the funds for a corporation's activities. For small business, this is referred to as SME finance. It generally involves balancing risk and profitability, while attempting to maximize an entity's wealth and the value of its stock.Long term funds are provided by ownership equity and long-term credit, often in the form of bonds. The balance between these forms the company's capital structure. Short-term funding or working capital is mostly provided by banks extending a line of credit.Another business decision concerning finance is investment, or fund management. An investment is an acquisition of an asset in the hope that it will maintain or increase its value. In investment management -- in choosing a portfolio -- one has to decide what, how much and when to invest. To do this, a company must: Identify relevant objectives and constraints: institution or individual goals, time horizon, risk aversion and tax considerations; Identify the appropriate strategy: active v. passive -- hedging strategy Measure the portfolio performance Financial management is duplicate with the financial function of the Accounting profession. However, financial accounting is more concerned with the reporting of historical financial information, while the financial decision is directed toward the future of the firm.CapitalMain article Financial capital Capital, in the financial sense, is the money which gives the business the power to buy goods to be used in the production of other goods or the offering of a service.Sources of capital Long Term - usually above 7 years Share Capital Mortgage Retained Profit Venture Capital Debenture Sale & Leaseback Project Finance Medium Term - usually between 2 and 7 years Term Loans Leasing Hire Purchase Short Term - usually under 2 years Bank Overdraft Trade Credit Deferred Expenses Factoring Capital market Long-term funds are bought and sold: Shares Debentures Long-term loans, often with a mortgage bond as security Reserve funds Euro Bonds Money market Financial institutions can use short-term savings to lend out in the form of short-term loans: Credit on open account Bank overdraft Short-term loans Bills of exchange Borrowed capitalThis is capital which the business borrows from institutions or people, and includes debentures: Redeemable debentures Irredeemable debentures Debentures to bearer Ordinary debentures Own capitalThis is capital that owners of a business (shareholders and partners, for example) provide: Preference shares/hybrid source of finance Ordinary preference shares Cumulative preference shares Participating preference share Ordinary shares Bonus shares Founders' shares They have preference over the equity shares.Means the Payment made to the shareholders is done by firstly paying to preference shareholder and than to the equity shareholders.Differences between shares and debentures Shareholders are effectively owners; debenture-holders are creditors. Shareholders may vote at AGMs and be elected as directors; debenture-holders may not vote at AGMs or be elected as directors. Shareholders receive profit in the form of dividends; debenture-holders receive a fixed rate of interest. If there is no profit, the shareholder does not receive a dividend; interest is paid to debenture-holders regardless of whether or not a profit has been made. In case of dissolution of firms debenture holders are paid first as compared to shareholder. Fixed capitalThis is money which is used to purchase assets that will remain permanently in the business and help it to make a profit.Factors determining fixed capital requirements Nature of business Size of business Stage of development Capital invested by the owners location of that area Working capitalThis is money which is used to buy stock, pay expenses and finance credit.Factors determining working capital requirements Size of business Stage of development Time of production Rate of stock turnover ratio Buying and selling terms Seasonal consumption Seasonal production seasonal cost The desirability of budgetingCapital budgetThis concerns fixed asset requirements for the next five years and how these will be financed.Cash budgetWorking capital requirements of a business should be monitored at all times to ensure that there are sufficient funds available to meet short-term expenses.The cash budget is basically a detailed plan that shows all expected sources and uses of cash. The cash budget has the following six main sections:1. Beginning Cash Balance - contains the last period's closing cash balance.2. Cash collections - includes all expected cash receipts (all sources of cash for the period considered, mainly sales)3. Cash disbursements - lists all planned cash outflows for the period, excluding interest payments on short-term loans, which appear in the financing section. All expenses that do not affect cash flow are excluded from this list (e.g. depreciation, amortisation, etc)4. Cash excess or deficiency - a function of the cash needs and cash available. Cash needs are determined by the total cash disbursements plus the minimum cash balance required by company policy. If total cash available is less than cash needs, a deficiency exists.5. Financing - discloses the planned borrowings and repayments, including interest.6. Ending Cash balance - simply reveals the planned ending cash balance.Management of current assetsCredit policyCredit gives the customer the opportunity to buy goods and services, and pay for them at a later date.Advantages of credit trade Usually results in more customers than cash trade. Can charge more for goods to cover the risk of bad debt. Gain goodwill and loyalty of customers. People can buy goods and pay for them at a later date. Farmers can buy seeds and implements, and pay for them only after the harvest. Stimulates agricultural and industrial production and commerce. Can be used as a promotional tool. Increase the sales. Disadvantages of credit trade Risk of bad debt. High administration expenses. People can buy more than they can afford. More working capital needed. Risk of Bankruptcy. Forms of credit Suppliers credit: Credit on ordinary open account Instalment sales Bills of exchange Credit cards Contractor's credit Factoring of debtors Factors which influence credit conditions Nature of the business's activities Financial position Product durability Length of production process Competition and competitors' credit conditions Country's economic position Conditions at financial institutions Discount for early payment Debtor's type of business and financial position Credit collectionOverdue accounts Cards arranged alphabetically in card index system Attach a notice of overdue account to statement. Send a letter asking for settlement of debt. Send a second or third letter if first is ineffectual. Threaten legal action. Effective credit control Increases sales Reduces bad debts Increases profits Builds customer loyalty Sources of information on creditworthiness Business references Bank references Credit agencies Chambers of commerce Employers Credit application forms Duties of the credit department Legal action Taking necessary steps to ensure settlement of account Knowing the credit policy and procedures for credit control Setting credit limits Ensuring that statements of account are sent out Ensuring that thorough checks are carried out on credit customers Keeping records of all amounts owing Ensuring that debts are settled promptly Timely reporting to the upper level of management for better management. Stock Purpose of stock control Ensures that enough stock is on hand to satisfy demand. Protects and monitors theft. Safeguards against having to stockpile. Allows for control over selling and cost price. StockpilingThis refers to the purchase of stock at the right time, at the right price and in the right quantities.There are several advantages to the stockpiling, the following are some of the examples: Losses due to price fluctuations and stock loss kept to a minimum Ensures that goods reach customers timeously; better service Saves space and storage cost Investment of working capital kept to minimum No loss in production due to delays There are several disadvantages to the stockpiling, the following are some of the examples: Obsolescence Danger of fire and theft Initial working capital investment is very large Losses due to price fluctuation Influence of stock management on rate of return Right price Right quantity Right quality Right place Right time Right property Rate of stock turnoverThis refers to the number of times per year that the average level of stock is sold. It may be worked out by dividing the cost price of goods sold by the cost price of the average stock level.Determining optimum stock levels Maximum stock level refers to the maximum stock level that may be maintained to ensure cost effectiveness. Minimum stock level refers to the point below which the stock level may not go. Standard order refers to the amount of stock generally ordered. Order level refers to the stock level which calls for an order to be made. CashReasons for keeping cash The transaction motive refers to the money kept available to pay expenses. The precautionary motive refers to the money kept aside for unforeseen expenses. The speculative motive refers to the money kept aside to take advantage of suddenly arising opportunities. Advantages of sufficient cash Current liabilities may be catered for. Cash discounts are given for cash payments. Production is kept moving. Surplus cash may be invested on a short-term basis. The business is able to pay its accounts timeously, allowing for easily-obtained credit. Liquidity Management of fixed assetsDepreciationDepreciation is the decrease in he value of an asset due to wear and tear or obsolescence. It is calculated yearly to ensure realistic book values for assets.
