Financial Management Terminology- Session 1

Some common terms include:

Profit and loss (P&L) statement: This is a report of your income and expenditure for a
specific period of time, e.g. a month, a quarter, a year.
Balance sheet: The balance sheet is the total picture of a company’s worth at a given point in
time, e.g. 30 June. It lists the value of all assets and liabilities.
Cash flow projection: This is a forecast of when a company expects to receive funds or cash
and when payments need to be made. Projections are done for a period of time, generally a
month. The aim of doing a cash flow projection is to make sure you have enough money to
pay all expenses when they fall due.
Budget: A budget is a financial planning tool. It is a list of anticipated income and
expenditure over a period of time, usually a year. Budgets may predict a surplus (income
exceeds expenditure) or a deficit (expenditure exceeds income).
A cash budget tracks when income and expenditure can be expected during the period
covered by the operating budget. It amounts to a series of monthly cash flow projections.
Income: Monies received or expected to be received (i.e. invoiced).
Expenditure: Monies spent or bills received.
Assets: A physical asset is anything that a person or business owns, e.g. car, furniture,
building, equipment.
Current assets (or Liquid Assets) are those that a business could expect to realise in cash, sell
or consume during the current year, e.g. cash, short-term investments.
Non current assets (Non Liquid Assets) are ‘long-term’ assets such as property and
equipment.
Intangible assets are not physical in nature, e.g. copyright, intellectual property.
Owners Equity: The net worth of the business. All Assets less all Liabilites equals net
worth.
Liabilities: Loans or expenses that a person or company has committed to and must pay for.
Capital: Money and property that a person or company uses to transact business.
Reserves: Funds that have been set aside for special purposes or to cover contingencies.
Debtors: People who owe you money.
Creditors: People you owe money to.
Cash accounting: With cash accounting, you record entries according to the date you paid
someone or someone paid you. So if you invoice someone, you record the date you receive
the money, rather than the date you sent the invoice. At its simplest, cash accounting uses the
receipt book and bank deposit details to track income and the chequebook to track
expenditure.
Cash accounting is the simplest form of book-keeping and very small stations may find it
adequate. If your station operates largely on shortterm transactions and you don’t have long-
term debts or commitments, cash accounting will work as long as the station stays small. If
you start growing, you will need to switch to accrual accounting.
Accrual accounting: In accrual accounting, revenue is recognised when it is earned rather
than when it is received, and expenses are recognised when they are incurred, rather than
when they are paid. So if you buy an item using your credit card, record the date you bought
the item, rather than the date you paid your credit card bill. Similarly, your income is
recorded when an invoice is raised by your station, not when it is paid. Accrual accounting is
generally preferable because it gives a better idea of your station’s overall medium-term
financial status.
Cash flow method- The method recognises revenues and expenses only with respect to
actual cash inflows and outflows of cash. [Example in the video]
This helps the financial manager to maintain the solvency in the organisation. And provide
the enough cash flows to satisfy the obligations and acquiring the financing assets to achieve
the firm’s goals and objectives. Therefore, cash flow based returns helps the financial
managers to avoid the insolvency and achieve the desired financial goals.
Asymmetric Information- Asymmetric information, also known as "information failure,"
occurs when one party to an economic transaction possesses greater material knowledge than
the other party.
IPO- An initial public offering (IPO) refers to the process of offering shares of a private
corporation to the public in a new stock issuance. Public share issuance allows a company to
raise capital from public investors. The transition from a private to a public company can be
an important time for private investors to fully realize gains from their investment as it
typically includes share premiums for current private investors. Meanwhile, it also allows
public investors to participate in the offering.
Corporate governance - Corporate governance is the structure of rules, practices, and
processes used to direct and manage a company. A company's board of directors is the
primary force influencing corporate governance.
Cash flow-Cash flow is the net amount of cash and cash-equivalents being transferred into
and out of a business. At the most fundamental level, a company’s ability to create value for
shareholders is determined by its ability to generate positive cash flows, or more specifically,
maximize long-term free cash flow (FCF). Cash flows are taken from cash flow statement
which are of three types- cash flows come in or go out from the business from three activities
the firm investing, firm operation and firm financing
Growth Firms- A growth company is any company whose business generates significant
positive cash flows or earnings, which increase at significantly faster rates than the overall
economy. A growth company tends to have very profitable reinvestment opportunities for its
own retained earnings. Thus, it typically pays little to no dividends to stockholders opting
instead to put most or all of its profits back into its expanding business.
Capital Intensive units- The term "capital intensive" refers to business processes or
industries that require large amounts of investment to produce a good or service and thus
have a high percentage of fixed assets, such as property, plant, and equipment
Debt - Debt is an amount of money borrowed by one party from another. Debt is used by
many corporations and individuals as a method of making large purchases that they could not
afford under normal circumstances. A debt arrangement gives the borrowing party permission
to borrow money under the condition that it is to be paid back at a later date, usually with
interest.
Why firms prefer Debt
1. Financing cost is lower- cost to raise debt from the bank or market is lesser than the
cost to raise the equity. The debt contracts include liability (interest) payments which
is time bound (number of years) but in the equity the firm need to share the profits
forever (till the time shares are outstanding in the financial market)
2. Firm keep the business profit- In the debt the firm only pay interest out of the profit,
but in the equity the profit need to be shared with the investors w.r.t. their ownership
percentage. The companies with debt can restrict profit sharing and retain more
profits in for the business.
3. Tax front- The debt financing helps companies to reduce the tax liability. When the
company pays the interest, they get deductions. And the taxable income reduces.
When the taxable income reduces the tax paid on it reduces. Dividends paid to equity
holders are not tax-deductible and must come from after-tax income

Equity – Equity is known as the owner’s capital.

Equity, typically referred to as shareholders' equity (or owners’ equity' for privately held
companies), represents the amount of money that would be returned to a company’s
shareholders if all of the assets were liquidated and all of the company's debt was paid off.
Cost of capital – From a company’s point of view, a cost of capital is the cost required to
raise the funds in the company, which can be through debt (cost of debt), equity (cost of
equity) or a mix. From investors point of view this is also known as required of return.
Debt Restructuring – The private and public companies negotiate with the banks on
debts/loan which they have got. This happens when the firms are facing cash flow issues and
are in financial distress. Also after debt restructuring firms will improve their liquidity
positions and continue with their normal operations.
A latest news on it can be accessed from [Link]
permits-one-time-restructuring-of-corporate-loans
An integrated view of finance Decision making
 References:
The material is referred from
Financial Management – Srivastava and Mishra 2nd Edition
Financial Management - Khan and Jain 6th edition

Investopedia can be accessed for Terminology.