Certain shares, usually preferred shares, are redeemable by its terms at a fixed date or at the option of either the corporation who issued the shares, the stockholder or both at a given price. Investopedia explains that an issuing-corporation may require employees to redeem shares based on predetermined timelines.
Importance of Financial Planning : Financial Planning is process of framing objectives, policies, procedures, programmes and budgets regarding the financial activities of a concern. This ensures effective and adequate financial and investment policies. The importance can be outlined as-
Types of Financial Instruments
Financial instruments may be divided into two types: cash instruments and derivative instruments.
The values of cash instruments are directly influenced and determined by the markets. These can be securities that are easily trferable. Cash instruments may also be deposits and lo agreed upon by borrowers and lenders.
The value and characteristics of derivative instruments are based on the vehicle’s underlying components, such as assets, interest rates or indices. These can be over-the-counter (OTC) derivatives or exchange-traded derivatives.
There are eight important types of financing :
Business finance is available in multiple forms, including term lo, short-term lo, equipment financing, factoring, capital from angel investors and credit card lo.
Financial instruments may also be divided according to asset class, which depends on whether they are debt-based or equity-based.
Short-term debt-based financial instruments last for one year or less. Securities of this kind come in the form of T-bills and commercial paper. Cash of this kind can be deposits and certificates of deposit (CDs). Exchange-traded derivatives under short-term debt-based financial instruments can be short-term interest rate futures. OTC derivatives are forward rate agreements.
Long-term debt-based financial instruments last for more than a year. Under securities, these are bonds. Cash equivalents are lo. Exchange-traded derivatives are bond futures and options on bond futures. OTC derivatives are interest rate swaps, interest rate caps and flor, interest rate options, and exotic derivatives.
Securities under equity-based financial instruments are stocks. Exchange-traded derivatives in this category include stock options and equity futures. The OTC derivatives are stock options and exotic derivatives.
There are no securities under foreign exchange. Cash equivalents come in spot foreign exchange. Exchange-traded derivatives under foreign exchange are currency futures. OTC derivatives come in foreign exchange options, outright forwards and foreign exchange swaps.
Financial Planning has got many objectives to look forward to:
Determining capital requirements- This will depend upon factors like cost of current and fixed assets, promotional expenses and long- range planning. Capital requirements have to be looked with both aspects: short- term and long- term requirements.
Determining capital structure- The capital structure is the composition of capital, i.e., the relative kind and proportion of capital required in the business. This includes decisions of debt- equity ratio- both short-term and long- term.
Framing financial policies with regards to cash control, lending, borrowings, etc.A finance manager ensures that the scarce financial resources are maximally utilized in the best possible manner at least cost in order to get maximum returns on investment.
If a company has only one class of shares they will be ordinary shares and will carry equal rights. Different classes of shares within a company can carry identical rights, but very often have different voting, dividend and/or capital rights.
Preference shares, more commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, the shareholders with preferred stock are entitled to be paid from company assets first. Most preference shares have a fixed dividend, while common stocks generally do not. Preferred stock shareholders also typically do not hold any voting rights, but common shareholders usually do.
Procurement Procedure : While production businesses often have easier access to the inventory necessary to create the good being produced, the procurement of fixed capital can be lengthy. It may take a business a significant amount of time to generate the funds necessary for larger purchases, such as new production facilities, or external financing may be required. This can increase the risk of financial losses associated with low production if a company experiences an equipment failure and does not have redundancy built into the fixed capital assets.
Financial instruments are assets that can be traded. They can also be seen as packages of capital that may be traded. ... These assets can be cash, a contractual right to deliver or receive cash or another type of financial instrument, or evidence of one's ownership of an entity.
Working capital is a measure of both a company's efficiency and its short-term financial health. Working capital is calculated as:
Working Capital = Current Assets - Current Liabilities
The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 me that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient. Also known as "net working capital".
Fixed capital includes the assets and capital investments that are needed to start up and conduct business, even at a minimal stage. These assets are considered fixed in that they are not consumed or destroyed during the actual production of a good or service but have a reusable value. Fixed-capital investments are typically depreciated on the company's accounting statements over a long period of time, up to 20 years or more.
Small business financing (also referred to as startup financing or franchise financing) refers to the me by which an aspiring or current business owner obtains money to start a new small business, purchase an existing small business or bring money into an existing small business to finance current or future business
There are four types of preference shares:
Cumulative preferred stock includes a provision that requires the company to pay preferred shareholders all dividends, including those that were omitted in the past, before the common shareholders are able to receive their dividend payments.
Non-cumulative preferred stock does not issue any omitted or unpaid dividends. If the company chooses not to pay dividends in any given year, the shareholders of the non-cumulative preferred stock have no right or power to claim such forgone dividends at any time in the future.
Participating preferred stock provides its shareholders with the right to be paid dividends in an amount equal to the generally specified rate of preferred dividends plus an additional dividend based on a predetermined condition. This additional dividend is typically designed to be paid out only if the amount of dividends received by common shareholders is greater than a predetermined per-share amount. If the company is liquidated, participating preferred shareholders may also have the right to be paid back the purchasing price of the stock as well as a pro-rata share of remaining proceeds received by common shareholders.
Convertible preferred stock includes an option that allows shareholders to convert their preferred shares into a set number of common shares, generally any time after a pre-established date. Under normal circumstances, convertible preferred shares are exchanged in this way at the shareholder's request. However, a company may have a provision on such shares that allows the shareholders or the issuer to force the issue. How valuable convertible common stocks are is based, ultimately, on how well the common stock performs.
The amount of fixed capital needed to set up a business is quite variable, especially from industry to industry. Some lines of business require high fixed-capital investment. Common examples include industrial manufacturers, telecommunications providers and oil exploration firms. Service-based industries, such as accounting firms, may have more limited fixed capital. This can include office buildings, computers and networking devices, and other standard office equipment.
Financial Planning is the process of estimating the capital required and determining it’s competition. It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise.
Liquidity of Fixed Capital Assets : While fixed capital often maintain a level of value, these assets are not considered very liquid in nature. This can be due to the limited market for certain items, such as manufacturing equipment, or the high price involved, as with real estate. Additionally, the time commitment required to sell fixed capital assets is often lengthy.
Business finance is a term that encompasses a wide range of activities and disciplines revolving around the management of money and other valuable assets. Business finance programs in universities familiarize students with accounting methodologies, investing strategies and effective debt management.
An equity share, commonly referred to as ordinary share also represents the form of fractional or part ownership in which a shareholder, as a fractional owner, undertakes the maximum entrepreneurial risk associated with a business venture. The holders of such shares are members of the company and have voting rights.