Financial terms have gradually become a part and parcel of our lives. Somehow I am puzzled with their terminologies. Here is an effort to enhance the knowledge, although true familiarity only comes one when personally deals in this area somehow or the other.
Cash Management System
Cash management, or treasury management, is a marketing term for certain services offered primarily to larger business customers. It may be used to describe all bank accounts (such as checking accounts) provided to businesses of a certain size, but it is more often used to describe specific services such as cash concentration, zero balance accounting, and automated clearing house facilities. Sometimes, private banking customers are given cash management services.
Cash Management is the process of optimizing receivable and payables while ensuring predictability in the cash flows. Efficient Cash Management is about getting funds in time, quick transfers, quick realization of local and outstation cheques, easy disbursements, account reconciliation, controlled processes and customized MIS. Thus Cash Management Services (CMS) eliminates the inherent delays of a funds transfer mechanism, thus enhancing liquidity and ensuring optimum planning and utilization of funds.
Cash Management Services include the following basic components:
1. Collection or Receivables Management
2. Payment or Payables Management
Venture Capital
Venture capital is a type of private equity financing that is provided to those companies that are starting out on their business operations. The beneficiaries of venture capital services also find it difficult to generate capital by issuing debt financing instruments.
The investors who deal in putting money in new business enterprises are known as venture capitalists. The venture capitalists operate on a professional basis and could be regarded as being one of the primary sources of equity financing.
Simply put, equity finance is money that is raised by issuing shares of the company. The basic aim to generate capital by using company equity. Equity finance comes in various forms and is principally provided by venture capitalists and business angels.
The investors are normally different from conventional money lenders, in that they normally have no right to any form of interest payment, and cannot expect to be paid within a specified time. The payments made to investors, normally done through dividends, depend on the performance of the business.
Debt consolidation entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan.
Debt consolidation can simply be from a number of unsecured loans into another unsecured loan, but more often it involves a secured loan against an asset that serves as collateral, most commonly a house. Sometimes, debt consolidation companies can discount the amount of the loan. When the debtor is in danger of bankruptcy, the debt consolidator will buy the loan at a discount. A prudent debtor can shop around for consolidators who will pass along some of the savings. Consolidation can affect the ability of the debtor to discharge debts in bankruptcy, so the decision to consolidate must be weighed carefully.
Debt syndication is the process of distributing the money advanced in, generally a large loan, to a number of companies or investors. It is common to use debt syndication when the loan required, in order to fund a company or save a company from bankruptcy
Options trading
In finance, an option is a contract between a buyer and a seller that gives the buyer the right—but not the obligation—to buy or to sell a particular asset (the underlying asset) at a later day at an agreed price. In return for granting the option, the seller collects a payment (the premium) from the buyer. A call option gives the buyer the right to buy the underlying asset; a put option gives the buyer of the option the right to sell the underlying asset. If the buyer chooses to exercise this right, the seller is obliged to sell or buy the asset at the agreed price. The buyer may choose not to exercise the right and let it expire. The underlying asset can be a piece of property, or shares of stock or some other security, such as, among others, a futures contract. For example, buying a call option provides the right to buy a specified quantity of a security at a set agreed amount, known as the 'strike price' at some time on or before expiration, while buying a put option provides the right to sell. Upon the option holder's choice to exercise the option, the party who sold, or wrote the option, must fulfill the terms of the contract.
The primary types of financial options are:
• Exchange traded options (also called "listed options") are a class of exchange traded derivatives. Exchange traded options have standardized contracts, and are settled through a clearing house with fulfillment guaranteed by the credit of the exchange. Since the contracts are standardized, accurate pricing models are often available. Exchange traded options include
1. stock options,
2. commodity options,
3. bond options and other interest rate options
4. stock market index options or, simply, index options and
5. options on futures contracts
• Over-the-counter options (OTC options, also called "dealer options") are traded between two private parties, and are not listed on an exchange. The terms of an OTC option are unrestricted and may be individually tailored to meet any business need. In general, at least one of the counterparties to an OTC option is a well-capitalized institution. Option types commonly traded over the counter include:
1. interest rate options
2. currency cross rate options, and
3. options on swaps or swaptions.
• Employee stock options are issued by a company to its employees as compensation.
Treasury and its responsibilities fall under the scope of the Chief Financial Officer. In many organizations, the Treasurer will be responsible for the treasury function and also holds the position of Chief Financial Officer.
The CFO's responsibilities usually include capital management, risk management, strategic planning, investor relations and financial reporting. In larger organizations, these responsibilities are usually separated between accounting and treasury, with the controller and the treasurer each leading a functional area. Generally accepted accounting principles and generally accepted auditing standards recommend the division of responsibilities in areas of cash control and processing. Accounting will create the entries for treasury to process payments, treasury will advise accounting of receipts of cash, so accounting can make the proper entries, and reconciliation of bank accounts under the control of treasury will be completed by accounting. The working relationship between the managers of t hese two financial functions must be very close and ethical.
High-level treasury responsibilities will normally include capital management, risk management and relationship management. Treasury is a staff service function that supports many different areas of the organization. As an internal consultant to the teams in the different functional areas, treasury provides advice in the areas of cost of capital, risk analysis and mitigation, and the effects of the teams' actions on vendors, customers or investors. The specific tasks of a typical treasury function include cash management, risk management, hedging and insurance management, accounts receivable management, accounts payable management, bank relations and investor relations.
Corporate Finance
Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize corporate value [1] while managing the firm's financial risks.
The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, the short term decisions can be grouped under the heading "Working capital management". This subject deals with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers).
The terms corporate finance and corporate financier are also associated with investment banking. The typical role of an investment banker is to evaluate company's financial needs and raise the appropriate type of capital that best fits those needs.
Investment Banking
Investment banking is the traditional aspect of the investment banks which also involves helping customers raise funds in the capital markets and advise on mergers and acquisitions. Investment banking may involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. Another term for the investment banking division is corporate finance, and its advisory group is often termed mergers and acquisitions (M&A). The investment banking division (IBD) is generally divided into industry coverage and product coverage groups. Industry coverage groups focus on a specific industry such as healthcare, industrials, or technology, and maintain relationships with corporations within the industry to bring in business for a bank. Product coverage groups focus on financial products, such as mergers and acquisitions, leveraged finance, equity, and high-grade debt and generally work and collaborate with industry groups in the more intricate and specialized needs of a client.
An investment bank is a financial institution that raises capital, trades in securities and manages corporate mergers and acquisitions. Investment banks profit from companies and governments by raising money through issuing and selling securities in capital markets (both equity, debt) and insuring bonds (e.g. selling credit default swaps), as well as providing advice on transactions such as mergers and acquisitions. A majority of investment banks offer strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities.
Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize corporate value [1] while managing the firm's financial risks. Although it is in principle different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.
The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, the short term decisions can be grouped under the heading "Working capital management". This subject deals with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers).
The terms corporate finance and corporate financier are also associated with investment banking. The typical role of an investment banker is to evaluate company's financial needs and raise the appropriate type of capital that best fits those needs.
Retail Banking
Retail banking refers to banking in which banking institutions execute transactions directly with consumers, rather than corporations or other banks. Services offered include: savings and checking accounts, mortgages, personal loans, debit cards, credit cards, and so forth.
Wholesale Banking
Wholesale banking can mean two different things. Sometimes wholesale banking is the provision of services by banks to other financial institutions. Usually, however, wholesale banking also includes banking services offered to corporations and other large institutions, financial or otherwise. In this sense, wholesale banking comprises cash management services, foreign exchange, business-to-business payments, trust services, custodial services, commercial lending, and trade finance. Wholesale banking compares with retail banking, which is the provision of banking services to individuals. Large financial institutions, such as Citigroup, commonly engage in both wholesale banking and retail banking.
Project Finance
Project finance is the financing of long-term infrastructure and industrial projects based upon a complex financial structure where project debt and equity are used to finance the project, rather than the balance sheets of project sponsors. Usually, a project financing structure involves a number of equity investors, known as sponsors, as well as a syndicate of banks that provide loans to the operation. Project Financing discipline includes understanding the rationale for project financing, how to prepare the financial plan, assess the risks, design the financing mix, and raise the funds. In addition, one must understand the cogent analyses of why some project financing plans have succeeded while others have failed. A knowledge-base is required regarding the design of contractual arrangements to support project financing; issues for the host government legislative provisions, public/private infrastructure partnerships, public/private financing structures; credit requirements of lenders, and how to determine the project's borrowing capacity; how to prepare cash flow projections and use them to measure expected rates of return; tax and accounting considerations; and analytical techniques to validate the project's feasibility
Wealth Management
Wealth management is an investment advisory discipline that incorporates financial planning, investment portfolio management and a number of aggregated financial services. High net worth individuals, small business owners and families who desire the assistance of a credentialed financial advisory specialist call upon wealth managers to coordinate retail banking, estate planning, legal resources, tax professionals and investment management. Wealth managers can be independent certified financial planners, MBAs, CFAs or any credentialed professional money manager who works to enhance the income, growth and tax favored treatment of long-term investors. One must already have accumulated a significant amount of wealth for wealth management strategies to be effective.
F & O
Normally to buy shares, you need to have sufficient limit to provide for 100% of the order value, while to sell shares, you need to have shares in your demat account. However, in F&O Trading, funds are blocked only to the extent of some % of the order value allowing you to leverage on your trading limits. Investors generally use F&O to increase their purchasing power so that they can own more stock without fully paying for it. But F&O exposes you to the potential for higher losses. Here's what you need to know about F&O.
M & A
The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity.
Export finance
Export financing is loans made for the shipping of products outside a country or region. If you have a good product that has is appealing to another country, and has great potential to sell off you could also consider a venture capitalist to help bring your business where it needs to be.
Financial assistance is extended by the banks to the exporters at pre-shipment and post-shipment stages. Financial assistance extended to the exporter priorto shipment of goods from
Letter of credit
A standard, commercial letter of credit is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking.
The LC can also be the source of payment for a transaction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another.
