finance definition

You have choices in sources of working capital finance and in business credit solutions.

It is all about understanding the problem and knowing where to go for the solution, so let’s look at those two key issues. Understanding the problem is not something you have to read about, as a business owner and financial manager in Canada you live the capital ‘crunch’ or ‘challenge’ every day.

Working capital is best understood as your operating capital, and you have investments in receivables, inventory, that’s where your investment currently lies, and your goal is to monetize those assets in the best manner possible.

The textbook definition doesn’t really help us out – our accountants and analysts tell us to go to the balance sheet, subtract current liabilities from current assets, and, voila! That’s working capital!

One of the biggest contradictions that you need to understand is the issues of assets, profit, liquidity and turnover. Once you have a handle of those the concept of working capital and, more importantly, the solutions start making more sense.

We hate those textbook definitions we referred to, but we will agree that the calculation we shared needs to be positive – you do need more inventory and receivables combined as measured against payables and other short term liabilities. How you manage those short term assets of A/R and inventory is the challenge.

Many business owners quickly realize that one of their liabilities, i.e. payables, is actually a large asset in measuring capital and managing it. That is because if you can continue to convert inventory into A/R into cash, and slow down payables you are achieving working capital progress.

Is there a perfect way to measure your working capital needs and progress? One of those methods is to check into the ‘cash conversion cycle ‘- It’s a tool you can use to measure how low a dollar takes to flow through your company. It simply takes your inventory and receivable days outstanding, subtracts your payables days outstanding, and there is your final number. It’s a great long tool to understand your progress over long periods of time.

In order to achieve solid cash flow you need to increase turnover – that can be done by accelerating cash flow by borrowing against receivables, or selling receivables via a factoring process.

Your working capital solutions in Canada are limited, but they are very focused and real. Your can increase cash flow today with no ones assistance simply by accelerating turnover of your assets such as receivables and inventory. If you feel your challenge is more of a long term nature a term loan (if larger these loans are called subordinated debt) is the solution.

You can also generate unlimited capital by entering into an asset based lending or facility with a non bank finance firm. Don’t forget that term loans for working capital add debt and obligations to your balance sheet, so we often suggest to clients that the best solution is in fact monetizing your assets, not borrowing more – that where asset based lines of credit work best.

So whats it all about – it’s a case of understanding what it is, looking at how your firm performs in key metric areas of turnover, etc, and then choosing a solution that works best for your firm, whether that is long term in nature, or a bulge type facility that augments your daily cash needs. Speak to a trusted, credible and experience working capital business financing advisor to determine what choice is best for your firm.

Private financing is a necessary tool in today’s business world and society. Especially when lending is as tight as it is right now. Even though private financing typically is more expensive than your traditional methods through the bank, it is usually more readily and easily available even to those who may have credit issues, or cannot verify all their income to someone. The flexibility and the speed to which you can obtain the money is what makes private financing a major key in today’s financial world.

With private financing you can quickly fund whatever it is you need the money for. Whether it’s to catch up on some bills, invest in another investment, start a business and so on. It can be made available very quickly and with much less red tape than with a traditional lender or a bank. Most private lenders will want some security to back up their loans and this is typically done through lending against equity you have built up in your home or other real estate you may own. Having equity in your home can be a great financial tool that you can put to work for you or to help dig you out of a hole.

The key and the power to having private funds at your disposal is huge and extremely powerful! Especially when money is needed quickly and you know nobody else can fund you as quickly as you need. Having that connection to private money can definitely save whatever it is you need the money for in a short amount of time. Some private lenders can fund deals in as quickly as 24 hours or less. That is completely unheard of with traditional lending institutions. All the applications and processing times usually takes at least a week or two until you finally get an answer if you have been approved or not? Sometimes a deal or an opportunity just cannot wait that long.

With private financing you have the flexibility and resources to obtain the money you need quick for whatever the reason is. Having a trustworthy, reliable and quick private lender in your network is a must for anyone who is in business for themselves or is an active investor. For the average person looking for a loan it can be a very powerful tool as well if for whatever reason you cannot qualify through a bank or other traditional methods. Don’t think because a bank or other traditional lender turned you down that you cannot get that loan that you may need. There are many other options out there and private lending is definitely one of them.

Committed to your success,

Derek Wilson

In case your income is stable, and you have proof of being employed; you should be able to get a loan on the new car or a pre owned car, hassle free. With the advent of online providers of auto finance, the story has become better for the not so affluent class. There are wider options, better interest rates and favorable repayment terms to choose from. Thus, auto financing brings in a new hope for many who have been looking for that help in buying a car for their family.

Auto financing has never been as easy to get as it is today. With not so stringent norms in Canada, car buyers can look at reducing their immediate financial burden and spreading it over a period of time. This works well for people who have savings but not enough to buy a car outright or in a break up. Thus, a more lucrative method is to opt for auto financing. With lot of lenders entering this segment, the auto financing industry has rapidly evolved into a big business. A four wheeler is a definite moral booster and status statement for most of the families in any part of the country or the world. Hence, all those borderline cases, where families were undecided whether to take the plunge, have been given the final push by these financial instruments. Indeed, for some, these financing option have made a world of difference. With more companies cropping up, the terms and interest rates just got a little more borrower friendly.

The fact of the matter is that, even with a bad credit record, today one can qualify for an auto financing loan. In Canada, one has incredible choices in terms of the financing options that are available. With the advent of online auto financing options, the entire process of qualification check, processing and disbursement is finished within days. The only difference that one might find is the interest rates or the down payments between the borrowers with good credit records and those with not so good records. For individuals with a below par credit score the down payment is going to be higher. Some financiers might increase the interest rates for the individuals where the credit scores are not so good. Unlike some other countries, in Canada, the individual with a bad credit score still has a much better chance of getting a good auto financing option. As the installment repayments occurs regularly so does the positive change in the credit score.

In Canada, one can also take advantage of the option of refinancing. A term very few would have heard of, usually, most people assume that once an auto financing option is taken, that is final. The answer is no, if in case the market situation changes and there are better options available, there would be more than one company willing to give you a better deal than the existing provider. Well this is definitely one aspect people should look at, for better repayment options. Then one can look at the option of buying a previously owned car through auto financing. Usually the term available for an auto loan is 5 to 7 years. One thing is for sure; just don’t simply go by the words of the dealer, if you are taking an auto financing option, look around, you may definitely find something better.

Many of us would have been wondering how to save money in this world of a thousand needs. You will find so many requirements around you to be spending money on and when you can hardly find money to get that how are you going to save money?

I wish to tell you that it is definitely possible to save money. The first thing that we have to change about ourselves is the thought we have that it is not possible to make savings. It definitely is possible.

The most important requirement for saving money is a personal finance management tool. You can get many of them online. It is definitely easy to find one. Now after you get a tool, provide all the required data like your income statements, expenses, credit card statements, loans and all other financial statements that you need. Now the software can be used to make a personal finance budget for you. Once you get a budget, it will contain the details on how you have to spend each dollar you have got. You have to follow the budget strictly.

In the process you will come across many situations when you have got to cut down unnecessary expenses also. You will have to follow this very strictly. If you do keep your budget strictly for a month, you will find the saving mentioned in your budget in your bank very easily. You stick to the budget for a year means you will have the required savings in your account that can be used for an emergency need or for some investments. Thus you will be able to make lots of money by saving and sensible use of money. This money saved is equal to the money you have earned. Si learn to use your personal finance management tool for saving money every month.

When we are trying to understand Personal Finance, the best thing to do is to understand what Personal Finance is NOT.

Many people think that accounting and personal finance are the same, but Personal Finance is NOT Accounting.

On the surface they may seem the same; they both have something to do with money. However, the definitions will help us better understand the differences.

Merriam-Webster’s definition of accounting is “the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results.”

Based on this definition, we see that accounting is the process of analysing and recording what you have already done with your money.

This is why having an accountant is usually not enough when it comes to your personal finances.

Accountants generally don’t concern themselves with personal finance (there are some exceptions to this rule). Unless your accountant is also a financial advisor or coach, he or she will likely just look at what you have done with your money at the end of the year and provide you with a report of their analysis.

This report is usually your tax return; what you owe the government or what the government owes you.

Very rarely does the accountant provide an individual with a Balance Sheet or Income Statement or a Net worth statement; all very helpful tools that are necessary to effectively manage your personal finances.

Personal Finance is looking at your finances from a more pro-active and goal oriented perspective. This is what provides the accountants with something to record, verify and analyze.

The Merriam-Webster’s (Concise Encyclopedia) definition of “Finance” is the “process of raising funds or capital for any kind of expenditure. Consumers, business firms, and governments often do not have the funds they need to make purchases or conduct their operations, while savers and investors have funds that could earn interest or dividends if put to productive use. Finance is the process of channeling funds from savers to users in the form of credit, loans, or invested capital through agencies including COMMERCIAL BANKS, SAVINGS AND LOAN ASSOCIATIONS, and such nonbank organizations as CREDIT UNIONS and investment companies. Finance can be divided into three broad areas: BUSINESS FINANCE, PERSONAL FINANCE, and public finance. All three involve generating budgets and managing funds for the optimum results”.

Personal Finance Simplified

By understanding the definition of “finance” we can break our “personal finance” down into 3 simple activities:-

1. The process of raising funds or capital for any kind of expenditure = Generating an Income.
A Business gets money through the sale of their products and services. This is labeled “revenue” or “income”. Some businesses will also invest a portion of their revenue to generate more income (interest income).

A Person gets money through a job, or a small business (self employment, sole proprietorship, network marketing or other small business venture). The money coming in can be a salary, hourly wage, or commission, and is also referred to as income.

A Government gets money through taxes that we pay. This is one of the main ways that the government generates an income that is then used to build infrastructure like roads, bridges, schools, hospitals etc for our cities.

2. Using our money to make purchases = Spending Money.
How much we spend relative to how much we make is what makes the difference between having optimum results in our personal finances. Making good spending decisions is critical to achieving financial wealth – regardless of how much you make.

3. Getting optimum results = Keeping as much of our money as possible
It’s not how much you MAKE that matters – its how much you KEEP that really matters when it comes to your personal finances.

This is the part of personal finance that virtually everyone finds the most challenging.

Often people who make large incomes (six figures or more) also tend to spend just as much (or more) which means they put themselves in debt and that debt starts to accrue interest. Before long that debt can start to grow exponentially and can destroy any hope they would have had to achieving wealth.

Personal Finance made simple

Personal Finance doesn’t need to be complicated if you keep this simple formula in mind:

INCOME – SPENDING = WHAT YOU KEEP

For Optimal Results you simply have to make more than what you spend and spend less than what you make so you can keep more for you and your family!

If you are not actively working towards an optimal result you will by default get less than optimal results

It really is that simple!

Now that you understand personal finance and WHAT you need to do, the next step is learning HOW to do this!

The best way to start is by following these 3 simple steps:-

1. Know what you want to achieve – “if you don’t know where you are going, any road will take you there” has become a very popular quote, probably because it is so true. One of the habits that Stephen Covey highlights in his book “7 Habits of Highly Successful People”, is to always start with the end in mind. Knowing where you want to go will be a big help in ensuring you get there.

2. Have a plan – that you can follow that will get you to your goals. Knowing how you will achieve your goals in a step by step plan is invaluable. Sometimes this is easier with the help of an advisor or a financial coach.

3. Use tools and resources – that will help you to stick to your plan and not become distracted by the things in life that could limit our incomes and make us spend more than we should. Don’t try and work it all out in your head! You will end up with a massive headache and your finances will become one gigantic dark fog!

FINANCE:

Definition - A branch of economics concerned with resource allocation as well as resource management, acquisition, and investment. Simply, finance deals with matters related to money and the markets.

Role - Finance is used to raise money through the issuance and sale of debt and / or equity. Institutions could also use finance techniques to create balance sheets, general ledgers, profit and loss statements, etc..to determine the health of the business.

EFFICIENT MARKET:

Definition - A market in which the values of securities at any instant in time fully reflect all available information, which results in market value and the intrinsic value being the same.

Role - A good example of efficient markets in finance could be seen with the stock markets because information is available to all participants at the same time and the prices respond immediately to the available information.

PRIMARY MARKET:

Definition - Transactions in securities offered for the first time to potential investors.

Role - To illustrate the role that primary markets have in finance, people could look at “initial public offerings (IPOs)” in the stock markets where companies offer shares of common stock to the public for the first time.

SECONDARY MARKET:

Definition – The market in which stocks previously issued by the firm trades.

Role – The role that secondary market has in finance could be seen with numerous stock exchanges on Wall Street, such as the DOW, NASDAQ, etc. Through these stock exchanges, people trade company stocks.

RISK:

Definition – The likely variability associated with expected revenue or income streams.

Role – Risk plays an integral role in finance because it determines the probability that an actual return on investment (ROI) will be lower, or higher, than the expected return.

SECURITY:

Definition – A financing or investment instrument issued by a company or government agency that denotes an ownership interest and provides evidence of a debt, a right to share in the earnings of the issuer, or a right in the distribution of a property.

Role – The role that security has in finance could be seen when people make investments in securities such as bonds, debentures, notes, options, and shares that may be traded in financial markets such as stock exchanges.

STOCK:

Definition – Equity capital raised through sale of shares and it is the proportional part of a company’s equity capital represented by fully paid up shares.

Role – Stocks has a major role in finance because investors commonly trade stocks on a daily basis from a variety of institutions in the secondary market.

BOND:

Definition – A type of debt or a long-term promissory note, issued by the borrower, promising to pay its holder a predetermined and fixed amount of interest each year.

Role - A good example of the role of bonds in finance could be seen with how the government uses the purchase and sale of bonds to inject money into the economy.

CAPITAL:

Definition – Wealth in the form of assets, taken as a sign of the financial strength of an individual, organization, or nation, and assumed to be available for development or investment.

Role – The role that capital plays in finance is that institutions use capital, such as stocks, to create capital gains that could be used to improve on the overall business.

DEBT:

Definition - Consists of such sources as credit extended by suppliers or a loan from banks.

Role – Debt is used in finance to determine certain ratios pertaining to individuals or organizations. For instance, prior to giving out loans to individuals, banks tend to do background checks to determine the individuals “debt-to-income-ratio,” thus knowing if the loan is repayable.

YIELD:

Definition – The annual income earned from an investment, expressed usually as a percentage of the money invested.

Role – Yield is used in finance to determine how profitable an investment is, along with knowing if the investment is priced at a good value based on the “rate of return.”

RATE OF RETURN:

Definition – The annual percentage returned realized on an investment, which is adjusted for changes in prices due to inflation or other external effects. Expresses the nominal rate of return in real time, which keeps the purchasing power of a given level of capital constant over time.

Role – The role that the rate of return plays in finance is that people, including institutions, use this to adjust the nominal returns to compensate for factors, such as inflation, to determine how much of the investment is actually being returned.

RETURN ON INVESTMENT:

Definition – Return on investment (ROI) is the measure of a corporations profitability, equal to a fiscal year’s income divided by common stock and preferred stock equity plus long-term debt. The ROI is the income that an investment provides in a year.

Role – The ROI measures how effectively the firm uses its capital to generate profit; the higher the ROI, the better for the company.

CASH FLOW:

Definition – A measure of a company’s financial health, and equals cash receipts minus cash payments over a given period of time; or equivalently, net profits plus amounts charged off for depreciation, depletion, and amortization.

Role – In finance, investors and companies use cash flow to purchase assets in hopes of achieving higher ROIs. In addition, cash flow is also used to maintain the business or household, and is a necessary part of finance.

As mentioned, every entrepreneur must know their numbers. To do so, you must understand the lingual. Hopefully this post has assisted in helping you comprehend the common terms listed above better while taking the lead with your “dance with finance.”