Accounts receivable, Capital Assets, Current assets, Cash flow, Depreciation and Net worth.Do you know what these words mean and where they are being used? Yes, youve heard about them but did you actually try to find out what they mean? Perhaps you are thinking that you wont need them thats why there is no need to learn them. Maybe, you are thinking you can have a lawyer with you to do things regarding your finances. Being unaware of the basic financial terms can cost you a lot of your earnings, dont you know? Having a lawyer or a financial advisor to explain things to you when you need it will surely cost you a lot. You are going to learn today about those financial terms mentioned above and hopefully, youll find them useful.
Accounts receivable are the money you owned. These are the amounts you receive from sales of assets or services you have given. While capital assets are those assets you acquired to start the business. Examples of capital assets are land, buildings or space and equipment. Current assets are items like cash, accounts receivable and inventory. They are assets that can be turned over and can be converted to cash. Stocks and marketable securities are examples.
Cash flow is the moving of money in and out of your business. It finds out the credit worthiness of your business. The difference between the cash out and cash in is important. If more money flows in, it is cash positive. If more money flows out, it is cash negative.
If you are a small business owner, you should be well aware of the difficulty in finding enough money to support your business operations and deal with shortages in cash flow. When possible business financing like loans and credits are not enough, business owners will sometimes resort to accounts receivable financing. However, is this kind of business financing right for you and your business?
Accounts receivable financing refers to the selling of receivables, like outstanding invoices at a discounted price to another company that will assume all the risks on a receivable and provide instant cash to the business. The age of a receivable affects the value assigned to it. For example, receivables that are over 3 months are usually not financed. This type of financing is also known as accounts receivable factoring.
This kind of financing offers some advantages over conventional financing methods. By outsourcing the management of your accounts receivable to other companies, you will be able to free up your resources. Your business will be able to focus its attention on other business activities such as planning of sales and production.
A lot of companies today are unable to use most of their capital because majority of it is tied up in their business inventories. With accounts receivable financing, your business will be able to free up capital that is tied up in the business inventory. You can then use this free capital on other more productive business expenditures.
Unlike other forms of financing, accounts receivable financing does not require much documentation. There is no need to create business plans or a record of the most recent tax statements. This method of financing allows businesses to get quick cash, ideal for instances when a firm is experiencing income fluctuations or sudden financial issues.
A company entering the market with a goal to do business shall have the following objectives:
Maximizing the returns on stockholders capital (wealth maximization) & and;
Profit Maximization
Unlike traditional business theories where maximum importance was given to profit maximization, modern theories lays down facts stressing on the maximization of wealth of its stock holders. Which means, maximizing the price of the stock/shares.
Profit maximization is a short term goal mainly for a period of one year or less. A company can maximize its short term profits at the expense of its long term wealth maximization. Stock holders wealth maximization is along term goal as stockholders are investing in a company expecting good-future-returns. Wealth maximization is preferable because it considers (1) wealth for long term, (2) risks, (3) stockholders returns and timing of the returns.
Timing of the returns is important, as earlier the return is received, the better. A quick-positive return reduces the risk involved in the investment due to time factor. Also, if you have quick cash in hand you can reinvest the same.
When we are discussing long and short term business objectives, we must keep in mind that very often profit maximization and wealth maximization are conflicting objectives. It is very important for an entrepreneur to decide that what is his priority, longer term business or short term business. Very often you will find business starting off very well but ultimately going down to competition. They never invest in modernization and expansion of their business process. Hence better companies with good technology took over it.