Archives: Resources

Caveat Emptor (buyer beware) is a legal principle that places the due diligence burden of a transaction on buyers. It means that the person making the purchase is responsible for making an informed decision.

 

Explanation:

The phrase caveat emptor  comes from Latin and it means “let the buyer beware”. It is a legal term implicitly involved in a sales transaction, where the buyer has the unilateral responsibility to research the product or service properly to make sure it fits all his requirements. Any difference between expectations and actual result can’t be blamed on the seller, according to this principle. This is a rule that normally applies in free market transactions, with the exception of illegal situations where the seller has acted in bad faith against the customer’s interest. This principle has been softened by legislation that aims to protect consumers from potential market misconduct.

In  a nutshell :

  • Caveat emptor is a Latin phrase that can be roughly translated in English to “let the buyer beware.”
  • While the phrase is sometimes used as a proverb in English, the principle of caveat emptor is also sometimes used in legal contracts as a type of disclaimer.
  • A caveat emptor disclaimer is intended to resolve disputes that arise from information asymmetry, a situation in which the seller has more information than the buyer about the quality of a good or service.

A cash discount, also called a purchase discount or sales discount , is a reduction in the purchase price of a good because of early cash payment. In other words, the seller of goods is willing to reduce the price of the goods if the buyer is willing to pay for the goods earlier.

Explanation:

Most businesses, especially manufacturers, sell goods to other businesses on account. This means that a retailer can buy inventory from its supplier on the first of the month and not actually pay for the goods until the end of the month. This inventory is bought on account.Most businesses have credit terms for purchases on account of 2/10, n/30 or 2/10, net/30. These terms give the buyer an additional two percent discount if they pay for the goods in full in the first ten days after the order was placed. If the buyer doesn’t pay for the goods in the first ten days, the entire purchase price must be paid in 30 days.

Example:

This 2 percent discount is good for the buyer and the seller. Since the buyer is receiving its inventory for 2 percent less, it can earn a 2 percent higher gross profit. The discount is good for the seller because it receives the cash from the transaction faster. In most businesses, cash flow is a problem. If companies can do something to improve their cash flow, it is usually worth it.

In a nutshell:

  • Cash discounts are deductions that aim to motivate customers to pay their bills within a certain time frame.
  • A cash discount gives a seller access to her cash sooner than if she didn’t offer the discount.
  • An example of a cash discount is a seller who offers a 2% discount on an invoice due in 30 days if the buyer pays within the first 10 days of receiving the invoice.

Capital refers to the financial resources that businesses can use to fund their operations like cash, machinery, equipment and other resources. These are the assets that allow the business to produce a product or service to sell to customers.

Explanation :

This is a vital source of financing across all types of businesses because companies need these resources in order to operate. Businesses raise capital by issuing stocks and bonds  to investors who purchase these financial instruments with cash or other assets. It’s important to distinguish money from capital because they aren’t the same thing. Capital is more durable than money and is used to produce something and build wealth. Property rights give capital it’s value and allow it to generate revenues and build wealth. Equipment, machinery, patents, trademarks, brand names, buildings, and land are a few examples

Examples :

Ana is the CEO of a large conglomerate that has various business lines in the insurance and energy industries. Her company wants to build a new energy plant that will need to be funded in the next year. A majority of her managers have come to her with multiple proposals for a total of $100,000,000. This is an extremely large expense that has to be funded this year in order to expand operations. In order to fund this, Ana must use a variety of resources including the cash and short-term investments that the company holds as well as sell company stock to new investors.

Types of Capital

 

  • Debt Capital

A business can acquire capital by borrowing. This is debt capital, and it can be obtained through private or government sources. For established companies, this most often means borrowing from banks and other financial institutions or issuing bonds. For small businesses starting on a shoestring, sources of capital may include friends and family, online lenders, credit card companies, and federal loan programs.

  • Equity Capital

Equity capital can come in several forms. Typically, distinctions are made between private equity, public equity, and real estate equity.Private and public equity will usually be structured in the form of shares of stock in the company. The only distinction here is that public equity is raised by listing the company’s shares on a stock exchange while private equity is raised among a closed group of investors.

  • Working Capital

A company’s working capital is its liquid capital assets available for fulfilling daily obligations. It is calculated through the following two assessments:

  • Current Assets – Current Liabilities
  • Accounts Receivable + Inventory – Accounts Payable
  • Trading Capital

Any business needs a substantial amount of capital in order to operate and create profitable returns. Balance sheet analysis is central to the review and assessment of business capital. Trading capital is a term used by brokerages and other financial institutions that place a large number of trades on a daily basis. Trading capital is the amount of money allotted to an individual or the firm to buy and sell various securities.

 

Capital vs. Money

 

At its core, capital is money. However, for financial and business purposes, capital is typically viewed from the perspective of current operations and investments in the future. Capital usually comes with a cost. For debt capital, this is the cost of interest required in repayment. For equity capital, this is the cost of distributions made to shareholders. Overall, capital is deployed to help shape a company’s development and growth.

In a nutshell:

  • The capital of a business is the money it has available to pay for its day-to-day operations and to fund its future growth.
  • The four major types of capital include working capital, debt, equity, and trading capital. Trading capital is used by brokerages and other financial institutions.
  • Any debt capital is offset by a debt liability on the balance sheet.
  • The capital structure of a company determines what mix of these types of capital it uses to fund its business.
  • Economists look at the capital of a family, a business, or an entire economy to evaluate how efficiently it is using its resources.

Cycle time, also called throughout time , is the amount of time required to produce a product or service. This time includes all production processes including value added time  and non-value added time.

Explanation:

The cycle time formula is calculated by adding the total process time, inspection time, move time, wait time, and any other time used during the production process. Basically, the equation sums all of the time from which a product is started to when it is shipped to the customer.

Example:

The process time includes all steps in the manufacturing and assembly process that actually build the product. This value added time consists of machining, design, assembly, and other processes to make a product or service. This is the only step in the cycle time that actually adds value to the product. The next three steps are necessary but don’t physically build anything. Inspection time is the number of hours spent checking partially and fully finished products for defects. Most manufacturers have multiple inspection points in the manufacturing process to ensure goods are free of defects.

In a nutshell:

  • Markets move in four phases; understanding how each phase works and how to benefit is the difference between floundering and flourishing.
  • In the accumulation phase, the market has bottomed, and early adopters and contrarians see an opportunity to jump in and scoop up discounts.
  • In the mark-up phase, the market seems to have leveled out, and the early majority are jumping back in, while the smart money is cashing out.
  • In the distribution phase, sentiment turns mixed to slightly bearish, prices are choppy, sellers prevail, and the end of the rally is near.
  • In the mark-down phase, laggards try to sell and salvage what they can, while early adopters look for signs of a bottom so they can get back in.

A call option is a contract that gives the option holder the right to purchase securities at a specified price on or before the option’s maturity date. These securities could include stocks, bonds, or other commodities.

Explanation:

Basically, it’s a contingent purchase agreement between someone who owns a security and someone who wants to purchase it. The current owner of the securities is paid a premium and agrees to allow the prospective owner to purchase the securities at a specific price, called the strike price , before a specific date, the contract maturity date. Although a call-option gives the option owner the right to purchase the securities, he is not obligated to exercise his call on or before the contract matures. He simply has the right, or option, to purchase the asset from the owner. On the other hand, the option seller is obliged to sell the securities on or before maturity if the option holder chooses to exercise his right. Call options are exercised at the strike price, and investors realize a profit if the strike price is higher than the market price of the underlying security. The maximum loss for a call-option is the premium paid for the option.

Example:

George owns 100 shares of a technology company that trade at $87. George believes that the stock price will rise to $102 within the next 5 months, and he decides to buy a call option on the technology stock for $3 at a strike price of $100. He pays $300 for 100 shares (each option contract covers 100 shares).

In a nutshell :

  • A call is an option contract giving the owner the right but not the obligation to buy a specified amount of an underlying security at a specified price within a specified time.
  • The specified price is known as the strike price, and the specified time during which the sale can be made is its expiration or time to maturity.
  • You pay a fee to purchase a call option, called the premium; this per-share charge is the maximum you can lose on a call option.
  • You can go long on a call option by buying it or short a call option by selling it.
  • Call options may be purchased for speculation or sold for income purposes or for tax management.
  • Call options may also be combined for use in spread or combination strategies.

A board of directors represents an elected or an appointed body of members who are responsible for overseeing a firm’s activities to the benefit of its stockholders.

Explanation:

 The board is mandatory for all organizations – private, nonprofit, or governmental because it is held accountable for the firm’s policies and actions. For instance, if an organization acts in an irresponsible manner that harms consumers and the public benefit, the board members are held responsible for the consequences of the organizations’ actions. Generally, a board is acting within the framework of corporate governance, which includes the explicit and implicit contracts between the board and the company’s stakeholders concerning their responsibilities and rights and the procedures for monitoring and controlling the company’s operations to ensure that there are no conflicting interests between the stakeholders (management, employees, customers, government, community).

In a nutshell:

  • The board of directors is elected to represent shareholders’ interests.
  • Internal board members are not usually monetarily compensated for their work, but outside board members are paid.
  • The board makes decisions concerning the hiring and firing of personnel, dividend policies and payouts, and executive compensation.
  • A board member is likely to be removed if they break foundational rules, for example, engaging in a transaction that is a conflict of interest or striking a deal with a third party to influence a board vote.
  • A board of directors is elected by shareholders but nominated by a nominations committee.

Blue chip stocks are stocks issued by large market capitalization firms, which are leaders in their industries, release strong operating and financial results and consistently deliver dividend payments to their shareholders.

Explanation:

A blue-chip stock is named after the highest valued chips in poker because these companies are the most valuable in the world and have a market cap  of several billion dollars. They also have a reputation of excellent performance even during turbulent times, strong history of earnings growth, and strong brand name. Although a dividend payment  is not the main characteristic of BCS companies, well established, leading companies typically have a long-standing record of rising dividend payments and increasing shareholder value. Furthermore, these large companies are components of reputable market indexes, including the Dow Jones Industrial Average, the Standard & Poor’s (S&P 500) and others.

In a nutshell:

  • Blue chip stocks are huge companies with excellent reputations, often including some of the biggest household names.
  • Investors turn to blue chip stocks because they have dependable financials and often pay dividends.
  • There is a perception among investors that blue chips can survive market challenges of many kinds; while this may be largely true, it is not a guarantee. For this reason, it’s crucial to diversify a portfolio beyond only blue-chip stocks.

A bond is a written agreement or contract between an issuer and the holder that requires the issuer to pay the holder the bond’s par value  or face value plus the stated amount of interest. Bonds are most typically issued in denominations of $500 or $1,000.

Explanation:

Typically, a bond is issued at a discount or premium depending on the market rate of interest. The bondholder pays the face value of the bond to the bond issuer. The bond is then paid back to the bondholder at maturity with monthly, semi-annual, or annual interest payments. Companies, non-profit organizations, and government municipalities use bonds to raise funds for current operations and expansions. Since companies have several ways to finance expansions, they tend to use bond financing less regularly than government municipalities. Companies can raise funds through equity financing and traditional loans.

In a nutshell:

  • Bonds are units of corporate debt issued by companies and securitized as tradable assets.
  • A bond is referred to as a fixed-income instrument since bonds traditionally paid a fixed interest rate (coupon) to debtholders. Variable or floating interest rates are also now quite common.
  • Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa.
  • Bonds have maturity dates at which point the principal amount must be paid back in full or risk default.

Bookkeeping, often called record keeping, is the part of accounting that records transactions and business  events  in the form of journal entries in the accounting system. In other words, bookkeeping is the means by which data is entered into an accounting system. This can either be done manually on a physical ledger pad or electronically in an accounting program like Quickbooks.

Explanation :

Accounting is the process of recording financial transactions pertaining to a business. The accounting process includes summarizing, analyzing, and reporting these transactions to oversight agencies, regulators, and tax collection entities. The financial statements used in accounting are a concise summary of financial transactions over an accounting period, summarizing a company’s operations, financial position, and cash flows . Since the principles of accounting  rely on accurate and thorough records, bookkeeping is the foundation of accounting. Bookkeepers oftentimes have to exercise analytical skills and judgment calls when recording business events since they are the source for most accounting information in the system.

In a nutshell:

  • Regardless of the size of a business, accounting is a necessary function for decision making, cost planning, and measurement of economic performance measurement.
  • A bookkeeper can handle basic accounting needs, but a Certified Public Accountant (CPA) should be utilized for larger or more advanced accounting tasks.
  • Two important types of accounting for businesses are managerial accounting and cost accounting. Managerial accounting helps management teams make business decisions, while cost accounting helps business owners decide how much a product should cost.
  • Professional accountants follow a set of standards known as the Generally Accepted Accounting Principles (GAAP) when preparing financial statements.

A bid is an offer or proposal with particular conditions that pursue an opportunity to provide a good or service. In business terms, a bid is commonly known as an application presented by a person or a firm to a bid solicitor with the aim of being selected as a supplier.

Explanation:

Bidding processes are very common in government procurement. They are often used to improve transparency and guarantee better quality. However, a bid solicitor can be any private or public institution or even an individual that requires a product or a service. The solicitor commonly notifies about the specific procurement requirements to potential suppliers and provides bid terms, which are minimum requisites to participate in the selection process. The bidders are interested companies that present their bids according to conditions and time previously defined by the solicitor. A typical bid should include evidence about past successful jobs performed, past and current clients, available resources to execute the required work and any other information proving that requisites are not only met but even exceeded.

In a nutshell:

  • A bid is an offer made by an investor, trader, or dealer in an effort to buy an asset or to compete for a contract.
  • The spread between the bid and the ask is a reliable indicator of supply and demand for the financial instrument.
  • Market makers are vital to the efficiency and liquidity of the marketplace.
  • Bids can be made live, online, through brokers, or through a closed bidding process.
  • Types of bids include auction bids, online bids, and sealed bids.