Financial Management Decision Understanding Basic Finance Terms

Financial Management Decision

Understanding Basic Finance Terms

Generally, it is beneficial to have a basic understanding of financial concepts and terminology before going into business independently. Financial management refers to the process of calculating anticipated sources of profit and comparing them to anticipated expenses and other variables and contingencies. In principle, financial management is used to determine what prospective ventures are likely to be profitable and to identify those that are too risky to launch without risking the initial investment.

Risk financing refers to the process of identifying and evaluating potential sources of negative consequences known as risks and of calculating the financial resources that would be necessary to mitigate those risks. Generally, that process would include a risk matrix in which the magnitude of every reasonable identifiable potential risk is considered in conjunction with and in relation to its respective likelihood of occurrence. That risk matrix provides data that will assist in determining which risks can be accepted, what the cost of mitigation might be, and to identify those risks that cannot be taken.

The stock market refers to the system of companies issuing public stock in their ventures. The value of that stock is a reflection of complex formulas that correspond to the potential profitability or a company and the total value of all of its assets minus its expenses. Typically, company stock is issued as a means of accumulating financial capital to help a company grow and it is often issued to employees as a form of deferred compensation instead of cash. The stocks issued by companies were traditionally only sold and traded through licensed financial professionals such as stock brokers. Generally, stock brokers must pass a licensing examination know as the Series 7 and register with the Securities and Exchange Commission. Today, the availability of personal computers and Internet connections have greatly reduced the role of stock brokers in the negotiated accumulation, sale, or trade of stock, simply because private individuals can now execute the transactions directly without engaging a professional stock broker. Investment bankers provide similar services but focus more on trading the much more complex and larger negotiable instruments that represent the value of large companies, large numbers of combined individual debt, and collateral debt obligations of companies. The most obvious recent example of the role of investment bankers would be their responsibility in destroying the home real estate market by selling millions of overvalued high-risk mortgage loan obligations as very safe, AAA-rated financial investments.

Considering the Available Options for Funding the Venture

The options available to me for financing my catering business venture are licensing technology, selling stock, or borrowing the money. Since the catering industry is a service and not a business that features advanced or proprietary technology, licensing technology would not be a viable option. Since the venture will start off as a very small business, the option of financing the initial investment by issuing stock shares is not practical either. Therefore, the only option that is realistic and practical will be for me to finance my initial investment by borrowing the money.

Considering the Pros and Cons of Borrowing Money from Different Lenders