FINMAN (FINALS) Flashcards

The Importance of Market Research

Understanding Your Target Audience

• A _____ is a road map for achieving your business goals.
• It outlines the capital that you need, the personnel to make it happen, and the description of your product and prospective customers.

The Small Business Administration (SBA), for instance, provides a format that includes the following eight (8) sections:

• This should be a description of your company and its potential for success.
• The _____ can cover your mission statement, employees, location, and growth plan.

This is where you detail what your business offers, its competitive advantages, and your strengths as a business.

• Lay out how your company is positioned to perform well in your industry.
• Describe market trends and themes and your knowledge of successful competitors.

• Who is running your company, and how is your business structured? Include an organizational chart of your management team.
• Discuss if your business will be incorporated as a business C or S corporation, a limited partnership, a limited liability company, or a sole proprietorship.

• Here is where you describe how your business will solve a problem a nd why this will benefit customers.
• Describe how your product lifecycle would unfold.

Detail your marketing strategy and how this will reach your customers and drive return on investment.

• If you're looking for financing, lay out the capital you’re requesting under a five-year horizon and where, in detail, it will be allocated, such as salaries, materials, or equipment.

This section shows the five-year financial outlook for your company and ties these to your request for capital. ³

• Having a coherent business plan is important for businesses looking to raise cash and crystallize their business goals

Setting Goals and Strategies

Financial Projections and Budgeting

• Another important aspect of starting a business are the _____ that enable you to operate under the law.
• The help of a legal services professional might save you headaches.
• The legal structure of a business will impact your taxes, your liability, and how you operate.

Businesses may consider the following structures in which to operate:

• Each has different legal consequences, from regulatory burdens to tax advantages to liability being shifted to the business instead of the business owner.

• Now that you have your business structure outlined, the next step is _____.
• Your location is the second key factor in how you’ll _____.
• In many cases, small businesses can register their business name with local and state government authorities.

• If your business conducts certain activities that are regulated by a federal agency, you’re required to get a permit or license.
• A list of regulated activities can be found on the SBA website, and includes activities such as agriculture, alcoholic beverages, and transportation. ⁶

• There are many different ways to fund a business.
• One of the key mistakes entrepreneurs make is not having enough capital to get their business running.
• The good news is that there are several channels to help make this happen, given the vital role entrepreneurs play in creating jobs and boosting productivity in the wider economy.

Self-Funding vs. External Funding

• ____, the term commonly used to describe self-funding your business, is where companies tap into their own cash or network of family and friends for investment.
• While the advantage of self-funding is having greater control, the downside is that it often involves more personal risk.

• _____ involves funding from bank loans, crowdfunding, or venture capital, among other sources.
• These may provide additional buffers and enable you to capture growth opportunities.
• The drawback is less freedom and more stringent requirements for paying back these funds.⁷

Grant and Loan Opportunities

Crafting a Marketing Strategy

Branding Your Business

Digital Marketing and Social Media

Managing and Growing Your Business

Hiring and Training Staff

ü Scaling Your Business

• Growing your business also requires strategy.
• According to Gino Chirio, executive vice president at the consultancy group Maddock Douglas,
• there are six (6) ways that companies can grow their business to drive real growth and expansion:

Boost margins by cutting costs.

Connect with customer in powerful ways to help increase retention.

Provide advancements to your existing product or service.

Expand into new markets, or find markets where your product addresses a different need.

Offer a new product.

Utilize new business models, such as subscription-based services, fee-for-service, or advertising-based models.

How Do I Start a Small Business for Beginners?

• A good place to start building a business is to understand the following core steps that are involved in an entrepreneur's journey:

How Do I Create a Business Plan?

• ____ are assets that can be traded or exchanged.
• Some examples of _____ include stock shares, exchange-traded funds (ETFs), bonds, certificates of deposit (CDs), mutual funds, loans, and derivatives contracts.
• _____ provide efficient flow and transfer of capital among the world’s investors.
• They are assets that may be in the form of cash, a contractual right to deliver or receive cash or another type of _____, or evidence of ownership in some entity.

KEY TAKEAWAYS

• A _____ is a real or virtual document representing a legal agreement that involves any kind of monetary value.
• _____ may be divided into two types: cash and derivatives.
• They also are categorized by asset class, which depends on whether they are debt-based or equity-based.
• Foreign exchange instruments comprise a third, unique type of financial instrument.

Understanding Financial Instruments

____ represent ownership of an asset.

_____ represent a loan made by an investor to the owner of the asset.

_____ comprise a third, unique type of financial instrument.

Different subcategories of each instrument type exist, such as :

Important: _____ define financial instruments as:

“any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.”

Financial instruments may be divided into two types:

• The values of _____ are directly influenced and determined by the markets and can be readily brought and sold.
• Stocks and bonds are examples of such primary instruments.
• _____ may also be deposits and loans agreed upon by borrowers and lenders.
• Checks are an example of a _____ because they transmit payment from one bank account to another.

• The value and characteristics of _____are based on the
• vehicle’s underlying components, such as assets, interest rates, or indices.
• An equity options contract—such as a call option on a particular stock,
• for example—is a derivative because it derives its value from the underlying shares.
• The call option gives the right, but not the obligation, to buy shares of the stock at a specified price and by a certain date.
• As the price of the underlying stock rises and falls, so does the value of the option, although not necessarily by the same percentage.
• There are over-the-counter (OTC) derivatives and exchange-traded derivatives.
• OTC is a market or process whereby securities not listed on formal exchanges are priced and traded.³

Types of Asset Classes of Financial Instruments

• Financial instruments may also be divided according to an
• asset class, which depends on whether they :

• _____ are essentially loans made by an investor to the issuer in return for a payment of interest.
• Short-term _____ last for one year or less.
• Securities of this kind come in the form of Treasury bills (T-bills) and commercial paper.
• Bank deposits and certificates of deposit (CDs) are technically _____ because they earn depositors interest payments.
• Exchange-traded derivatives are traded for short-term,
• _____ such as short-dated interest rate futures.
• There also are OTC derivatives such as forward rate agreements (FRAs).

• ______last for more than a year.
• _____ securities are typically issued as bonds or mortgage-backed securities (MBS).
• Exchange-traded derivatives on these instruments are traded in the form of fixed-income futures and options.

____ on long-term debts include interest rate swaps, interest rate caps and floors, and long-dated interest rate options.

• ______ represent ownership of an asset.
• Stocks are _____, as are ETFs and mutual funds that are invested in stocks.

• Exchange-traded derivatives in this category include stock options and equity futures.

What Are Some Examples of Financial Instruments?

Are Commodities Financial Instruments?

Is an Insurance Policy a Financial Instrument?

Types of Risk Analysis

• Many people are aware of a cost-benefit analysis.
• In this type of analysis, an analyst compares the benefits a company receives to the financial and non-financial expenses related to the benefits.
• The potential benefits may cause other, new types of potential expenses to occur.
• In a similar manner, a risk-benefit analysis compares potential benefits with associated potential risks.
• Benefits may be ranked and evaluated based on their likelihood of success or the projected impact the benefits may have.

• A needs risk analysis is an analysis of the current state of a company.
• Often, a company will undergo a needs assessment to better understand a need or gap that is already known.
• Alternatively, a needs assessment may be done if management is not aware of gaps or deficiencies.
• This analysis lets the company know where they need to spending more resources in.

• In many cases, a business may see a potential risk looming and wants to know how the situation may impact the business.
• For example, consider the probability of a concrete worker strike to a real estate developer.
• The real estate developer may perform a business impact analysis to understand how each additional day of the delay may impact their operations.

• Opposite of a needs analysis, a ____ is performed because something is happening that shouldn't be.
• This type of risk analysis strives to identify and eliminate processes that cause issues.
• Whereas other types of risk analysis often forecast what needs to be done or what could be getting done, a root cause analysis aims to identify the impact of things that have already happened or continue to happen.

How to Perform a Risk Analysis

• The first step in many types of risk analysis to is to make a list of potential risks you may encounter.
• These may be internal threats that arise from within a company, though most risks will be external that occur from outside forces.
• It is important to incorporate many different members of a company for this brainstorming session as different departments may have different perspectives and inputs.
• A company may have already addressed the major risks of the company through a SWOT analysis. Although a SWOT analysis may prove to be a launching point for further discussion, risk analysis often addresses a specific question while SWOT analysis are often broader. Some risks may be listed on both, but a risk analysis should be more specific when trying to address a specific problem.

• The primary concern of risk analysis is to identify troublesome areas for a company.
• Most often, the riskiest aspects may be the areas that are undefined.
• Therefore, a critical aspect of risk analysis is to understand how each potential risk has uncertainty and to quantify the range of risk that uncertainty may hold.
• Consider the example of a product recall of defective products after they have been shipped.
• A company may not know how many units were defective, so it may project different scenarios where either a partial or full product recall is performed.
• The company may also run various scenarios on how to resolve the issue with customers (i.e. a low, medium, or high engagement solution.

• Most often, the goal of a risk analysis is to better understand how risk will financially impact a company.
• This is usually calculated as the risk value, which is the probability of an event happening multiplied by the cost of the event.
• For example, in the example above, the company may assess that there is a 1% chance a product defection occurs.
• If the event were to occur, it would cost the company $100 million. In this example, the risk value of the defective product would be assigned $1 million.
• The important piece to remember here is management's ability to prioritize avoiding potentially devastating results.
• For example, if the company above only yielded $40 million of sales each year, a single defect product that could ruin brand image and customer trust may put the company out of business.
• Even though this example led to a risk value of only $1 million, the company may choose to prioritize addressing this due to the higher stakes nature of the risk.

• The inputs from above are often fed into an analysis model.
• The analysis model will take all available pieces of data and information, and the model will attempt to yield different outcomes, probabilities, and financial projections of what may occur.
• In more advanced situations, scenario analysis or simulations can determine an average outcome value that can be used to quantify the average instance of an event occurring.

• With the model run and the data available to be reviewed, it's time to analyze the results.
• Management often takes the information and determines the best course of action by comparing the likelihood of risk, projected financial impact, and model simulations.
• Management may also request to see different scenarios run for different risks based on different variables or inputs.

• After management has digested the information, it is time to put a plan in action.
• Sometimes, the plan is to do nothing; in risk acceptance strategies, a company has decided it will not change course as it makes most financial sense to simply live with the risk of something happening and dealing with it after it occurs.
• In other cases, management may want to reduce or eliminate the risk.

FAST FACT:

• Under ______, a risk model is built using simulation or deterministic statistics to assign numerical values to risk.
• The inputs are mostly assumptions and random variables.

• _____ is an analytical method that does not identify and evaluate risks with numerical and quantitative ratings.
• It involves a written definition of the uncertainties, an evaluation of the extent of the impact (if the risk ensues), and countermeasure plans in the case of a negative event.