Corporate Finance Fundamentals: Key Concepts & Definitions

Financial Management Area: Resources & Structure

The Financial Management Area (often referred to as TERMS T-12 in some contexts) is responsible for managing and controlling the financial resources used by a company. Its primary objectives include:

• Finding the minimum cost for the financial resources needed to develop productive activities.
• Determining the most appropriate financial structure.
• Selecting necessary investments.

Investment Classifications

An Investment is the deployment of financial resources to purchase property or assets. Investments can be classified in the following ways:

• Current Asset Investment: Short-term assets.
• Financial Investment: Investments in securities or other financial instruments.
• Productive Investment: Investments in assets used to produce goods or provide services.

Sources of Funding

Domestic Sources of Funding

These are cash flows originating from resources generated by the company's own activities, primarily from undistributed profits. Types include:

• Maintenance: This consists of depreciation accounting for asset wear and tear. Funds accumulated for this purpose are often called a sinking fund and can be used for other investments.
• Enrichment: These are reservations coming from retained earnings.

External Sources of Funding

These are financial resources captured from outside the company. They are typically formed by:

• Social Capital: Capital contributed by owners (e.g., through the issuance of new shares).
• Liabilities: Obligations to external parties.

Debt Instruments & Financing Methods

Debenture & Related Terms

A Debenture is a type of bond or debt instrument. If a company needs capital and finds traditional loans expensive or difficult to obtain, it may resort to issuing bonds to lenders. The entire process of issuing these bonds is referred to as a loan in this context.

• Face Value: The principal amount of the loan, on which interest is calculated.
• Issue Value: The amount paid to acquire the debenture or title at the time of issuance.
• Rebate Value: The amount paid to the owner of the debenture at the time of redemption.

Loan Definition

A Loan is a contract by which a financial institution delivers an agreed amount of money to a company, which promises to return it with a predetermined interest rate.

Financial Leasing Explained

Financial Leasing is a form of financing where, through a lease agreement, a company needing an asset can use it for a specified period with periodic fee payments. This typically involves three parties:

• Lessor (Arendor): The entity that buys the asset.
• Supplier (Manufacturer): The entity that produces the asset.
• Lessee: The company that needs and uses the asset.

Other Financing & Operational Concepts

Operational Leasing

In Operational Leasing, the lessor is typically the manufacturer of the product, rather than a financial institution.

Renting Agreements

Renting is a long- and medium-term mode of leasing movable property. In the contract, the tenant agrees to pay a fixed, periodic income for a given time. Business renting often includes additional services to facilitate the use of the property, such as maintenance and comprehensive insurance.

Commercial Discounting (Factoring)

Commercial Discounting (also known as Factoring) is an operation to obtain short-term funds. An entity (typically a bank or factoring company) anticipates the payment of a claim or receivable that the company has on its customers. The bank receives an interest or deduction for this credit. The company remains responsible for the claim unless their customers pay.

Types of Investments & Key Financial Concepts

Types of Investments

• Permanent Investments: Used for acquiring assets with a long useful life (e.g., more than a year).
• Temporal Investments: Assets that remain in the company for less than a year.
• Productive Investments: Embodied in assets used to produce goods or provide services.
• Financial Investments: Intended to acquire shares, bonds, or other securities.

Key Financial Concepts

• Revenue: A collection right (the right to receive money).
• Cash: The actual receipt of money.
• Expenditure: An obligation to pay at a specific time.
• Payment: The act of disbursing money.