Financial management concepts

7/28/2019 Financial management concepts

1/10

FINANCIAL MANAGEMENT CONCEPTS

1. ABC System : a System used to categorize inventory items to ensure that the most important

ones are reviewed most often.

2. Account Receivable: A balance due from a customer.

3. Aggressive Working Capital Investment Policy : A policy under which holdings of cash,

securities, inventories, and receivables are minimized.

4. Aging Schedule : A report showing how long accounts receivable have been outstanding; it

gives the percentage of receivables currently past due and the percentages past due by specified

periods.

5. Amortization Schedule: A schedule showing precisely how a loan will be repaid. It gives the

required payment on each specified date and a breakdown of the payment showing how much

interest constitutes and how much repayment of principal constitutes.

6. Amortized Loan : A loan that is repaid in equal payments over its life.

7. Annual Report : A report issued annually by a corporation to its stockholders. It contains the

basic financial statements, along with managements opinion of the past years operations and of

the firms future prospects.

8. Annuity : A series of payments of an equal, or constant, amount for a specified number of

periods.

9. Annuity Due : An annuity in which the payments occur at the beginning of each period.

10. Asset Management Ratios :A set of ratios which measures dhow effectively a firm ismanaging its assets; also called activity ratios.

11. Assets : All items which the firm owns.

12. Average Tax Rate : Taxes paid divided by taxable income.

13. Balance Sheet : A statement of the firms financial position at a specific point in time.

14. Basic Earning Power (BEP) Ratio : This ratio indicates the ability of the firms assets to

generate operating income; computed by dividing EBIT by total assets.

15. Bond : A long-term debt instrument.

16. Bond Ratings : Ratings assigned to bonds based on the probability of their default. Those

bonds with the smallest default probability are rated Aaa and carry the lowest interest rates.17. Breakeven Analysis : An analytical technique for studying the relationship between fixed

costs, variable costs, sales volume, and operating profits.

18. Breakeven Point : The volume of sales at which total operating costs equal total revenues and

operating income (EBIT) equals zero.

19. Business Risk : The risk associated with future operating income; the risk that would existeven if the firms operations were all equity financed.

20. Capital Budgeting : The process of planning expenditures on assets and projects whose returnsextend beyond one year.

21. Capital Gain Or Loss : The profit (loss) from the sale of a capital asset for more (less) than itspurchase price.

22. Capital Gains Yield : The capital gain during a given year divided by the beginning price.23. Capital Intensity Ratio : The amount of assets required per dollar of sales (A*/S).

24. Capital Markets : Financial markets for stocks and for long-term debt (one year or longer).

25. Carrying Costs : The costs associated with carrying inventories, including storage, capital, anddepreciation costs. Carrying costs generally increase in proportion to the average amount of

inventory held.

26. Cash : The total of bank demand deposits plus currency.

27. Cash Budget : A schedule showing cash flows (receipts, disbursements, and cash balances) fora firm over a specified period.

28. Cash Conversion Cycle : The length of time from the payment for raw materials and labour to

the collection of accounts.29. Cash Discount : A reduction in the price of goods, given to encourage early payment.

30. Cash Flow : The actual net cash, as opposed to accounting net income, that flows into or out of

the firm during a specified period; equal to net income plus depreciation and other noncash

expenses.

31. Change In Net Working Capital : The increased current assets required for a new project,

minus the simultaneous increase in accounts payable and accruals.

32. Coefficient Of Variation (CV) : A standardized measure of the risk per unit of return;

calculated as the standard deviation divided by the expected return.

33. Collateral : Assets that are pledged to secure a loan.


2/10

34. Collections Float : The amount of checks received but not yet credited to the payees account.

35. Collection Policy : The procedures used to collect accounts receivable.

36. Common Stock : Long-term equity claim on the issuing corporation; does not guarantee

dividend payments.

37. Comparative Ratio Analysis : An analysis based on a comparison of a firms rations with

those of other firms in the same industry.

38. Conservative Working Capital Investment Policy : A policy under which relatively large

amounts of cash, marketable securities, and inventories are carried and under which sales are

stimulated by a generous credit policy, resulting in a high level of receivables.39. Constant Growth Model : Also called the Gordon Model; used to find the value of a constant

growth stock.

40. Convertible Bond : A bond that is exchangeable, at the option of the holder, for common stock

of the issuing firm.

41. Convertible Security : A security, usually a bond or preferred stock, that is exchangeable at

the option of the holder for the common stock of the issuing firm.

42. Corporate Bonds : Long-term debt securities issued by corporations.

43. Corporation : A legal entity created by a state, separate and distinct from its owners and

managers, having unlimited life, easy transferability of ownership, and limited liability.

44. Correlation Coefficient, r : A measure of the degree of relationship between two variables.

45. Cost Of Capital : The discount rate that should be used in the capital budgeting process.

46. Cost Of New Common Equity, Ke : The cost of external equity; based on the cost of retainedearnings but increased for flotation costs.

47. Cost Of Preferred Stock, Kp : The rate of return investors require on the firms preferredstock, adjusted for flotation costs. Kp is calculated as the preferred dividend, Dp, divided by the

net issuing price, Pn.

48. Cost Of Retained Earnings, Ks : the rate of return required by stockholders on a firmscommon stock.

49. Coupon Interest Rate : The stated annual rate of interest on a bond.

50. Coupon Rate : The stated, or nominal, rate of interest on a bond.

51. Credit Crunch : A period in which capital is scarce and interest rates, typically, are high.52. Credit Period : The length of time for which credit is granted.

53. Credit Policy : A set of decisions that includes a firms credit period, discounts offered, credit

standards, and collection policy.

54. Credit Standards : Standards that stipulate the minimum financial strength that an applicant

must demonstrate in order to be granted credit.

55. Credit Terms : A statement of the credit period and any discounts offered for example, 2/10,

net 30.

56. Cumulative Dividends : A protective feature on preferred stock that requires preferred

dividends in arrears to be paid before any common dividends can be paid.

57. Current Ratio : this ratio is computed by dividing current assets by current liabilities. It

indicates the extent to which the claims of short-term creditors are covered by assets expected tobe converted to cash in the near future.

58. Current Yield : The annual interest payment on a bond dividend by its current market price.

59. Days Sales Outstanding (DSO) : The ratio computed by dividing average credit sales per dayinto accounts receivable; indicates the average length of time the firm must wait after making a

credit sale before receiving payment.

60. Debenture : A bond that is not secured by a mortgage on specific property.

61. Debt Ratio : The ratio of total debt to total assets.

62. DECLARATION DATE : Date On Which A Firms Directors Issue A Statement Declaring A

Regular Dividend.

63. Default Risk : The risk that a borrower will not pay the interest or principal on a loan.64. Degree Of Financial Leverage (DFL) : The percentage change in earnings available to

common shareholders associated with a given percentage change in earnings before interest and

taxes.

65. Degree Of Leverage : The percentage change in one variable, given a percentage change in

another variable; a form of elasticity.

66. Degree Of Operating Leverage (DOL) : The percentage change in EBIT resulting from a

given percentage change in sales.

67. Degree Of Total Leverage (DTL) : The percentage change in EPS brought about by a given

percentage change in sales; DTL shows the effects of both operating leverage and financial


3/10

leverage.

68. Depreciation : The accounting process whereby the cost of a productive asset is allocated

against the revenues that it helps to produce.

69. Discount Bond : A bond that sells below its par value; occurs whenever the going rate of

interest rises above the coupon rate.

70. Discount Interest : Interest that is calculated on the face amount of a loan but is paid in

advance.

71. Discounted Cash Flow (Dcf) Techniques : Methods of evaluating investment proposals that

employ time value of money concepts; two of these are the net present value and internal rate ofreturn methods.

72. Discounting : The process of finding the present value of a future payment or a series of future

payments; the reverse of compounding.

73. Dividend Payout Ratio : The percentage of earnings paid out in dividends.

74. Dividend Policy Decision : The decision as to how much of current earnings to pay out as

dividends rather than to retain for reinvestment in the firm.

75. Dividend Reinvestment Plan (DRIP) : A plan that enables a stockholder to automatically

reinvestment dividends received in the stock of the paying firm.

76. Dividend Yield : The expected dividend divided by the current price of a share of stock.

77. Dividends Per Share (DPS) : Total dividends paid to common stockholders divided by the

number of shares of common stock outstanding.

78. Du Pont Equation : A formula that finds the rate of return on assets by multiplying the profit

margin by the total assets turnover.

79. Earnings Per Share (EPS) : Net income available to common stockholders divided by the

number of shares of common stock outstanding.

80. Economic Ordering Quantity (EOQ) : The optimal, or least-cost, quantity of inventory that

should be ordered.

81. Effective Annual Rate (EAR) : The annual rate of interest actually being earned as opposed to

the nominal or stated rate.

82. Efficient Capital Market : Market in which securities are fairly priced in the sense that the

price reflects all publicly available information on each security.

83. Eoq Model : Formula for determining the ordering quantity that will minimize total inventory

costs.

84. Equity : Financing supplied by the firms owners.

85. Equity Multiplier : The ratio of total assets to total common equity.

86. Ex-Dividend Date : The date on which the right to the current dividend no longer accompanies

a stock; it is four working days prior to the holder of record date.

87. Excess Capacity : Capacity that exists when an asset is not being fully utilized.

88. Expected Rate Of Return : The rate of return expected to be realized from an investment; themean value of the probability distribution of possible outcomes.

89. Extra Dividend : A supplementary dividend paid in years when excess funds are available.

90. Factoring : Outright sale of accounts receivable.91. Financial Intermediaries : Specialized financial firms that facilitate the transfer of funds from

savers to demanders of capital and, in the process, create new financial products.

92. Financial Lease : A lease that does not provide for maintenance services, is not cancelable,and is fully amortized over its life; also called a capital lease.

93. Financial Leverage : The extent to which a firm uses debt (or preferred stock) financing.

94. Financial Management : The acquisition and utilization of funds to maximize the efficiency

and value of an enterprise.

95. Financial Risk : the portion of stock holders risk, over and above basic business risk, resulting

from the use of financial leverage.

96. Financing Cash Flows : The cash flows associated with the principal and periodic payments on

the financial structure of the firm; for example, the principal and interest payments on debt.97. Five Cs Of Credit : The factors used to evaluate credit risk; character, capacity, capital,

collateral, and conditions.

98. Fixed Assets Turnover Ratio : The ratio of sales to net fixed assets; also called the fixed

assets utilization ratio.

99. Fixed Charge Coverage Ratio : This ratio expands upon the TIE ratio to include the firms

annual long-term lease and sinking fund obligations.

100. Fixed Operating Costs : Operating costs that do not vary directly with sales; that is, costs thatwould exist even if no sales were made. Examples include depreciation and lease payments.

101. Floating Rate Preferred Stock : Preferred stock on which the dividend rate fluctuates with


4/10

changes in the general level of interest rates.

102. Flotation Costs : The costs of issuing new common stock, preferred stock, or bonds.

103. Funded Debt : Long-term debt; funding means replacing short-term debt with securities of

longer maturity.

104. Growth Rate : The expected rate of growth in dividends per share.

105. Hurdle Rate : The minimum acceptable IRR; the rate which determines whether a projectshould be accepted or rejected.

106. Income Statement : A statement summarizing the firms revenues and expenses over an

accounting period.107. Incremental Cash Flows : The net cash flows attributable to an investment project.

108. Indenture : A formal agreement between the issuer of a bond and the bondholders.

109. Inflation : The tendency of prices to increase over time.

110. Inflation Premium (IP) : A premium for expected inflation that investors add to the real risk-

free rate of interest.

111. Interest Rate : The price paid by borrowers to lenders for the use of funds.

112. Interest Rate Risk : The risk to which investors are exposed due to rising interest rates.

113. Inventory Management : The balancing of a set of costs that increase with larger inventory

holdings with a set of costs that decrease with larger order size.

114. IRR : The discount rate which forces the PV of a projects cash flows to equal the PV of its

costs and, thus, forces the projects NPV to equal zero.

115. Lessee : The party that uses, rather than the one who owns, the leased property.

116. Lessor : The owner of the leased property.

117. Letter Of Credit : A written statement by an importing firms bank testifying to the firms

ability to make payment, often guaranteeing payment to the exporter or the exporters bank.

118. LIABILITIES : All the legal claims held against the firm by nonowners.

119. LIQUIDITY : The ability to sell an asset at a reasonable price on short notice.

120. LIQUIDITY RISK : The risk that securities cannot be sold at close to the quoted price onshort notice.

121. MARGINAL COST OF CAPITAL (MCC) : The cost of obtaining another dollar of new

capital; the weighted average cost of the last dollar of new capital raised.122. MARKET RISK : That part of a securitys risk that cannot be eliminated by diversification.

Also, that part of a projects risk that cannot be eliminated by diversification; it is measured by aprojects beta coefficient.

123. MARKET VALUE RATIOS : A set of ratios that relates the firms stock price to its earningsand book value per share.

124. MATURITY DATE : A specified date on which the par value of a bond must be repaid.

125. MONEY MARKETS : Financial markets in which funds are borrowed or loaned for short

periods (less than one year).

126. MONEY MARKET FUND : A mutual fund that invests in short-term, low-risk debt securities

and allows investors to write checks against their accounts.

127. MUTUAL FUND : A financial intermediary that invests the pooled funds of savers, thusobtaining economies of scale in investing and reducing risk by diversification.

128. NET FLOAT : The difference between a firms checkbook balance and the balance shown on

the banks books, i.e., the difference between disbursement float and collections float.

129. NET PRESENT VALUE (NPV) METHOD : A method of evaluating investment proposals

by finding the present value of future net cash flows, discounted at an appropriate interest rate,

minus the cost of the investment.

130. NET WORKING CAPITAL : Current assets minus current liabilities; also equal to the

current assets financed by long-term funds.

131. Offering Price : The price at which common stock is sold to the public.

132. Operating Cash Flows : The cash flows associated with the everyday business activities of the

firm; for example, the purchasing of inputs from a foreign supplier.133. Operating LeasE : A lease under which the lessor maintains and finances the property; also

called a service lease.

134. Opportunity Cost : The return on the best alternative investment available of equal risk.

135. Overdraft System : A system whereby firms may write checks in excess of their balances,

with the banks automatically extending loans to cover the shortages.

136. Paid In Capital : Funds received in excess of par value when a firm sells stock.

137. Payback Period : The number of years required to recover the firms original investment.

138. Permanent Current Assets : Current assets that are still on hand when business activity is at

seasonal or cyclical lows.


5/10

139. Pledging Of Accounts Receivable : Putting accounts receivable up as security for a loan.

140. Portfolio : A collection of investments.

141. Preferred Stock : Long-term equity securities which pay a fixed dividend.

142. Premium Bond : A bond that sells above its par value; occurs whenever the going rate ofinterest falls below the coupon rate.

143. Present Value (Pv) : The value today of a future payment or series of payments discounted atthe appropriate interest rate.

144. Profit Margin On Sales : This ratio measures income per dollar of sales; it is computed by

dividing net income by sales.145. Profit Maximization : The maximization of the firms net income.

146. Profitability Ratios : A group of ratios showing the combined effects of liquidity, asset

management, and debt management on operating income and net income.

147. PUT OPTION : An option to sell a share of stock at a certain price, within a specified period.

148. QUICK, ACID TEST, RATIO : This ratio is computed by deducting inventories from currentassets and dividing the remainder by current liabilities.

149. RANKING METHODS : Techniques used to evaluate capital expenditure proposals in terms

of their attractiveness to the firm.

150. RATIO ANALYSIS : Analysis of the relationships among financial statement accounts.

151. REAL RISK-FREE RATE OF INTEREST : The rate of interest that would exist on short-

term default-free U.S. Treasury securities if no inflation were expected.

152. REINVESTMENT RATE RISK : The risk that a decline in interest rates will lead to lower

income when securities mature and funds are reinvested.

153. RELEVANT CASH FLOWS : The specific set of cash flows that should be considered in a

capital budgeting decision.

154. RELEVANT RISK : The risk of a security that cannot be diversified away, or its market risk.This reflects a securitys contribution to the risk of a portfolio.

155. REORDER POINT : The inventory level at which an order should be placed.

156. RESIDUAL VALUE : The value of leased property at the end of the lease term.

157. RETENTION RATE : The percentage of its earnings retained by the firm after payment of

dividends, which is equal to 1 minus the dividend payout ratio.158. RISK : The chance that some unfavourable event will occur. Also, in a financial market

context, the chance that a loan will not be repaid as promised.

159. RISK PREMIUM : The difference between the required (and expected0 rate of return on agiven risky asset and that on a less risky asset.

160. SAFETY STOCKS : Additional inventory carried to guard against increases in sales rates orproduction/shipping delays.

161. SECONDARY MARKETS : Financial markets in which securities are traded among investorsafter the securities have been initially issued.

162. SECURED LOAN : A loan backed by collateral, often inventories or receivables.

163. SPECULATIVE BALANCES : Cash balances or marketable securities that are held to enable

the firm to take advantage of any bargain purchases that might arise.164. Spread : The difference between the price a securities dealer offers to pay for securities (the

bid price) and the price at which the dealer offers to sell the securities (the asked price)

165. Statement Of Cash Flows : A statement reporting the impact of a firms operating, investing,

and financing activities on cash flows over an accounting period.

166. Stock Dividend : A dividend paid in the form of additional shares of stock rather than in cash.

167. Stock Repurchase : A transaction in which a firm buys back shares of its own stock, therebydecreasing shares outstanding, increasing EPS, and, often, increasing the price of the stock.

168. Stock Split : An action taken by a firm to increase the number of shares outstanding, such as

doubling the number of shares outstanding by giving each stock holder two new shares for eachone formerly held.

169. Stretching Accounts Payable : the practice of deliberately paying accounts payable late.170. Sunk Cost : A cash outlay that has already been incurred and which cannot be recovered

regardless of whether the project is accepted or rejected.

171. Taxable Income : Gross income minus exemptions and allowable deductions as set forth in the

Tax Code.

172. Temporary Current Assets : Current assets that fluctuate with seasonal or cyclical sales

variations.

173. Term Loan : A loan, generally obtained from a bank or insurance company, with a maturity

greater than one year.

174. Trade Credit : Inter-firm debt arising from credit sales; recorded as an account receivable by


6/10

the seller and as an account payable by the buyer.

175. Variable Operating Costs : Operating costs that vary directly with sales. For example, factory

labour, materials, and sales commissions.

176. Venture Capital : An investment into new, privately held firms; it is intended to facilitate the

growth of small firms not yet able to go public.

177. Weighted Average Cost Of Capital (Wacc) : A weighted average of the component costs of

debt, preferred stock, and common equity.

178. Working Capital : A firms investment in short-term assets cash, marketable securities,

inventory, and accounts receivable.179. Working Capital Financing Policy : The manner in which the firms permanent and

temporary current assets are financed.

180. Yield Curve : A graph showing the relationship between yields and maturities of debt

securities.

181. Zero Coupon Bonds (Zeros) : Bonds that pay no annual interest but are sold at a discount

below par, thus providing compensation to investors in the form of capital appreciation.

A Glossary of Loan Terms

AssetsAnything of value. Any interest in real or personal property which can be appropriated for the

payment of debt.

Bad Debt A debt that is not collectible and is therefore worthless to the creditor.

Balance SheetFinancial statement presenting measures of the assets, liabilities and owner's equity or

net worth of business firm or nonprofit organization as of a specific moment in time.

Bridge Loan Short-term loan to provide temporary financing until more permanent financing is

available.

Business Plan A document that describes an organization's current status and plans for several years

into the future. It generally projects future opportunities for the organization and maps the financial,operations, marketing and organizational strategies that will enable the organization to achieve its

goals.

Capital Broadly, all the money and other property of a corporation or other enterprise used in

transacting its business.

Capitalization Long-term debt, preferred stock and net worth. The loan capital of a community

development loan fund; includes that which has been borrowed from and is repayable to third parties

as well as that which is earned or owned by the loan fund (i.e. "permanent capital").

Capital Markets Those financial markets, including institutions and individuals, that exchange

securities, especially long-term debt instruments.

Cash Flow Financing Short-term loan providing additional cash to cover cash shortfalls in

anticipation of revenue, such as the payment(s) of receivables.

Collateral Assets pledged to secure the repayment of a loan.

Covenant An agreement or promise to do or not to do a particular thing; to enter into a formal

agreement; a promise incidental to a deed or contract. The following are functional objectives guiding

most covenants: full disclosure of information, preservation of net worth, maintenance of asset

quality, maintenance of adequate cash flow, control of growth, control of management, assurance of

legal existence and concept of going concern, provision for lender profit or program goals.

Current Asset Assets that will normally be turned into cash within a year.

Current Liability Liability that will normally be repaid within a year.


7/10

Current Ratio Current assets divided by current liabilities -- a measure of liquidity. Generally, the

higher the ratio, the greater the "cushion" between current obligations and a firm's ability to meet

them.

DebtAn amount owed for funds borrowed. The debt may be owed to an organization's own reserves,

individuals, banks, or other institutions. Generally, the debt is secured by a note, bond, mortgage, or

other instrument that states repayment and interest provisions. The note, in turn, may be secured by alien against property or other assets.

Debt Service Amount of payment due regularly to meet a debt agreement; usually a monthly,

quarterly or annual obligation.

Debt Service ReserveTerm used to refer to cash reserves set aside by a borrower, either by internal

policy or lender covenant, to repay debt in the event that cash generated by operations is insufficient.

Default A failure to discharge a duty. The term is most often used to describe the occurrence of an

event that cuts short the rights or remedies of one of the parties to an agreement or legal dispute, for

example, the failure of the mortgagor to pay a mortgage installment, or to comply with mortgage

covenants.

Delinquent In a monetary context, something that has been made payable and is overdue and unpaid,

Due DiligenceRefers to the task of carefully confirming all critical assumptions and facts presented

by a borrower. This includes verifying sources of income, accuracy of financial statements, value of

assets that will serve as collateral, the tax status of the borrower and any other material facts presented

by the borrower.

Endowment or Trust A fund that contains assets whose use is restricted only to the income earned

by these assets.

EquityThe value of property in an organization greater than total debt held on it. Equity investments

typically take the form of an owner's share in the business, and often, a share in the return, or profits.

Equity investments carry greater risk than debt, but the potential for greater return should balance the

risk.

Equity Participation An ownership position in an organization or venture taken through an

investment. Returns on the investment are dependent on the profitability of the organization or

venture.

Fund BalanceNet worth in a nonprofit organization; total assets minus total liabilities.

General RecourseRights to demand payment from the general assets of the debtor, without seniority

in access to any specific assets.

Guaranteed Loan A pledge to cover the payment of debt or to perform some obligation if the person

liable fails to perform. When a third party guarantees a loan, it promises to pay in the event of a

default by the borrower.

Interim FinancingShort-term loan to provide temporary financing until more permanent financing is

available.

Intermediaries Non- or for-profit institutions that have specialized lending capacities. They obtain

capital in the form of equity and low interest loans from a variety of sources, including foundations

and other funders, to form a "lending pool." They then serve as "wholesalers" who process large

numbers of small loans or investments. This "economy of scale" often allows intermediaries to be

more efficient than a foundation or funder could be if it considered each investment individually.


8/10

Also, intermediaries often develop expertise in a particular field or region that foundations or funders

cannot afford to develop. In the context of this study, non-financial intermediaries include community

foundations and financial intermediaries include credit unions, venture capital and loan funds, banks,

etc.

LeverageUsing long-term debt to secure funds for an organization. In the social investment world,

often refers to financial participation by other private, public or individual sources.Liabilities, Total Liabilities Total value of financial claims on a firm's assets. Equals total assets

minus net worth.

Limited Liability Limitation of shareholders' losses to the amount invested.

Limited RecourseRights only to specifically stipulated assets to satisfy an unpaid debt.

Line of Credit Agreement by a bank that a company may borrow at any time up to an established

limit.

Linked Deposit A deposit in an account with a financial institution to induce that institution's support

for one or more projects. By accruing no interest or low interest on its deposit, a foundation essentially

subsidizes the interest rate of the project borrowers.

Loan Agreement A written contract between a lender and a borrower that sets out the rights and

obligations of each party regarding a specified loan.

Loss Reserves That portion of a fund's earnings or permanent capital designated by the board of

directors as a reserve against possible loan losses and, as such, unavailable for lending purposes.

Generally accepted accounting principles governing for-profit and regulated financial institutions

require that loan loss expense be deducted as an annual expense on an accrual basis and that the loan

loss reserve be shown as a contra asset reducing loan assets. To date, no accounting convention has

been established to govern loan loss reserve accounting for unregulated nonprofit institutions. The

technical treatment is to establish the reserve through periodic charges against earnings, and actual

losses, when and if incurred, and are charged against the reserve. For balance sheet purposes a loan

loss reserve (should) be shown as a deduction from the loan portfolio to suggest that its true economic

value should be reduced by the estimated loss exposure.

Market RateThe rate of interest a company must pay to borrow funds currently. Program-related

investments generally are offered at below market rates or at no interest rate.

Negative CovenantsStatements of actions or events of the borrower must prevent from occurring or

existing, for example, additional borrowing without the lender's consent.

Net Working CapitalCurrent assets minus current liabilities.

Net Worth (Fund Balance in nonprofit. organizations) Total assets minus total liabilities.

Aggregate net value of the organization.

Opportunity Cost The potential benefit that is foregone from not following the best (financially

optimal) alternative course of action.

Portfolio A combination of assets held for its investment benefits, including financial and non-

financial returns. The asset mix is usually varied in kind and size to maintain an acceptable level of

risk and return.

PrincipalIn commercial law, the principal is the amount that is received, in the case of a loan, or the

amount from which flows the interest.


9/10

Program-Related EnterpriseA business or enterprise designed to promote the social purpose goals

of an organization as well as generate revenue. Among nonprofits, products and services are usually,

but not exclusively, identified with the purpose of the organization. Activities can range from fee-for-

service charges to full-scale commercial ventures.

Program-Related Investment Broad, functional definition: A method of providing support to an

organization, consistent with program goals involving the potential return of capital within anestablished time frame. In the context of this study, program-related investments include loans, loan

guarantees, equity investments, asset purchases or the conversion of asset(s) to charitable use, linked

deposits, and, in some cases, recoverable grants.

Promissory NotePromise to pay. Written contract between a borrower and a lender that is signed by

the borrower and provides evidence of the borrower's indebtedness to the lender.

Receivables Accounts receivable; an amount that is owed the business, usually by one of its

customers as a result of the ordinary extension of credit,

RecourseRefers to the right, in an agreement, to demand payment from the person who is taking on

an obligation. A full recourse loan refers to the right of the lender to take any assets of the borrower if

repayment is not made. A limited recourse loan only allows the lender to take assets named in the loan

agreement. A non-recourse loan limits the lender's rights to the particular asset being financed -- an

approach that is common in home mortgages and other real estate loans.

Recoverable Grants Funds provided by a philanthropist to fulfill a role similar to equity. A

recoverable grant may include an agreement to treat the investment as a grant if the enterprise is not

successful, but to repay the investor if the enterprise meets with success.

RestructureA revision of a financial agreement that alters the conditions or covenants of the original

agreement. For example, parties may agree to restructure a loan agreement, easing the payment

schedule, when a borrower is delinquent or otherwise faces default on a loan.

Roll OverPrior to or at the time of the maturity of an investment or loan, the interested parties agree

to continue to carry over the investment or loan for another, successive period of time.

SecurityA pledge made to secure the performance of a contract or the fulfillment of an obligation.

Examples of securities include real estate, equipment stocks or a co-signer. Mortgages are a form of

security with strong legal standing, because they are publicly registered following a formal legal

procedure. A mortgage gives the lender holding a mortgage security the right to reclaim the asset

being financed, if repayment is not made.

Senior DebtDebt that must be repaid before subordinated debt receives any payment in the event of

default.

Subordinated Debt (Junior Debt) Debt over which senior debt takes priority. In the event of

bankruptcy, subordinated debt-holders receive payment only after senior debt is paid in full. A

subordination of security interest in property allows another creditor to have the rights to the proceeds

of the sale of that property before the claim of the subordinated creditor.

Term Refers to the maturity or length of time until final repayment on a loan, bond, sale or other

contractual obligation.

User A non- or for-profit entity that receives a program-related investment directly from a funder for

use in its programs or ventures.


10/10

Warranties Statement attesting that certain statements are true. For instance, the borrower may

warrant that it is a corporation, that it is entering into the agreement legally and that financial

statements supplied to the bank are true.

Working Capital The term is commonly used a synonymous with net working capital. The term

often also is used to refer to all short-term funding needs for operations (excluding debt service and

fixed assets). Net working capital, which is the excess of current assets over current liabilities is alsointerchangeable with working capital. Both reflect the resources in circulation to meet operating needs

and obligations as they come due.

Write off: When an investment, such as a loan, becomes seriously delinquent or in default and is

determined to be uncollectible, the lender may choose to charge the outstanding investment amount as

an expense or a loss.

Documents

Financial management concepts