MODULE 10: BASIC LONG-TERM FINANCIAL CONCEPTS

1. Define & differentiate between short-term and long- term financial concepts.
DEFINITIONS
Short-term financial concepts are related to managing money and financial resources over a
brief period, usually within a year or less. These concepts are primarily concerned with meeting
immediate financial obligations and addressing short-range financial goals.
Some key aspects include:
1. Working Capital: Managing day-to-day expenses, like paying bills and salaries.
2. Cash Flow: Ensuring that there's enough money coming in to cover immediate expenses.
3. Short-Term Debt: Borrowing money for a brief period, like a few months to a year.
Example: Imagine you have a small store, and you need to pay your suppliers for the inventory
you bought this month. You use your daily sales revenue to cover these costs.
Long-term financial concepts deal with managing money and resources over a more extended
period, typically beyond one year. These concepts focus on achieving long-range financial
objectives, such as expansion, investments, or retirement planning.
Key aspects include:
1. Capital Budgeting: Deciding which long-term investments or projects to undertake.
2. Debt Management: Handling long-term loans and bonds.
3. Savings and Investment Planning: Saving for retirement or making investments that will
grow over time.
Example: Let's say you're planning to buy a house. You need to save money for a down payment
over several years, take out a long-term mortgage to finance the house, and manage your
finances for the next 20 to 30 years to pay off the mortgage.

 In summary, short-term financial concepts are about managing your day-to-day finances
and immediate obligations, while long-term financial concepts are more focused on
achieving goals that require planning and resources over an extended period, such as
buying a home or saving for retirement.

DIFFERENCES in terms of:

SHORT-TERM FINANCIAL CONCEPTS

Time Frame: Short-term financial concepts typically involve periods of one year or less.

Focus: They are concerned with managing and optimizing a company's financial resources in the near
future, often to meet immediate operational needs.

Examples: Cash flow management, working capital management, short-term budgeting, and liquidity
analysis are common short-term financial concepts.

Goals: The primary goal is to ensure a company's day-to-day operations run smoothly and that it has
enough liquidity to cover its short-term obligations.

LONG-TERM FINANCIAL CONCEPTS

Time Frame: Long-term financial concepts encompass periods beyond one year, often spanning several
years or even decades.

Focus: They revolve around the strategic financial planning and investment decisions that affect a
company's future growth and sustainability.

Strategic planning is a process that organizations use to set their long-term goals and determine the best
ways to achieve those objectives. It involves making thoughtful decisions about where an organization is
headed, what it wants to achieve, and how it will get there.

Examples: Capital budgeting, long-term debt management, equity financing, and strategic financial
planning are typical long-term financial concepts.

Goals: The main objective is to secure the company's long-term financial stability, growth, and
competitiveness by making careful investment and financing choices.

2. Identify the various sources of long-term finance.

VARIOUS SOURCES OF LONG-TERM FINANCE

 Preference Shares. A type of company ownership that gives shareholders certain

advantages over common equity shareholders. These advantages typically include a
fixed dividend payment and a higher claim on the company's assets in case of
liquidation.

 Equity Shares. Equity shares, also known as common shares, represent ownership in a
company. Equity shareholders have voting rights and may receive dividends after the
preferred shareholders.

 Debentures. Debentures are long-term debt instruments issued by a company or

government. Debentures are a type of bond. Debentures are a type of loan that a
company or government takes from people like you and me. When you buy a debenture,
 you're lending them money, and they promise to pay you back the amount you lent plus
some extra money (interest) at a later date. Unlike some loans that have specific stuff
(like a house or a car) as a backup, debentures are like a simple promise to pay you back.
A debt instrument is a financial contract that represents a promise by one party (the issuer) to
repay a borrowed sum of money to another party (the holder or investor) at a future date.
Maturity Date: A maturity date is like the "due date" for a financial agreement. In simple
terms, it's the date when the financial arrangement comes to an end, and you get your money
back or complete your payments.

 Term Loans. A term loan is like a big loan you take from a bank or lender, and you agree
to pay it back over a fixed period, such as 3, 5, or 10 years. Each month, you pay a
portion of the loan plus interest until it's all paid off. It's like when you buy something
expensive, but you can't pay for it all at once, so you borrow the money and return it bit
by bit over time. Term loans are often used to finance things like starting a business,
buying a car, or expanding a company.

 Financial Institutions. Financial institutions are organizations that provide a wide range
of financial services, including banking, lending, investing, and insurance. They serve as
intermediaries between borrowers and savers, facilitating the flow of money in the
economy.

 Lease financing is like renting, but for big things like equipment, cars, or property.
Instead of buying them, you pay to use them for a set time, like a few years. You make
regular lease payments, and at the end of the lease, you can decide if you want to return
the item or buy it at a reduced price. It's a bit like renting a house, where you don't own
it, but you get to live in it as long as you keep paying rent. Businesses often use lease
financing for things they need without buying them outright.

 Internal Sources. Internal sources of funds, in simple terms, refer to the money that a
company generates from its own operations and activities without relying on external
sources like loans or investments. These internal sources typically include: Profit,
Retained Earnings, Working Capital - Managing a company's current assets (like cash,
accounts receivable, and inventory), and liabilities (like accounts payable) efficiently can
generate funds from within the company.

 Debt Capital. Debt capital is like borrowing money for your business. When you need
funds, you can get a loan or issue bonds. You promise to pay back the money with
interest over time. It's similar to taking out a personal loan, but businesses do it to
finance operations, expansion, or other needs. Debt capital is money you have to pay
back, unlike selling shares in your company where people become co-owners.
  Ploughing Back of Profits. In business, it means a company keeps some of the money it
makes (profits) and reinvests it back into the company to help it grow or improve, rather
than giving it all out to shareholders as dividends. It's a way to make the company
stronger for the future.
 Foreign Capital. It is like money from outside your country that comes in to be used for
various purposes. This can be in the form of investments, loans, or direct financial
support from individuals, businesses, or governments in other countries. It's a way for a
country to access funds to fuel its economic growth or support specific projects or
industries.

Example: Imagine a small country called "Country A" wants to build a new infrastructure
project like a high-speed train system, but it doesn't have enough money. "Country B," a
larger and wealthier nation, agrees to provide the necessary funds for this project. The
money from Country B is foreign capital, and it allows Country A to build the project and
improve its transportation system, benefiting its economy and citizens. In return,
Country B might expect repayment with interest or other benefits from Country A,
strengthening their economic ties.

3. Explain the principle of the time value of money (TVM) and its importance in long-
term financial decisions

The principle of the time value of money (TVM) is like the idea that money today is worth more
than the same amount of money in the future. This is because money you have now can be
invested or earn interest, making it grow over time.
Time value of money is important in long-term financial decisions for several reasons:

 Investment Decisions: TVM helps individuals and businesses make informed decisions
about where to invest their money. By comparing the present and future values of
different investment options, they can choose the one that offers the best return.
 Borrowing Decisions: TVM influences decisions about borrowing money. It helps
borrowers understand the total cost of loans and decide whether it's financially
beneficial to take out a loan.
 Budgeting and Savings: TVM is crucial in setting financial goals and budgeting for the
future. It encourages saving and investing early to take advantage of compound interest
and mitigate the impact of inflation.
 Retirement Planning: TVM is a key concept in retirement planning. It helps individuals
estimate how much they need to save to maintain their desired lifestyle in retirement,
considering inflation and investment returns.
  Capital Budgeting: Businesses use TVM to evaluate long-term projects and investments.
They assess the cash flows associated with these projects over time and calculate their
net present value (NPV) to make decisions.

Time Value of Money is important in long-term financial decisions because it helps you
understand how the value of money changes over time and guides you in making choices that
can lead to more financially rewarding outcomes.
4. Define risk and return in the context of long-term financial investment.

 Risk is like the uncertainty or potential for things not going as planned when you make a
long-term financial investment. It's the possibility that you might not get back all the
money you put in, or that your investment might not perform as expected.
 Return is what you hope to gain from your long-term financial investment. It's like the
profit or earnings you expect to receive, such as interest, dividends, or the increase in
the value of your investment over time.
In the context of long-term financial investment, people often face a trade-off between risk and
return. The riskier the investment, the higher the potential return, but also the greater chance
of losing money. So, long-term investors need to find a balance between taking some risk to
achieve higher returns while ensuring they're comfortable with the level of risk they're taking.

 Risk-Return Trade-off: Investors need to find a balance between taking on more

risk for the potential of higher returns or opting for safer, lower-return investments.