Financial Services

Shared Financial Services

Shared Financial Services

There is currently a move towards converging and consolidating Finance provisions into shared services within an organization. Rather than an organization having a number of separate Finance departments performing the same tasks from different locations a more centralized version can be created. Finance of states Country, state, county, city or municipality finance is called public finance. It is concerned with Identification of required expenditure of a public sector entity Source(s) of that entity's revenue The budgeting process Debt issuance (municipal bonds) for public works projects.

Financial Economics:

Financial economics is the branch of economics studying the interrelation of financial variables, such as prices, interest rates and shares, as opposed to those concerning the real economy. Financial economics concentrates on influences of real economic variables on financial ones, in contrast to pure finance.

It studies:

Valuation - Determination of the fair value of an asset How risky is the asset? (identification of the asset appropriate discount rate) What cash flows will it produce? (discounting of relevant cash flows) How does the market price compare to similar assets? (relative valuation) Are the cash flows dependent on some other asset or event? (derivatives, contingent claim valuation) Financial markets and instruments: Commodities, Stocks, Bonds, Money market instruments, Derivatives, Financial institutions and regulation.

Financial mathematics:

Financial mathematics is the main branch of applied mathematics concerned with the financial markets. Financial mathematics is the study of financial data with the tools of mathematics, mainly statistics. Such data can be movements of securities—stocks and bonds etc.—and their relations. Another large subfield is insurance mathematics.

Experimental finance:

Experimental finance aims to establish different market settings and environments to observe experimentally and analyze agents' behavior and the resulting characteristics of trading flows, information diffusion and aggregation, price setting mechanisms, and returns processes. Researchers in experimental finance can study to what extent existing financial economics theory makes valid predictions, and attempt to discover new principles on which such theory can be extended. Research may proceed by conducting trading simulations or by establishing and studying the behaviour of people in artificial competitive market-like settings.

Finance

Finance
Finance

Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. The term "finance" may thus incorporate any of the following:

1. The study of money and other assets;
2. The management and control of those assets;
3. Profiling and managing project risks;
4. The science of managing money;
5. As a verb, "to finance" is to provide funds for business or for an individual's large purchases (car, home, etc.).

The activity of finance is the application of a set of techniques that individuals and organizations (entities) use to manage their money, particularly the differences between income and expenditure and the risks of their investments.
An income that exceeds its expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower, a financial intermediary, such as a bank or buy notes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary pockets the difference.
A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays the interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity. Banks are thus compensators of money flows in space.
A specific example of corporate finance is the sale of stock by a company to institutional investors like investment banks, who in turn generally sell it to the public. The stock gives whoever owns it part ownership in that company. If you buy one share of XYZ Inc, and they have 100 shares outstanding (held by investors), you are 1/100 owner of that company. Of course, in return for the stock, the company receives cash, which it uses to expand its business in a process called "equity financing". Equity financing mixed with the sale of bonds (or any other debt financing) is called the company's capital structure.
Finance is used by individuals (personal finance), by governments (public finance), by businesses (corporate finance), as well as by a wide variety of organizations including schools and non-profit organizations. In general, the goals of each of the above activities are achieved through the use of appropriate financial instruments, with consideration to their institutional setting.
Finance is one of the most important aspects of business management. Without proper financial planning a new enterprise is unlikely to be successful. Managing money (a liquid asset) is essential to ensure a secure future, both for the individual and an organization.

Project Finance

Project finance Project Finance

Project finance is the financing of long-term infrastructure, industrial projects and public services based upon a complex financial structure where project debt and equity used to finance the project are paid back from the cashflow generated by the project rather than the general assets or creditworthiness of the project owners. Because of this structure, the debt is said to be "nonrecourse." The financing is typically secured by the project assets, including the revenue-producing contracts. Generally, special purpose corporations (SPCs) are created for each project.
Project finance is more complicated, and more expensive, than alternative financing methods. It is most commonly utilized in the mining, transportation, telecommunication and public utility industries, which are subject to a number of insurmountable technical, environmental, economic and political risks. To cope with these risks, projects in these industries (such as power plants or railway lines) are generally completed by a number of specialist companies operating in a contractual network with each other. The various patterns of implementation are known as "project delivery methods." The financing of these projects must also be distributed among multiple parties, so as to distribute the risk associated with the project while simultaneously ensuring profits for each party involved. Usually, a project financing scheme involves a number of equity investors, known as sponsors, as well as a syndicate of banks which provide loans to the operation. The loans are most commonly non-recourse loans, which are secured by the project itself and paid entirely from its cash flow. A riskier or more expensive project may require limited recourse financing secured by a surety from sponsors. A complex project finance scheme may incorporate corporate finance, securitization, options, insurance provisions or other further measures to mitigate risk. Project finance shares many characteristics with maritime finance and aircraft finance; however, the latter two are more specialized fields.
A basic project finance scheme
Hypothetical project finance scheme Acme Coal Co. imports coal. Energen Inc. supplies energy to consumers. The two companies agree to build a power plant to accomplish their respective goals. Typically, the first step would be to sign a memorandum of understanding to set out the intentions of the two parties. This would be followed by an agreement to form a joint venture. Acme Coal and Energen form a SPC called Power Holdings Inc. and divide the shares between them according to their contributions. Acme Coal, being more established, contributes more capital and takes 70% of the shares. Energen is a smaller company and takes the remaining 30%. The new company has no assets. Power Holdings then signs a construction contract with Acme Construction to build a power plant. Acme Construction is an affiliate of Acme Coal and the only company with the know-how to construct a power plant in accordance with Acme's delivery specification. A power plant can cost hundreds of millions of dollars. To pay Acme Construction, Power Holdings receives financing from a development bank and a commercial bank. These banks provide a guarantee to Acme Construction's financier that the company can pay for the completion of construction. Payment for construction is generally paid as such: 10% up front, 10% midway through construction, 10% shortly before completion, and 70% upon transfer of title to Power Holdings, which becomes the owner of the power plant. Acme Coal and Energen form Power Manage Inc., another SPC, to manage the facility. The ultimate purpose of the two SPCs (Power Holding and Power Manage) is primarily to protect Acme Coal and Energen. If a disaster happens at the plant, prospective plaintiffs cannot sue Acme Coal or Energen and target their assets because neither company owns or operates the plant. A Sale and Purchase Agreement (SPA) between Power Manage and Acme Coal supplies raw materials to the power plant. Electricity is then delivered to Energen using a wholesale delivery contract. The cashflow of both Acme Coal and Energen from this transaction will be used to repay the financiers.
Complicating factors

The above is a simple explanation which does not cover the mining, shipping, and delivery contracts involved in importing the coal (which in itself could be more complex than the financing scheme), nor the contracts for delivering the power to consumers. Minority owners of a project may wish to use "off-balance-sheet" financing, in which they disclose their participation in the project as an investment, and excludes the debt from financial statements by disclosing it as a footnote related to the investment. In the United States, this eligibility is determined by the Financial Accounting Standards Board. Many projects in developing countries must also be covered with war risk insurance, which covers acts of hostile attack, derelict mines and torpedoes, and civil unrest which are not generally included in "standard" insurance policies. Today, some altered policies that include terrorism are called Terrorism Insurance or Political Risk Insurance. In many cases, an outside insurer will issue a performance bond to guarantee timely completion of the project by the contractor. Publicly-funded projects may also use additional financing methods such as tax increment financing or Private Finance Initiative (PFI). Such projects are often governed by a Capital Improvement Plan which adds certain auditing capabilities and restrictions to the process.
History

Limited recourse lending was used to finance maritime voyages in the days of ancient Greece and Rome. Its use in infrastructure projects dates to the development of the Panama Canal, and was widespread in the US oil and gas industry during the early 20th century. However, project finance for high-risk infrastructure schemes originated with the development of the North Sea oil fields in the 1970s and 1980s. For such investments, newly created Special Purpose Corporations (SPCs) were created for each project, with multiple owners and complex schemes distributing insurance, loans, management, and project operations. Such projects were previously accomplished through utility or government bond issuances, or other traditional corporate finance structures. Project financing in the developing world peaked around the time of the Asian financial crisis, but the subsequent downturn in industrializing countries was offset by growth in the OECD countries, causing worldwide project financing to peak around 2000. The need for project financing remains high throughout the world as more countries require increasing supplies of public utilities and infrastructure. In recent years, project finance schemes have become increasingly common in the Middle East, some incorporating Islamic finance laws. The new project finance structures emerged primarily in response to the opportunity presented by long term power purchase contracts available from utilities and government entities. These long term revenue streams were required by rules implementing PURPA, the Public Utilities Regulatory Policies Act of 1978. Originally envisioned as an energy initiative designed to encourage domestic renewable resources and conservation, the Act and the industry it created lead to further deregulation of electric generation and, significantly, international privatization following amendments to the Public Utilities Holding Company Act in 1994. The structure has evolved and forms the basis for energy and other projects throughout the world.

Corporate Finance

Corporate Finance Corporate Finance

Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to enhance corporate value while reducing the firm's financial risks. Equivalently, the goal is to maximize the corporations' return on capital. Although it is in principle different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.
The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, the short term decisions can be grouped under the heading "Working capital management". This subject deals with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers).
The terms Corporate finance and Corporate financier are also associated with investment banking. The typical role of an investment banker is to evaluate investment projects for a bank to make investment decisions.
Capital investment Capital investment
Capital investment decisions are long-term corporate finance decisions relating to fixed assets and capital structure. Decisions are based on several inter-related criteria. Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value when valued using an appropriate discount rate. These projects must also be financed appropriately. If no such opportunities exist, maximizing shareholder value dictates that management return excess cash to shareholders. Capital investment decisions thus comprise an investment decision, a financing decision, and a dividend decision.
The investment decision The investment decision
Management must allocate limited resources between competing opportunities ("projects") in a process known as capital budgeting. Making this capital allocation decision requires estimating the value of each opportunity or project: a function of the size, timing and predictability of future cash flows.
Project valuationProject valuation
In general, each project's value will be estimated using a discounted cash flow (DCF) valuation, and the opportunity with the highest value, as measured by the resultant net present value (NPV) will be selected .This requires estimating the size and timing of all of the incremental cash flows resulting from the project. These future cash flows are then discounted to determine their present value . These present values are then summed, and this sum net of the initial investment outlay is the NPV. The NPV is greatly influenced by the discount rate. Thus selecting the proper discount rate—the project "hurdle rate"—is critical to making the right decision. The hurdle rate is the minimum acceptable return on an investment—i.e. the project appropriate discount rate. The hurdle rate should reflect the riskiness of the investment, typically measured by volatility of cash flows, and must take into account the financing mix. Managers use models such as the CAPM or the APT to estimate a discount rate appropriate for a particular project, and use the weighted average cost of capital (WACC) to reflect the financing mix selected. (A common error in choosing a discount rate for a project is to apply a WACC that applies to the entire firm. Such an approach may not be appropriate where the risk of a particular project differs markedly from that of the firm's existing portfolio of assets.) In conjunction with NPV, there are several other measures used as (secondary) selection criteria in corporate finance. These are visible from the DCF and include payback, IRR, Modified IRR, equivalent annuity, capital efficiency, and ROI.

Finance

Finance Finance

Finance is a field that studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. The term finance may thus incorporate any of the following:

The study of money and other assets;
The management and control of those assets;
Profiling and managing project risks;
The science of managing money;
As a verb, "to finance" is to provide funds for business or for an individual's large purchases (car, home, etc.).

The activity of finance is the application of a set of techniques that individuals and organizations (entities) use to manage their financial affairs, particularly the differences between income and expenditure and the risks of their investments.
An entity whose income exceeds its expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower, a financial intermediary, such as a bank or buy notes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary pockets the difference.
A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays the interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity. Banks are thus compensators of money flows in space.
A specific example of corporate finance is the sale of stock by a company to institutional investors like investment banks, who in turn generally sell it to the public. The stock gives whoever owns it part ownership in that company. If you buy one share of XYZ Inc, and they have 100 shares outstanding (held by investors), you are 1/100 owner of that company. Of course, in return for the stock, the company receives cash, which it uses to expand its business in a process called "equity financing". Equity financing mixed with the sale of bonds (or any other debt financing) is called the company's capital structure.
Finance is used by individuals (personal finance), by governments (public finance), by businesses (corporate finance), etc., as well as by a wide variety of organizations including schools and non-profit organizations. In general, the goals of each of the above activities are achieved through the use of appropriate financial instruments, with consideration to their institutional setting.
Finance is one of the most important aspects of business management. Without proper financial planning a new enterprise is unlikely to be successful. Managing money (a liquid asset) is essential to ensure a secure future, both for the individual and an organization.

Real Estate Investing

Real Estate Investing

Real Estate Investing

Real estate investing involves the purchase of real estate for profit. Profits are accumulated slowly by renting out properties in a cashflow method, or are generally improved and resold for a capital gain. In addition, real estate investors may wholesale properties as a means to make profits.
Advantages
There are many gurus out there that contend that real estate is a panacea where you cannot lose money. Although this is false, there are a number of advantages to investing in real estate. The biggest factor in marketability of an investment is supply and demand. The first big advantage is that it is an extremely expensive product. Each sale you make generates more profit potential for this reason.
Leverage, or the ability to borrow based on the value of the property, is probably the second greatest advantage. It is much easier to finance real estate than any other product. While investing in most assets requires the purchaser to have the full purchase price available for the asset, in real estate investing, one only needs to have a fraction of the purchase price available (like 5%, 10% or 20%) as a down payment. Therefore, real estate, although incredibly expensive, is still easier to buy than say, a piece of industrial equipment of the same value. Local advantage is rarely discussed but it stands to reason that you know your neighborhood better than a real estate investing expert would if they were in another part of the world. This creates an advantage the beginner can exploit in his market.
The bulk of the world's assets are in real estate.
One way a beginner can get started in real estate investing without taking on any personal risk is to 'bird dog', or hunt for good deals, for another more experienced investor. This allows the beginner to learn to find and recognize value.
Disadvantages
Real estate is an illiquid investment that needs maintenance and taxes to be paid. A balanced investment portfolio has some liquid assets that can be quickly converted to cash to sustain the real estate when its returns are not sufficient to pay its recurring costs.
During a real estate boom, speculators can be prone to make purchases without precalculating the costs involved in the purchase and for the ongoing costs of a property. The real estate can then sometimes work against them instead of for them, realizing a loss at resale.
There is no guarantee that values will maintain themselves as society changes; megatrends can cause large scale changes. An example is the period from 1815 to 1914 in the U.K., during which real estate values did not increase although the society as a whole made massive economic progress.

Creative real estate investing
Creative real estate investing is a term used to describe non-traditional methods of buying and selling real estate. Typically, a buyer will secure financing from a lending institution and pay for the full amount of the purchase price with a combination of the borrowed funds and his own funds (or his "down payment").
Bird-dogging
"Bird dogs" get paid a referral fee for finding good deals for other investors. This is often where people begin their investing career as there is only time at stake. They are typically paid when the deal closes. Some birddogs will structure companies and partnership arrangements as they're frequently not real estate agents and may not be able to collect a "referral fee" for their services.

Consumer Finance

Consumer Finance

Consumer finance in the most basic sense of the word refers to any kind of lending to consumers. However, in the United States financial services industry, the term "consumer finance" often refers to a particular type of business, sub prime branch lending (that is lending to people with less than perfect credit). This branch of the financial services industry is more extensive in the United States than in some other countries, because the major banks in the U.S. are less willing to lend to people with marginal credit ratings than their counterparts in many other countries. Examples of these companies include HSBC Finance, CIT, CitiFinancial, Wells Fargo Financial, and Allied Business Systems, LLC.
Consumer finance in general
Consumer finance covers a wide range of activities, including loans from banks and indirect finance such as hire-purchase agreements, and loans by specialist retail finance companies. At the most respectable end of the market, consumer finance is an integral part of retail banking and an important source of unsecured loans. However, in many countries some 'consumer finance' companies are little different from loan sharks, offering considerably higher interest rates than those available on other unsecured loans. On another view, however, such companies are beneficial because they offer credit to sectors of society which are otherwise excluded from financial markets, and the credit offered is no worse than the alternative credit cards.
The term as used in the United States
The Consumer Finance industry (meaning branch based subprime lenders) mainly came to fruition in the middle of the twentieth century. At that time these companies were all standalone companies, not owned by banks and an alternative to banks. However, at that time the companies were not focused on subprime lending, instead they attempted to lend to everyone who would accept their high rates of interest. There were many reasons why certain people would: Banks made it difficult to obtain personal credit. Banks did not have the wide variety of programs or aggressive marketing that they do today. Many people simply didn't like to deal with bank employees and branches, and preferred the more relaxed environment of a consumer finance companies. Consumer finance companies focused on lowering the required payment for their customers debts. Many customers would gladly refinance $10,000.00 worth of an auto loan debt at 7 percent for a home equity loan at 18 percent because the auto loan would have to be paid off in 5 years while the home equity loan would have a 20 year repayment plan, making the monthly payments for the customer lower (even though overall the customer would end up paying dramatically higher amounts of interest). However, as the financial services industry evolved and banks and other kinds of financial services companies began offering more consumer credit, consumer finance companies came to serve primarily those with bad credit, who couldn't obtain financing elsewhere. A typical consumer finance office engages in some unsecured, and auto secured, but primarily home equity secured loans. To find new customers, these companies often provide the store financing for furniture stores, pool stores, and other stores where homeowners might shop. When buyers of products at those stores want to pay in installments, it is often a consumer finance company which actually does the loan for that purpose. Since this loan is usually at a high interest rate, the consumer finance company employees will call the customer to offer to refinance the loan as a home equity secured loan at a somewhat lower rate and a lower payment. Besides charging a higher interest rate compensating for their risk, consumer finance companies are usually able to operate successfully because their employees are given more flexibility in structuring loans and in collections than compared to banks.
Controversial practices of the United States consumer finance industry
The more dubious consumer finance companies are held to engage in the following practices. Failing to tell people who ask for a loan from the lender that they really have good credit and can get a better deal somewhere else (a subprime loan is usually more expensive than a prime loan). This is one of the primary criticisms of industry and is implied in many others critiques. For example consumer finance companies have been called racist because of branches they might have opened in primarily African American areas. If their customers all had bad credit they would be working in the same way they would elsewhere, but it is implied that they are preying on the communities' lack of knowledge of lower priced alternatives. Sending live checks through the mail which when used become loans. This can trick some people, and the interest rate is usually purposely high (although disclosed) Charging very high fees on a mortgage refinance. Offering refinance deals that are worse than the previous loan, usually by showing that the new payment will be lower, but not revealing that the new payment does not include taxes and insurance. Selling single premium credit insurance, also financing that into the loan. Critics consider also the concept and geographical placement of consumer finance stores as a form of "redlining". This is because the sub prime lenders in poorer communities will often be the only local store, yet will be higher priced.