Key Financial Concepts and Definitions
Activity-Based Costing (ABC)
Activity-based costing (ABC) identifies activities that create costs and factors that drive indirect costs. It ties cost drivers to the production of goods.
Money Supply Measures (M1 & M2)
- M-1: A measure of the money supply that includes only the most liquid (spendable) forms of money.
- Currency (Cash): Government-issued paper money and metal coins.
- Check: A demand deposit order instructing a bank to pay a given sum to a specified payee.
- M-2: A measure of the money supply that includes all the components of M-1 plus forms of money that can be easily converted into spendable forms.
Monetary Policy and the Federal Reserve
Monetary Policy: Management of the nation’s economic growth by managing the money supply and interest rates. By controlling these two factors, the Fed influences the ability and willingness of banks throughout the country to loan money.
- Reserve Requirement: The percentage of its deposits that a bank must hold in cash or on deposit with the Fed.
- Discount Rate: The interest rate at which member banks can borrow money from the Fed.
- Federal Funds Rate (Key Rate): The interest rate at which commercial banks lend reserves to each other, usually overnight.
- Open-Market Operations: The Fed’s sale and purchase of securities in the open market.
Federal Deposit Insurance Corporation (FDIC)
Federal Deposit Insurance Corporation (FDIC): A federal agency that guarantees the safety of deposits up to $250,000 in the financial institutions that it insures. It preserves confidence by supervising banks and insuring deposits in banks and thrift institutions. Commercial banks pay fees for membership in the FDIC. The FDIC maintains the right to examine the activities and accounts of all member banks.
Automated Clearing House (ACH)
Automated Clearing House (ACH): An electronic funds transfer system that provides interbank clearing of electronic payments for the nation’s financial institutions. The network allows businesses, government, and consumers to choose an electronic-over-paper alternative for payments.
Generational Cohorts
- Baby Boomers: Individuals born between 1946 and 1964.
- Generation X: Individuals born between the 1960s and late 1970s/early 1980s.
- Millennials (Millennial Generation): Individuals born between the late 1970s and mid-2000s.
Influences: Health, Longevity, Advanced and New Treatments, 50 Million Millennials, Government Influence, Fun, Social Networking, New Music Genres.
Savings Accounts
A savings account is an interest-earning account intended to satisfy obligations that your checking account cannot handle. Interest rates on savings accounts vary from bank to bank. Look for reputable banks that are insured by the Federal Deposit Insurance Corporation (FDIC). This is not an issue unless the account is greater than $250,000. An alternative is a non-insured cash position in a reputable brokerage account.
Building a Portfolio
It is usually desirable to invest in a diversified financial portfolio consisting of a variety of stocks, bonds, CDs, government securities, and other assets. Active vs. passive investing. The main advantage offered by diversification is that it reduces risk. Risk vs. reward. In many ways, the most important investment you can make is in yourself.
Personal Privacy and Intellectual Property
Personal Privacy: Firms can track customer behavior to offer better services, but at the expense of personal privacy.
Intellectual Property: The result of creative or intellectual effort. It is protected by copyright law and threatened by piracy.
Lean Areas of Waste Reduction
Lean Areas of Waste Reduction: Transportation, Motion, Waiting Time, Inspection, Redundant Activities, Over-processing, Defective Product and Rework, Inventory, Unneeded or Overproduction.
Six Sigma
Six Sigma measures variation: Customers are sensitive to variation, not averages.
Six Sigma = 3.4 defects for every million opportunities. An opportunity is defined as a chance for nonconformance.
It is a data-intensive methodology requiring training and investigative methods and tools. DMAIC for improving existing processes: Define, Measure, Analyze, Improve, Control.
Percentages cover improvement opportunities and can provide a false sense of effectiveness.
Tools: Flow charts, Pareto charts (80/20 rule), and control charts.