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Lecture 10

BUS 201 Lecture Notes - Lecture 10: Trade Credit, Revolving Credit, Accounts Payable


Department
Business Administration
Course Code
BUS 201
Professor
Peter Tingling
Lecture
10

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Chapter 15: Financing a
Business
Week 12
1)The Role of the Financial Manager
Finance
oThe business function involving decisions about a firm’s long-term
investments and obtaining the funds to pay for those investments
Financial managers
oManagers responsible fro planning and overseeing the financial
resources of a firm
Finance involves four key responsibilities:
oDetermine a firms long-term investments
oObtain funds to pay for those investments
oConduct the firms everyday financial activities
oHelp manage the risks that a firm takes
The Financial Manager:
oresponsible for planning and overseeing the financial resources of a
firm including:
Cash-flow management:
Managing the pattern of cash inflows (revenues) and
outflows (debt payments)
Investing funds that are not needed to service debt
Funds must either be committed to maintaining the firm,
or earning interest, not sitting idle
Financial plan:
Checking performance against strategic plans
Making adjustments
Preparing budgets to ensure that sufficient cash is on
hand to meet operational and debt-service needs
Financial control:
A plan to achieve a desired financial status:
projections of revenue flows
sources and planned uses of funds to meet both
short- and long- term goals
timing of when funds will be required
when constructing a financial plan, we must ask:
What funs are needed t meet immediate plans?
When will the firm need more funds?
Where can the firm get the funds to meet both its
short and long term needs?

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2)Why Do Businesses Need Funds?
Short-Term (Operating) Expenses
Account Payable
oWe define accounts payable as unpaid bills owed to suppliers plus
wages and taxes due within a year debt.
Account Receivable
oCredit policies
Rules governing a firm’s extension of credit to customers
Inventory
oMaterials and goods currently held by the company that will be sold
within the year
oRaw materials
That portion of a firm’s inventory consisting of basic supplies
used to manufacture products for sale
oWork-in-process
That portion of a firm’s inventory consisting of completed goods
partway through the production process
oFinished-goods
That portion of a firm’s inventory consisting of completed goods
ready for sale
Long-Term (Capital) Expenditures
ofunding fixed assets that have a long life and a lasting value: land,
buildings, machinery
onot normally sold or converted to cash
oacquisition requires a large investment ties up the firm’s resources for a
long period of time
3)Sources of Short-Term Funds
Short-Term Funds - allows firms to cover operational expenses and implement
short-term plans:
Trade credit - the granting of credit by a selling firm to a buying firm:
oOpen-book credit
oForm of trade credit in which sellers ship merchandise on faith that
payment will be forthcoming
oPromissory note
oForm of trade credit in which buyers sign promise-to-pay agreement
before merchandise is shipped
oTrade draft
oForm of trade in which buyer must sign statements of payment
terms attached to merchandise by sellers
Secure short term loans
oSecured loans:
A short-term loan for which the borrower is required to put up
collateral
interest rates are usually lower than for unsecured loans
appeals to firms whose credit rating is not sufficient (or
who are too new) to qualify for unsecured loans
oCollateral
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Any asset that a lender has the right to seize if a borrower does
not repay a loan
Inventory as collateral
oMore attractive as collateral when it can be readily
converted into cash
Accounts receivable as collateral
oPledging account receivable
Using accounts receivable as collateral for a
loan
Lender seize the receivables and if these
assets are not enough to cover the loan,
their borrower must make up the difference
Unsecured loans:
oA short term loan in which the borrower is t required to put up collateral
Line of credit
Standing agreement between a bank and a firm in which
the bank specifies the maximum amount it will make
available to the borrower for short term unsecure loan;
the borrower can then draw on those funds, when
available
Revolving credit agreement
A guaranteed line of credit for which the firm pays the
bank interest on funds borrowed, as well as a fee for
extending the line of credit
Commercial paper
A method of short-run fundraising in which a firm sells
unsecured notes for less than the face value and then
repurchases them at the face value within 270 days;
buyers’ profits are he difference between the original
price paid and the face value
Factoring accounts receivables
A firm can also raise funds by factoring (that
is, selling) its account receivable for less
than what it is.
Get money rapidly but at a loss
4)Sources of Long-Term Funds
Debt financing:
oRaising money to meet long-term expenditures by borrowing from
outside the company; usually takes the form of long-term loans or the
sale of corporate bonds
oRisk-return relationship
oLong-term loans - borrowing money for 3 to 10 years at a fixed or
floating rate
oCorporate bonds - a promise by the borrower to pay the lender an
amount of money on the maturity date
oBonds:
Corporate bonds
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