Class Notes (835,108)
Canada (508,934)
MGTA02H3 (143)
H Laurence (21)

Chapter 10-Financial Decisions

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Management (MGT)
H Laurence

Chapter 10: Financial Decisions The Role of the Financial Manager Financial Managers ± Those managers responsible for planning and overseeing the financial resources of a firm Finance (Corporate Finance) ± The business function involving decisions about a 1L72¶8O43J-term investments and obtaining the funds to pay for those investments - typically involves 4 responsibilities o 09072L3L3J,1L72¶8O43J9072L3;08920398 o Obtaining funds to pay for those investments o 43/:.9L3J9K01L72¶80;07\/,\1L3,3.L,O,.9L;L9ies o Helping to manage the risks that the firm takes Objectives of the Financial Manager - Financial managers collect funds, pay debts, establish trade credit, obtain loans, control cash balances, and plan for future financial needs - Overall objective is to in.70,80,1L72¶8;,O:0,3/894.NK4O/07¶8Z0,O9K - Also must ensure that the company makes a profit Responsibilities of the Financial Manager Cash Flow Management ± Managing the pattern in which cash flows into the firm in the form of revenues and out of the firm in the form of debt payments - Companies averaging $2 million in annual sales typically hold about $40,000 in non interest bearing accounts Financial Control ± The process of checking actual performance against plans to ensure that the desired financial status is achieved Financial Planning ± A description of how a business will reach some financial position it seeks for the future; includes projections for sources and uses of funds Why Do Businesses Need Funds? Short-Term (Operating) Expenditures Accounts Payable o Unpaid bills owed to suppliers plus wages and taxes due within the upcoming year o To plan for funding flows, financial managers want to know in advanced the amounts of new accounts payable as well as when they must be repaid Accounts Receivable o Funds due from customers who have bought on credit o A sound financial plan requires financial managers to project accurately both how much credit is advanced to buyers and when they will make payments on their accounts Credit Policy ± #:O08J4;073L3J,1L72¶s extension of credit to customers ƒ sets standards as to which buyers are eligible for what type of credit ƒ typically, credit is extended to customers who have the ability to pay and who honour their obligations; denied to firms with poor payment histories ƒ ³ 309 ´20,38411L15,L/ZL9KL3 /,\8,3/K,8 /,\8945,\9K070J:O,757L.0 Inventories ± Materials and goods currently held by the company that will be sold within the year o %44OL99O0L3;03947\.,3.4898,1L72¶88,O089442:.KL3;03947\means tied-up funds that cannot be used else where o 3 types of inventories ƒ Raw Materials Inventory ± %K05479L4341,1L72¶8L3;03947\.438L89L3J41-,8L.8:55OL08 used to manufacture products for sale ƒ Work-In-Progress Inventory ± %K05479L4341,1L72¶8L3ventory consisting of goods partway through the production process ƒ Finished Goods Inventory ± %K,95479L4341,1L72¶8L3;03947\.438L89L3J41.425O090/J44/8 ready for sale Working Capital o Inventories (raw materials, work in progress, and finished goods on had) + Accounts receivables (minus Accounts payables) o Large companies devote 20% of every sales dollar to working capital ƒ Every dollar that is not in working capital becomes a dollar of more useful cash flow ƒ Reduction of working capital raises earnings permanently Long Term (Capital Expenditures) - More carefully planned than short term outlays because they pose special problems: o Unlike inventories and other shirt term assets, they are not normally sold or converted in to case o Their acquisition requires a very large investment o They represent a binding commitment of company funds that continues long into the future Sources of Short-Term Funds Trade Credit Trade Credit ± The granting of credit by a selling firm to a buying firm Open-Book Credit ± Form of trade credit in which sellers ship merchandise on faith that payment will be forthcoming Promissory Note ± Form of trade credit in which buyers sign promise-to-pay agreements before merchandise is shipped Trade Draft ± Form of trade credit in which buyers must sign statements of payment terms attached to merchandise by sellers
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