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MGTA02H3 (143)
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MGTA04 Chapter 12.docx

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Management (MGT)
H Laurence

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 firms long term investments and obtaining the funds to pay for those investments  Objectives of the financial manager: collect funds, pay debts, establish trade credit, obtain loans, control cash balances and plan for future financial needs  overall objective is to increase a firms value and stock holders wealth 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  Financial control: the process of checking actual performance against plans to ensure that the desired financial status is achieved budget is he backbone and provides the “measuring stick” against which performance is evaluated discrepancies=need for financial adjustments so that resources are used to the best advantage  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  must develop a reason why firm needs funds and must assess relative costs and benefits of potential funding sources The Role of the Financial Manager Short-term (operating) expenditures  Accounts payable: unpaid bills owed to suppliers, wages and taxes due within the upcoming year largest single category or short term debt for most firms managers must know in advance about accounts payable  Accounts receivable: consists of funds due from customers who have bought on credit  financial plan requires managers to project accurately both how much credit is advanced to buyers and when they will make payments on their accounts  represent an investment in products for which a firm has not yet received payment  Credit policies: rules governing a firms extension of credit to customers predicts payment schedulesset standards as to which buyers are eligible for what type of credit and also sets payment terms sellers can adjust credit terms to influence when customers pat their bills  Inventories: materials and goods currently held by the company that will be sold within the year failure to manage inventories can cause grave financial consequences o Raw material inventory: that portion of a firms inventory consisting of basic supplies used to manufacture products for sale o Work-in-process inventory: that portion of a firms inventory consisting of goods partway through the production process o Finished goods inventory: that portion of a firms inventory consisting of completed goods ready for sale  Working capital: difference between a firms current assets and current liabilities it is a liquid asset out of which current debts can be paid add up inventories and accounts receivables- accounts payable every dollar that is not tied up in working capital becomes a dollar of more useful cash flow reduction in working capital raises earnings permanently Long-term (operating) expenditures  i.e fixed assets  are more carefully planned than shorterm because they pose special problems  not easily converted into cash, acquisition requires a very large investment, and 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: a 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  Trade acceptance: trade draft that has been signed by the buyer Secures Short Term Loas  Secured loan: a short term load in which the borrower is required to put up collateral  Collateral: any asset that a lender has the right to seize if as borrower doesn’t pay back a loan  Bank loans are a vital source of short term funding for most firms  Inventories, accounts receivable and other assets may serve as collateral  Fixed assets are more used to secure long term loans  Some even use marketable securities as collateral  Inventory is more attractive as collateral when it provides the lender real security for the loaned amount easily cashable inventories are better  Pledging accounts receivable: using accounts receivables as collateral for a loan  borrower must make up the difference if AR are less than the loan amount  Factoring: firm can raise funds rapidly by factoring=selling the firms account receivables Unsecured Short Term Loans  Unsecured loan: a short term loan in which the borrower is not required to put up any collateral  However, bank does require the borrower to maintain a compensating balance borrower must keep of a portion of the loaned amount on deposit with the bank in a non-interest bearing account terms and stuff are negotiated by 2 parties and to receive a loan a firm must have good banking relationships with the lender and often/promissory note is mademany take the forms of a line of credit, credit agreement, or commercial p
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