Class Notes (923,841)
CA (543,275)
UTSC (33,027)
MGT (624)
MGTA02H3 (149)
H Laurence (21)
Lecture

Chapter 10-Financial Decisions

3 Pages
125 Views

Department
Management (MGT)
Course Code
MGTA02H3
Professor
H Laurence

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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 ILUP¶VORQJ-term investments and
obtaining the funds to pay for those investments
- typically involves 4 responsibilities
o 'HWHUPLQLQJDILUP¶VORQJWHUPLQYHVWPHQWV
o Obtaining funds to pay for those investments
o &RQGXFWLQJWKHILUP¶VHYHU\GD\ILQDQFLDODFWLYLWies
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 inFUHDVHDILUP¶VYDOXHDQGVWRFNKROGHU¶VZHDOWK
- 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 ± 5XOHVJRYHUQLQJDILUP¶s extension of credit to customers
sets standards as to which buyers are eligible for what type of credit
typically, credit is extended to customers who have the ability to pay and who honour their
obligations; denied to firms with poor payment histories
³QHW´PHDQVRIILISDLGZLWKLQGD\VDQGKDVGD\VWRSD\WKHUHJXODUSULFH
Inventories ± Materials and goods currently held by the company that will be sold within the year
o 7RROLWWOHLQYHQWRU\FDQFRVWVDILUP¶VVDOHVWRRPXFKLQYHQWRU\means tied-up funds that cannot be
used else where
o 3 types of inventories
Raw Materials Inventory ± 7KHSRUWLRQRIDILUP¶VLQYHQWRU\FRQVLVWLQJRIEDVLFVXSSOLHV
used to manufacture products for sale
Work-In-Progress Inventory ± 7KHSRUWLRQRIDILUP¶VLQventory consisting of goods partway
through the production process
Finished Goods Inventory ± 7KDWSRUWLRQRIDILUP¶VLQYHQWRU\FRQVLVWLQJRIFRPSOHWHGJRRGV
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
Every dollar that is not in working capital becomes a dollar of more useful cash flow
Reduction of working capital raises earnings permanently
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Description
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 www.notesolution.com 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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