MGTA02H3 Lecture Notes - Unsecured Debt, Capital Structure, Corporate Bond
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¶VORQJ-term investments and
obtaining the funds to pay for those investments
- typically involves 4 responsibilities
o 'HWHUPLQLQJDILUP¶VORQJWHUPLQYHVWPHQWV
o Obtaining funds to pay for those investments
o &RQGXFWLQJWKHILUP¶VHYHU\GD\ILQDQFLDODFWLYLWies
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 inFUHDVHDILUP¶VYDOXHDQGVWRFNKROGHU¶VZHDOWK
- 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 ± 5XOHVJRYHUQLQJDILUP¶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
³QHW´PHDQVRIILISDLGZLWKLQGD\VDQGKDVGD\VWRSD\WKHUHJXODUSULFH
Inventories ± Materials and goods currently held by the company that will be sold within the year
o 7RROLWWOHLQYHQWRU\FDQFRVWVDILUP¶VVDOHVWRRPXFKLQYHQWRU\means tied-up funds that cannot be
used else where
o 3 types of inventories
Raw Materials Inventory ± 7KHSRUWLRQRIDILUP¶VLQYHQWRU\FRQVLVWLQJRIEDVLFVXSSOLHV
used to manufacture products for sale
Work-In-Progress Inventory ± 7KHSRUWLRQRIDILUP¶VLQventory consisting of goods partway
through the production process
Finished Goods Inventory ± 7KDWSRUWLRQRIDILUP¶VLQYHQWRU\FRQVLVWLQJRIFRPSOHWHGJRRGV
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
www.notesolution.com
1
MGTA02H3 Full Course Notes
Verified Note
1 document
