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MGTA02H3 Lecture Notes - Unsecured Debt, Secured Loan, Accounts Payable

Management (MGT)
Course Code
H Laurence

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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
schedulesset 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
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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
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