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Lecture 5

MGTA05H3 Lecture Notes - Lecture 5: Cash Flow, Retained Earnings, Commercial Paper


Department
Management (MGT)
Course Code
MGTA05H3
Professor
H Laurence
Lecture
5

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Corporate Finance: Lecture Five Part One
Why Do Businesses Need Financing?
Investment
Starting up
Expanding
Pay the bills
Timing of inflows/outflows of funds is not coordinated
The business is cyclical or seasonal
Why Do Businesses Need Financing?
Investment
Purchase equipment, land and buildings that will be used in production
Pay the bills
Cash flow problems – the need to have money available when it is needed
Cash Flow Problems
Businesses need money to buy materials, pay for labour and produce items for
sale
But collections of revenue from sales come at the end of the process, not the
beginning
Corporate Finance
Growth Financing
Business wants more production capacity
Business needs new warehouse or sales office
Business needs new equipment
These assets are expensive, and the business cannot always save to pay for them
Funding Needs
Paying for transactions
Immediate payables
Cash flow imbalances
Paying for productive assets
Long term plant and equipment
Funding that goes beyond retained earnings
Where does the business get money for both short-term and long-term needs
Sources of Funds Outside the Business
Short term funds
Trade credit – letting your suppliers finance the business by paying later
Secured short term loans – the bank gives you money to buy inventory and
deal with accounts receivable
Factoring of accounts – selling accounts receivable to someone else for
cash
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