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Chapter 10 – Financial Decisions:
Financial managers – those managers responsible for planning and overseeing the
financial resources at a firm.
Finance (corporate finance) – the business functions involving decisions about a
firm’s long-term investments and obtaining the funds to pay for those investments.
With responsibilities (1) determining a firm’s long term investment (2) obtaining
funds to pay for those investments (3) conducting the firm’s everyday financial
activities (4) helping to manage the risk the firm takes
Objective of financial manager:
Collect funds, pay debts, establish trade credit, and obtain loans, control cash
balance, and plan for future financial needs.
Increase firm’s value – thus stock holder’s wealth.
Ensure that a company’s earning exceed its cost – profit.
Responsibilities of the financial manager:
Must ensure that it always has enough funds on hand to purchase materials and
human resources it needs to produce goods and services.
Funds that are not need immediately should be invested to earn more money for the
Cash flow management – managing the pattern in which cash flows into the firm
in the form of revenue 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 provides the “measuring stick” against which performance is evaluated.
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.
Q asked: amount of funds does the company need to meet immediate plans? When
will need more funds? Where can I meet both short/long-term needs?
Must also assess the relative costs and benefits of potential funding sources.
Why do businesses need funds?
Failure to make payment may lead the company to bankruptcy and dissolution of the
Short-term (operating ) expenditure
Accounts payable – is the largest single category of short-term debt. Plan for
funding flows, financial managers want to know in advance the amounts of new
accounts payable as well as when to repay.
Account receivable – due from customer who have bought on credit. Financial
plan requires financial managers to project accurately both how much credit is
advanced to buyer and when they will make on their accounts. They temporarily tie
up its funds. Wants to receive payment asap.
Credit policy – rules governing a firm’s extension of credit to customers. Credits
are extended to customers who have the ability to pay and who honour their
Inventories – material and goods currently held by the company that will be sold
within the year.
Too little inventory -> cost of firm sale. Too much can end tied funds that cannot be
Raw materials inventory – that portion of a firm’s inventory consisting of basic
supplies used to manufacture product for sale.
Work in process inventory – that portion of a firm’s inventory consisting of goods
partway through the production process.
Finished goods – that portion of a firm’s inventory consisting of completed goods
ready for sale.
Working capital –
Difference between current asset and current liability.
Inventories + A/R
Large companies typically devoted 20 cent of every sale dollar to working capital.
Everyone dollar is not tied up in working capital becomes a dollar of more useful
Reduction of working capital raises earning permanently
Reducing WC means saving money.
Long-term (capital) expenditures –
Companies need fund to cover long-term expenditures for fixed assets.
Usually more carefully planned than short-term outlays because they pose special
They are not normally converted to cash
Acquisition requires a large investments
Represent a binding commitment of company fund that continues long into the
Sources of short-term funds:
Trading credit – the granting of credit by a selling firm to a buying firm.
can take several form such as :
Open-book credit – form of trade credit in which sellers ship merchandise on faith
that payment will be forthcoming. “Gentlemen agreement”.
Promissory note – form of trade credit in which buyers sign promise-to-pay
agreement before merchandise is shipped.
Trade draft – form of trade credit in which buyer must sign statements of payment
terms attached to merchandise by sellers.
Trade acceptance – trade acceptance – trade draft that has been signed by the
Secured short-term loans –
Bank loans are a vital source of short-term funding.
Secured loan – a short-term in which the borrower is required to put up collateral.
Collateral – any assets that a lender has the right to seize if a borrower does not
repay a loan.