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Financial Decisions and Risk Management

5 Pages
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Department
Management (MGT)
Course Code
MGTA02H3
Professor
Chris Bovaird

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Management Chapter 20: Financial Decisions and Risk Management
The Role of the Financial Manager
Financial managers: those managers responsible for planning and overseeing the financial resources of a firm
Finance: the business function involving decisions about a firms long-term investments and obtaining the funds to pay for
those investments
oFour responsibilities: determining long-term investments; obtaining funds; conducting firms everyday financial
activities; help manage risks
Objectives of the Financial Manager
To increase firms value (and stockholders wealth) by making decisions to improve status (in corporations, profits =
increase in value of common stock)
Responsibilities of 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 (idle cash should be invested)
Financial control: the process of checking actual performance against plans to ensure that the desired financial status is
achieved (sales are unpredictable so financial adjustments may need to be made) < budgets provide measuring stick to
evaluate performance
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
Failure to make contractually obliged payments can lead to bankruptcy
Short-Term (Operating) Expenditures
Accounts payable: unpaid bills owed to suppliers plus wages and taxes due within the upcoming year
Accounts receivable: funds due from customers who have bought on credit
oCredit policy: rules governing a firms extension of credit to customers (way of predicting payment schedules) <
credit usually allowed to customers who have ability to pay, vice versa
oEx. 2/10, net 30” means that customers have 2% discount if they pay within 10 days, must pay full price within 30
days
Inventory: materials and goods currently held by the company that will be sold within the year (too much means money
can’t be spent elsewhere, too little means potential sales are lost)
oRaw materials inventory: that portion of a firms inventory consisting of basic supplies used to manufacture
products for sale (ex. Levi Straus has rolls of denim)
oWork-in-process inventory: that portion of a firms inventory consisting of goods partway through the production
process (ex. Cut out but not sewn jeans)
oFinished goods inventory: that portion of a firms inventory consisting of completed goods ready for sale
(completed jeans)
Working capital: difference between a firms current assets and current liabilities (liquid asset)
oWorking capital = inventories + accounts receivable (- accounts payable)
oUsually is 20% of sales (working capital is not useful cash flow, less working capital raises earnings permanently)
< less WC saves money
Long Term Capital Expenditures
Long term capital expenditures are not normally sold or converted to cash, acquisition requires large investment, represent
a binding commitment of company funds that continues into the future, more carefully planned than short term
expenditures
Fixed assets: items that have a lasting use or value
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Sources of Short-Term Funds
Trade Credit
Trade credit: the granting of credit by a selling firm to a buying firm
oOpen book credit; form of trade credit in which sellers ship merchandise on faith that payment will be forthcoming
oPromissory notes: form of trade credit in which buyers sign promise-to-pay agreements before merchandise is
shipped
oTrade draft: form of trade credit in which buyers must sign statements of payment terms attached to merchandise
by sellers (useful in international transactions)
Trade acceptance: trade draft that has been signed by the buyer
Secured Short-Term Loans
Bank loans are vital source of short-term funding (involve promissory note)
Secured loans: a short term loan in which the borrower is required to put up collateral
Collateral: any asset that a lender has the right to seize if a borrower doesnt not repay a loan
Inventory loans: loan made with inventory as a collateral asset (inventory is more attractive when it provides lender with
real security for loan amount) < readily converted to cash
Accounts receivable as collateral: lender may seize accounts receivable in event of non-payment
oPledging accounts receivable: using accounts receivable as collateral for a loan
Factoring accounts receivables: raise funds by selling firms the firms accounts receivables (factor pays some percentage of
full amount, makes profit in long run)
Unsecured Short-Tem Loans
Unsecured loan: a short-term loan in which the borrower is not required to put up collateral (usually required to keep
compensating balance)
oCompensating balance: a portion of the loan amount on deposit with the bank in a non-interest-bearing account
Line of credit: a standing agreement between a bank and a firm in which the bank specifies the maximum amount it will
make available to the borrower for a short-term unsecured loan; the borrower can then draw on those funds, when
available
Revolving credit agreement: a guaranteed line of credit for which the firm pays the bank interest on funds borrowed as
well as a fee for extending the line of credit (bank charges a commitment fee in return)
oCommitment fee: fee for holding open line of credit for customer (ex. 0.5% of loan amount)
Commercial paper: a method of short-run fundraising in which a firm sells unsecured notes for less than the face value
and then repurchases them at the face value within 270 days; buyers profits are the difference between the original price
paid and the face value
Sources of Long-Term Funds
Debt Financing
Debt financing: raising money to meet long-term expenditures by borrowing from outside the company; usually takes the
form of long-term loans or the sale of corporate bonds
Long-term loans: from chartered banks, credit companies, insurance companies, and pension funds (arranged quickly
because parties involved is limited, no need to make public disclosure of business plans, duration of loan can be matched to
borrowers needs, contain clauses making it possible to change terms) < may have trouble finding lenders
oInterest rates: negotiated between borrower and lender
Corporate bonds: a promise by issuing company to pay holder a certain amount of money on specified date (major source
of long-term debt financing)
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Description
Management Chapter 20: Financial Decisions and Risk Management The Role of the Financial Manager Financial managers: those managers responsible for planning and overseeing the financial resources of a firm Finance: the business function involving decisions about a firms long-term investments and obtaining the funds to pay for those investments o Four responsibilities: determining long-term investments; obtaining funds; conducting firms everyday financial activities; help manage risks Objectives of the Financial Manager To increase firms value (and stockholders wealth) by making decisions to improve status (in corporations, profits = increase in value of common stock) Responsibilities of 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 (idle cash should be invested) Financial control: the process of checking actual performance against plans to ensure that the desired financial status is achieved (sales are unpredictable so financial adjustments may need to be made) < budgets provide measuring stick to evaluate performance 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 Failure to make contractually obliged payments can lead to bankruptcy Short-Term (Operating) Expenditures Accounts payable: unpaid bills owed to suppliers plus wages and taxes due within the upcoming year Accounts receivable: funds due from customers who have bought on credit o Credit policy: rules governing a firms extension of credit to customers (way of predicting payment schedules) < credit usually allowed to customers who have ability to pay, vice versa o Ex. 210, net 30 means that customers have 2% discount if they pay within 10 days, must pay full price within 30 days Inventory: materials and goods currently held by the company that will be sold within the year (too much means money cant be spent elsewhere, too little means potential sales are lost) o Raw materials inventory: that portion of a firms inventory consisting of basic supplies used to manufacture products for sale (ex. Levi Straus has rolls of denim) o Work-in-process inventory: that portion of a firms inventory consisting of goods partway through the production process (ex. Cut out but not sewn jeans) o Finished goods inventory: that portion of a firms inventory consisting of completed goods ready for sale (completed jeans) Working capital: difference between a firms current assets and current liabilities (liquid asset) o Working capital = inventories + accounts receivable (- accounts payable) o Usually is 20% of sales (working capital is not useful cash flow, less working capital raises earnings permanently) < less WC saves money Long Term Capital Expenditures Long term capital expenditures are not normally sold or converted to cash, acquisition requires large investment, represent a binding commitment of company funds that continues into the future, more carefully planned than short term expenditures Fixed assets: items that have a lasting use or value www.notesolution.com
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