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Rotman Commerce
Michael Szlachta

Ch 20 Financial Decisions and Risk Management The Role of Financial Manager - financial managers: those managers responsible for planning and overseeing the financial resources of a firm o plan and control acquisition and dispersal of the companys financial assets - finance(corporate) finance: o determining firms long-term investments o obtaining funds to pay for those investments o conducting the firms everyday financial activities o helping to manage the risks that the firm takes Objectives of Financial Manager - collect funds, pay debts, establish trade credit, obtain loans, control cash balances, plan for future financial needsmake decisions for improving financial statusmaking profit o overallincrease firms value and thus stockholders wealth - in sole proprietorships and partnerships, profits translate directly into increases in owners wealth - in corporations, profits translate into increase in value of common stock Responsibilities of Financial Manager: cash flow management financial control financial planning - Cash Flow Management: managing the pattern in which cash glows in to the firm in the form of revenues and out of the firm in the form of debt payments o If excess cash balances are allowed to sit idle instead of being investedfirm loses cash returns it could have earned o By locating idle cash and putting it to work, firms not only gain additional income, also avoid having to borrow from outside sourced Savings on interest payments can be substantial - Financial Control: process of checking actual performance against plans to ensure that the desired financial status is achieved o Make appropriate financial adjustments if necessary Excessively high revenues, for example, may be deposited in short-term interest-bearing accounts, or may be used to pay short- term debt o Otherwise earmarked resources can be saved or put to better use o Lower-than-expected revenues may necessitate short-term borrowing to meet current debt obligations o Budgets are often backbone of financial control Compare actual to budget numbers Discrepancies indicate need for financial adjustments so that resources are used to best adv - Financial Plan: description of how business will reach some financial position it seeks for the future; includes projections for sources and uses of funds o Cornerstone of effective financial management What amount of funds needed for immediate plans? When will it need more funds? Where to get funds both for short- and long- term needs? o Must develop clear picture of why a firm needs funds o Managers must also asses relative costs and benefits of potential funding sources Why do Businesses Need Funds? Short-term (Operating Expenditures) - must pay attention to accounts payable accounts receivable inventories working capital - Accounts Payable : unpaid bills owed to suppliers plus wages and taxes due within upcoming year o For most companies this is the largest single category of short-term debt o Finaincial managers want to know in advance amounts of new accounts payable as well as when they must be repaid Must rely on other department managers for info - Accounts Receivable: consist of funds due from customers who have bought on credit o Need to know how much credit is advanced to buyers and when they will make payments on their accounts o bc accounts receivable represent an investment in products for which a firm has not yet received payment, they temporarily tie up funds o Credit Policy: rules governing a firms extension of credit to customers Predicting payment schedules is a function of credit policy Sets standards as to which buyers are eligible for what type of credit Credit term of 210 net 30=selling company offers 2% discount if customer pays within 10 days, has 30 days to pay full price The higher the discount, more incentive buyers have to pay early - Inventory: materials and goods currently held by company that will be sold within the year o too little inventory can cost a firm sales, too much means funds tied up and cannot be used elsewhere o 3 types of inventory: Raw materials inventory: basic supplies used to manufacture products for sales
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