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RSM100Y1 Study Guide - Issued Shares, Preferred Stock

14 pages32 viewsWinter 2011

Department
Rotman Commerce
Course Code
RSM100Y1
Professor
Michael Szlachta

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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
oplan and control acquisition and dispersal of the company’s financial
assets
-finance(corporate) finance:
odetermining firm’s long-term investments
oobtaining funds to pay for those investments
oconducting the firm’s everyday financial activities
ohelping 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
status/making profit
ooverallincrease firm’s 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
oIf excess cash balances are allowed to sit idle instead of being
investedfirm loses cash returns it could have earned
oBy 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
oMake 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
oOtherwise earmarked resources can be saved or put to better use
oLower-than-expected revenues may necessitate short-term borrowing to
meet current debt obligations
oBudgets 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
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-Financial Plan : description of how business will reach some financial position it
seeks for the future; includes projections for sources and uses of funds
oCornerstone 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?
oMust develop clear picture of why a firm needs funds
oManagers 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
oFor most companies this is the largest single category of short-term debt
oFinaincial 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
oNeed to know how much credit is advanced to buyers and when they will
make payments on their accounts
ob/c accounts receivable represent an investment in products for which a
firm has not yet received payment, they temporarily tie up funds
oCredit Policy: rules governing a firm’s 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 “2/10 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
otoo little inventory can cost a firm sales, too much means funds tied up
and cannot be used elsewhere
o3 types of inventory:
Raw materials inventory: basic supplies used to manufacture
products for sales
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Work-in-process inventory: consisting of goods partway through
production process
Finished goods inventory: completed goods ready for sale
-Working Capital : difference between firm’s current assets and current liabilities
oLiquid asset out of which current debts can be pais
oWorking capital= inventories + accounts receivable(minus accounts
payable)
oLarge companies typically devote 20cents of every sales $ to working
capital
oEvery $ that is not tied up on working capital becomes a dollar of more
useful cash flow
oReducing working capital, raises earnings permanently b/c money costs
money (in interest payments etc.)
Long-Term (Capital) Expenditures
-fixed assets: items with long lasting valueplant, equipment
-more carefully planned than short-term
ounlike inventories and other short-term assets, not notrmally sold or
converted into cash
oacquisition requires very large investment
orepresent binding commitment of company funds that continues long into
future
Sources of Short-term Funds:
trade credit
secured loans
unsecured loans
factoring accounts receivable
-Trade Credit : granting of credit by one firm to anothershort-term loan
oAccounts payable not merely expenditures
oAlso source of funds to company, which has use of product purchased
until it pays its bill
oTrade credit can take several forms:
Open-book credit(most common): sellers ship merchandise on
faith that payment will be forthcoming
Promissory note: buyers sign promise-to-pay agreements before
merchandise is shipped
Agreement states when and how much money will be paid
to seller
Trade draft: buyers must sign statements of payments terms
attached to merchandise by sellers
Trade acceptance: trade draft that has been signed by buyer
oUseful forms of credit in international transactions
oTrade credit insurance for sellers
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