BU121 Study Guide - Comprehensive Final Guide: Operating Cash Flow, Cash Flow, Enterprise Risk Management

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1 Dec 2016
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BU121
FINAL EXAM
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Saturday, April 4, 2015
1
Chapter 5: Maximizing the Value
Role of Finance and the Financial Manager
- financial management is the art and science of managing a company’s money so that it can meets its
goals
- financial managers track how money is flowing into and out of the company
- closely related to accounting and focus on cash flows
- key activities of financial managers:
- financial planning: preparing a plan which projects revenues, expenditures, and financing needs
- investment (spending money): investing company funds in projects and securities that provide high
returns in relation to their risks
- financing (raising money): obtaining funds and achieving the best balance between debt and equity
- main goal is to maximize the value of the company to its owners (consider short and long term
consequences of company’s actions)
- risk-return trade-off: the higher the risk (potential loss), the greater the returned reward (opportunity for
profit)
Financial Planning
- financial plan guides the company to its business goals and the maximization of its value
FORECASTING THE FUTURE
- projections of future development in the company
- short-term forecasts or operating plans project revenues, costs of goods, and operating expenses over
a one year period
- what are your expenses and revenues like?
- long-term forecasts or strategic plans cover a period longer than a year and take a broader view
- developing a new product? acquiring other companies?
BUDGETS
- budgets are formal written forecasts of revenues and expenses that set spending limites based on
operational forecasts
- compare expenses and compare actual performance to the forecasts
- cash budgets forecast a company’s cash inflows and outflows
- capital budgets forecast outlay for fixed assets (cover a longer period)
- operating budgets combine sales forecasts with estimated production costs and operating expenses
How Organizations Use Funds
Short Term Expenses
- also called operating expenses, which are outlays used to support current selling and production
activities
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Saturday, April 4, 2015
2
- cash management is the process of making sure that a company has enough cash on hand to pay bills
as they are due and to meet unexpected expenses
- if a company is predictable and regular throughout the year, they need less cash on hand
- sometimes cash surpluses will be invested temporarily to earn interest (marketable securities)
- accounts receivable management
- offer customers credit terms attractive enough to increase sales but also collecting money asap
- credit policies: guidelines on offering credit
- credit terms: specific repayment conditions
- collection policies: procedures for collecting overdue accounts
- want least inventory as possible
Obtaining Short Term Financing
Unsecured Short-Term Loans
- made on the basis of the companies creditworthiness and previous experiences (no collateral)
- trade credit: extension of credit by the seller to the buyer between the time the buyer receives the
goods and when they pay
- bank loans include line of credit, agreement between bank and business that specifies the max amount
of short term borrowing the bank will make available (allows borrower to obtain a number of loans
without reapplying each time)
- revolving line of credit: allows borrower to have access to funds again once repaid
- commercial paper is issued by a financially strong corporation
Secured Short-Term Loans
- pledge specific assets as collateral, usually inventory or accounts receivable
- factoring: selling account receivables to a factor (i.e. bank)
Raising Long Term Financing
- debt and equity
- advantage of debt financing: deductibility of the interest expense and no loss of ownership
- disadvantage of debt: financial risk, the chance the company will be unable to make scheduled interest
- equity is permanent financing… don’t have to pay dividen=ds, but gives up ownership
- equity is more costly
Long Term Debt Financingl
- used to finance capital expenditures
- term loan is a business loan with an initial maturity of more than one year; can be unsecured/secured
- bonds; long term debt obligations issued by a company
- mortgage loan; long term loan made against real estate as collateral
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