BU121 Study Guide - Final Guide: Biodegradable Bag, Canadian Labour Congress, Vagueness

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School
Department
Course
BU Fial Ea Notes
Finance Chapter
The Role of Finance and the Financial Manager
- Financial Management: the at ad siee of aagig a opas oe so that is a eet its
goals
- Financial manager: tracks day-to-day operational data such as cash collections and disbursements to
ensure that the company has enough cash to meet its obligations
- Key activities of Financial Manager
o financial planning preparing the financial plan, which projects revenues, expenditures, and
financing needed over a given period
o Investing iestig the opas fuds i pojets ad seuities that poide high eturns
in relation to their risks
o Financing obtaining funding for operations and investments, seeking the best balance
between debt and equity financing
Financial Planning
- To prepare a financial plan, the financial manager must first consider existing and proposed products,
the resources available to produce them, and the financing needed to support productions and sales
- Financial Forecasts: projections of future developments within the firms such as sales forecasts
- Short-term forecasts (operating plans): they project revenues, costs of goods, and operating expenses
over a one-year period
- Long-term forecasts (strategic plans): cover 2 to 10 years, and take a broader view of financial
activities and show where funding is expected to come from.
- Importance: Lenders use this to evaluate risks, and structure loan terms and covenants based on those
statements
How Organizations Use funds
- Short term expenses outlays used to support current selling and production activities. Result in
uet assets, the fiaial aages goal is to aage uet assets so the opa has eough
cash to pay its bills and support its accounts receivable and inventory
- Long-term Debt Financing used to finance long-term expenditures. Range between 5 and 20 years,
the three biggest are loans, bonds, and mortgage loans
- Obtaining short term financing
o Firms raise funds by borrowing money (debt), selling ownership shares (equity), and retaining
earnings (profits)
o like expenses, borrowed funds can be divided into short-term (1 year) and long-term loans
- obtaining Long-term Financing
o equity financing comes either from selling new ownership interests or from retaining earnings
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Debt Financing
Equity Financing
Voice in
Management
Creditors typically have none
Common shareholders have voting
rights
Claim on income
and assets
Debt holders rank ahead of equity holders
Equity owners have a residual claim
on income (dividends)
Maturity
Debt has a state maturity and requires
repayment of principal by a specified date
The company is not required to
repay equity, which has no maturity
date
Tax Treatment
Interest is a tax-deductible expense
Dividends are not tax-deductible
and are paid from after-tax income
Trends
- Technology is improving the efficiency with which financial managers run their operations.
- The otiued epasio of the fiaial aages ole i isk aageet is a atual outgoth of
the regulations in the united states, as Canadian companies that trade on the united states exchanges
must adhere not only to Canadian law but also to American standards
Why is it so difficult to raise money and solutions?
- Investors must make decisions about funding new businesses of very uncertain value with less
information than the entrepreneur has. This uncertainty and information asymmetry creates problems
in financing new companies.
Types and Sources of Capital
- Savings is the ost ipotat soue of apital, the etepeeus o savings
- Friends and Family use friends and family to help finance their project
- Venture Capitalists are people who work for organizations that raise money from large institutional
investors, like university endowments and company pension funds, and invest those funds in new
firms.
- Business angels are private individuals while venture capitalists are a company that invests
- Commercial banks will only step in if there is a lot of proof
- Mezzanine Financing bridges the risk return tradeoff, if an investor feels concern they will loan money
but it will have an equity quicker
- Liquidity Stage Financing is when you decide to take a company public and create an IPO
Financing Through venture Life Cycle
Development
Stage
From idea to business prototype
trial
Startup Stage
Revenue Generation begins
Survival Stage
Revenues pay some but not all
expenses borrow or give up equity
Rapid Growth
Stage
Cash inflows > outflows cash flow
positive value increases
Early Maturity
Stage
Growth slows, most value realized
consider exit
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Venture Financing
Life Cycle Stage
Types of financing
Major Sources/Players
Development Stage
Seed Financing
Entrepreneurs assets
Family and friends
Startup Stage
Startup financing
Entrepreneurs assets
Family and friends
Business Angels
Venture Capitalists
Survival Stage
First-round Financing
Business operations
Venture Capitalists
Suppliers and customers
Government assistance programs
Commercial banks
Rapid-growth Stage
Second-round financing
Mezzanine Financing
Liquidity-stage financing
Business operations
Suppliers and customers
Commercial banks
Investment bankers
Seasoned Financing
Life Cycle Stage
Types of financing
Major Sources/Players
Early Maturity Stage
Obtaining banks loans
Issuing bonds
Issuing stock
Business operations
Commercial banks
Investment bankers
Cash Budgeting
- Tool to forecast and manage cash flows
Keys: 3 possibilities for a cash budget (besides excess = balance required)
- Dificiency
o Borrow for deficiency + minimum
o ending balance = minimum required
- Excess > minimum
o Surplus available to repay borrowing if
do… edig alae = total eess
- Excess < minimum
o Borrow to = minimum required
Cash Burn Rates and Cash Build rates
- Cash burn rate
o How quickly a venture burns through/uses cash
o Determine weeks of cash remaining
- Cash Build Rate
o How quickly a venture builds cash through collections on sales
- Liquidity
o The ability of the venture to maintain a build rate high enough to meet its obligations as they
come due
Beginning Cash Balance
+ Receipts
Total Cash Available
- Disbursements
Cash Excess / (Deficiency)
Minimum Cash Balance Desired
Boowig Re’d / Suplus o Repaet
Ending Cash Balance
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Document Summary

The role of finance and the financial manager. Financial management: the a(cid:396)t a(cid:374)d s(cid:272)ie(cid:374)(cid:272)e of (cid:373)a(cid:374)agi(cid:374)g a (cid:272)o(cid:373)pa(cid:374)(cid:455)(cid:859)s (cid:373)o(cid:374)e(cid:455) so that is (cid:272)a(cid:374) (cid:373)eet its goals. Financial manager: tracks day-to-day operational data such as cash collections and disbursements to ensure that the company has enough cash to meet its obligations. Key activities of financial manager financial planning preparing the financial plan, which projects revenues, expenditures, and financing needed over a given period. Investing i(cid:374)(cid:448)esti(cid:374)g the (cid:272)o(cid:373)pa(cid:374)(cid:455)(cid:859)s fu(cid:374)ds i(cid:374) p(cid:396)oje(cid:272)ts a(cid:374)d se(cid:272)u(cid:396)ities that p(cid:396)o(cid:448)ide high (cid:396)eturns in relation to their risks: financing obtaining funding for operations and investments, seeking the best balance between debt and equity financing. To prepare a financial plan, the financial manager must first consider existing and proposed products, the resources available to produce them, and the financing needed to support productions and sales. Financial forecasts: projections of future developments within the firms such as sales forecasts.

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