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Chapter 17

COMMERCE 1BA3 Chapter 17: Chapter 17 Business Environment Notes

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Rita Cossa

Chapter 17 Business Environment Notes • Finance: the function in a business that acquires funds for the firm and manages them within the firm • Financial management: the job of managing a firm's resources to meet its goals and objectives • Financial managers: examine the financial data prepared by accountants and recommend strategies for improving the financial performance of the firm • • Short-term forecast: predicts revenues, costs, and expenses for a period of one year or less • Cash flow forecast: predicts the cash inflows and outflows in future periods, usually months or quarters • Long-term forecast: predicts revenues, costs, and expenses for a period longer than one year, and sometimes as long as five or ten years. These forecasts are crucial in understanding the company’s future. • Budget: A financial plan that sets forth management's expectations for revenues and, on the basis of those expectations, allocates the use of specific resources throughout the firm • Capital Budget: highlights a firm's spending plans for major asset purchases that often require large sums of money, like property, buildings, and equipment. • Cash budget: estimates cash inflows and outflows during a particular period, like a month or a quarter (same as cash flow forecast) • Operating (master) budget: ties together the firm's other budgets and summarizes the business's proposed financial activities • Financial control: is a process in which a firm periodically compares its actual revenues, costs, and expenses with its budget • The crash of the financial markets in 2008 was on the fault of financial managers to do their job well • Financial managers must ensure that funds are available to meet daily cash needs without compromising the firm’s opportunities to invest money for its future • Capital expenditures: major investments in either tangible long-term assets, such as land, buildings, and equipment, or intangible assets, such as patents, trademarks, and copyrights. These are important if a company is looking to expand • Debt Financing: refers to funds raised through various forms of borrowing that must be repaid • Equity financing: money raised from operations within the firm or through the sale of ownership in the firm (shares) • Short-term financing: Refers to funds need for one year or less • Long-term financing: Refers to funds needed for more than one year (usually two to ten years) • Financial managers jobs put more importance on obtaining short-term funds rather than long-term • Trade credit: The practice of buying goods or services now and paying for them later • A term such as 2/10 net 30 would refer to taking a 2 percent discount of you pay in 10 days otherwise the full amount is due in 30 days • Promissory note: a written contract with a promise to pay a supplier a specific sum of money at a definite time. These are negotiable. • Banks, being sensitive to risk, generally prefer to lend short-term funds to larger, established businesses. Imagine the different types of business people who go to banks for a loan, and you will get a better idea of the requests bankers evaluate. Picture, for example, a farmer going to the bank in the spring to borrow funds for seed, fertilizer, supplies, and other needs that will be repaid after the fall harvest. • A secured loan: backed by collateral, something valuable such as property. If the borrower fails to pay the loan, the lender may take possession of the collateral • Unsecured loan: more difficult to obtain because it
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