Textbook Notes (363,683)
Canada (158,529)
Commerce (1,634)
Rita Cossa (56)
Chapter 14

chapter 14.docx

11 Pages
Unlock Document

Rita Cossa

Financial Management chapter 17 text The Role of Finance and Financial Managers  What is finance  What do financial managers do?  Finance o Function in a business that acquires funds for the firm and manages those funds within the firm o Preparing Budgets; cash flow analysis; planning for expenditure of funds on assets (plant, equipment, machinery)  Financial management o The job of managing a firm’s resources so it can meet its goals and objectives  Financial managers o Managers who make recommendations to top executives regarding strategies for improving the financial strength of a firm o Can make sound decisions only if they understand accounting info o Tasks:  main task is to obtain money and then control the use of that money effectively  responsible for seeing that the company pays its bills  buying merchandise on credit (accounts payable) and collecting payment (accounts receivable)  paying company’s bills & collecting overdue accounts receivables  three most common ways for a firm to fail financially: 1. undercapitalization (lacking funds to start and run the business) 2. poor control over cash flow 3. inadequate expense control Financial Planning  analyzing short/long-term money flows to and from the firm  to optimize the firms profitability and make the best use of its money  quality of financial plan improves based on lived experiences  involves three steps: 1. forecasting both short/long-term financial needs 2. developing budgets to meet those needs 3. establishing financial control to see how well the company is doing what it set out to do Forecasting Financial Needs  short-term forecast o forecast that predicts revenues, costs and expenses for a period of one year or less  cash flow forecast o part of the short-term can be cash flow o forecast that predicts the cash inflows and outflows in future periods, usually months/quarters o inflows/outflows of cash are based on expected sales revenue and on various costs and expense incurred and when the cash will be collected and costs will need to be paid  long-term forecast o forecast that predicts revenues, costs and expenses for a period longer than one year, and sometimes as far as 5/10 years into the future o software assist financial managers  long-term forecasting questions o gives top-management some sense of income or profit potential possible with different strategic plans Working with the Budget Process  depends on the accuracy of the firm’s financial statements  budget o financial plan that sets forth management’s expectation, &, on the bases of those expectations, allocates the use of specific resources throughout the firm  balance sheet, income statement, cash flow statement  form the basis for budgeting process  firms budget are compiled from short/long-term financial forecasts  types of budgets: o operating (master) budget  budget that ties together all of a firms other budgets; it is the projection of dollar allocating to various costs and expenses needed to run or operate the business, given projected revenues  ex. $ spent on supplies, rent, travel, advertising, research  most detailed and most used budget o capital budget  highlights a firms spending plans for major asset purchases that often require large sums of money  ex. property, buildings, equipment o cash budget  estimates a firm’s projected cash inflows and outflows that the firm can use to plan for any cash shortages/surpluses during a given period  assist managers in anticipating borrowing, debt payment, operating expenses, short-term investments  need to know when youre projected cash balance may fall below the minimum  can change how you will manage either your cash collection or cash payments Establishing Financial Controls  financial control o a process in which a firm periodically compares its actual revenues, costs & expenses with its projected ones  help managers identify variances to the financial plan and allow them to take corrective action if necessary  provide feedback to help reveal which accounts, departments and people are varying from financial plans The Need For Funds  change overtime for different reasons  certain funds must be available in all organizations: o managing day-to-day needs of the business o controlling credit operations o acquiring needed inventory o making capital expenditures Managing Day-to-Day Needs of the Business  funds have to be available to meet all operations costs of the business o salaries, tax payments, business loans  challenge is to see that funds are available to meet those daily cash needs  the interest gained on the firm’s investments in important in maximizing profit the company will gain encourage keeping a firms cash expenditures to a minimum Controlling Credit Operations  making credit available helps keep current customers happy and attracts new customers  problem with selling on credit  large % of a non-retailer’s business assets could be tied up in its credit accounts (AR) o meanwhile the firm needs to pay the costs incurred for making/provision of g/s already sold to customers who bought on credit  the firms credit policy reflects its financial position and its desire to expand into new markets  accept bank credit cards  decrease the time, & expenses, involved in collecting accounts receivable Acquiring Inventory  focus on customer  high-quality service and availability of goods are vital if a business expects to prosper in today’s marketers  to satisfy customers  businesses must maintain inventories that often involve sizeable expenditure of funds  just-in-time inventory  help reduce the amount of funds a firm must tie up in inventory  turnover ratio  firm can better control its outflow of cash for inventory Making Capital Expenditures  capital expenditures o major investments in either tangible long-term assets such as land, buildings & equipment, or tangible assets  patents, trademarks & copyrights  purchase of major assets is essential  land for future expansion, plants, research, etc  expansion into new markets cost large sums with no guarantee that the expansion will be commercially successful  companies weigh all possible options before committing large portions of their available resources Alternative Sources of Funds  firm can seek to raise needed capital through borrowing money (debt), selling ownership (equity), or earning profits (retained earnings)  debt financing (long-term) o funds raised through various forms of borrowing that must be repaid o ex. lending institutions, selling bonds  equity financing (long-term) o funds raised from operations within the firm or through the sale of ownership in the firm o ex. retained earning, venture capital, selling stock  short-term financing o borrowed funds that are needed for one year or less o ex. trade credit, promissory notes, fam & friends, financial institutions  long-term financing o borrowed funds that are needed for a period longer than one year Obtaining Short-term Financing  most small, business  firms need to borrow short-term funds to purchase additional inventory or to meet bills that come due (when the firms cash revenue are low)  lender will require some form of security for a loan o collateral, or personal guarantee Trade Credits  least expensive & most convenient  trade credit o the practice of buying goods and services now and paying for them later o accounts payable  business invoice contain 2/10, net 30 o buyer can take 2% discount of the invoice is paid within 10 days o the total bill is due in 30 days if the buyer does not take advantage of the discount  discounts create opportunities to reduce the firm’s cost  some suppliers hesitate to give trade credit to organizations with a poor credit rating, no credit history, or history of slow payment  promissory note o written contract with a promise to pay o can be sold by the supplier to a bank at discount Family and Friends  better no not borrow from relatives  may have several bills coming due at the same time with no sources of funds to pay them  instead go to a commercial bank that understands business’s risks and can help analyze your firm’s future financial needs  if borrow from fam & friends. Both parties: 1) agree on specific loan terms 2) put the agreement in writing 3) arrange for repayment in the same way they would for a bank loan Commercial Banks and Other Financial Institutions  wise to see banker periodically and continuously send them financial statements and other required info so bank keeps supplying funds when needed Different Forms of Short-Term Loans  banks and other financial institutions offer different types of loans to customers  secured loan o a loan backend by something valuable (property) o the item of value is call collateral o if the buyer fails to pay the loan, the lender may take possession of the collateral  accounts receivable are assets that are often used by businesses as collateral for loan  pledging o some % of the value of AR pledged is advances to the borrowing form o as customers pay off their accounts, the funds are forwarded to the lender in repayment of the funds that were advanced  unsecured loan o a loan that’s not backed by specific assets o most difficult kind od loan to get from bank o only given to highly regarded customers  if a business develops good relation with a bank, male open a line of credit o a given amount of unsecured funds a bank will lend to a business o speed the borrowing process so that a firm does not have to go through the process of applying for a new loan every times funds are needed o as business mature, amount of credit is increased  revolving credit agreement  a line of credit that is guaranteed by the bank  if a firm is unable to secure a short-term fund from a bank  commercial finance companies o organization that make short0term loans to borrowers who offer tangible assets as collateral (plants, property, equipment) o charger higher interest rates than banks Factoring Accounts Receivable  factoring o process of selling AR for cash o expensive source for short0term funds  today internet helps businesses find factors quickly so that they can solicit bids on a firm’s AR promptly  how it works: o firms sells many products on credits 
More Less

Related notes for COMMERCE 1E03

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.