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Canada (162,457)
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Chapter 14

Chapter 14 - Textbook Notes.pdf

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Rita Cossa

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Commerce 1E03 Chapter 14 Textbook Notes The Role of Finance and Financial Managers Finance: function in business that acquires funds for the firm and manages those funds within the firm Financial Management: job of managing firms resources so it can meet its goals objectives Financial Managers: mangers who make recommendation to top executives regarding strategies for improving the financial strength of a firm Financial managers can make sound financial decisions only if they understand accounting information (and viceversa) In large and medium sized organizations, accounting and finance function under the control of CFO or VP of finance effectively Key responsibility of financial managers: obtain money and control use of it Responsibility of Financial Managers: o AP and AR o Paying companys bills and collecting overdue AR 3 common ways for firm to fail financially: o Undercapitalization o Poor control over cash flow o Inadequate expense control Financial managers have become more involved in tax management, and must keep abreast of changes in tax law Another responsibility of finance dept. is internal audit, checks on ledgers, journal and financial statements prepared by accounting dept. o Purpose of internal audit: safeguard assets including cash Financial Planning Financial planning is key responsibility of financial manager Objective: optimize firms profitability and make best use of its money Involves 3 steps: o Forecasting both shortterm and longterm financial needs o Developing budgets to meet those needs o Establishing financial control to see how well the company is doing what it set out to do Forecasting Financial Needs: Shortterm forecast: predicts revenues, costs, and expenses for a period of 1 year or less o Accuracy of this is critical o Cashflow forecast: predicts cash inflows and outflows in future periods, usually months or quarters Based on expected sales revenues and on various costs and expenses incurred Page 1 of 11 Commercee 1E03 oongterm foreecast: predictts revenues, ccosts and exppenses for a pperiod longer than 1 year L (ssometimes 510 years) ss longterm sttrategic plannning o Crucial in company eerm projections assist finanncial manageers with prepaaration of commpany budgeets o Longt wwith Budget Process: Working Boorth managemments expectations, and, on basis of thhese expectations, allocat udget: sets f es sse of specific resources thee firm uroughout th and financia l eaal plan; primaffirms financiaal operations o Budgt is a financiry guide for needs h nnancial statemments for budgeting: balaance sheet, inncome statemment, and cas o Key fi flow sttatement OOperating (maaster) budgett: ties togetheer all of a firmms other budggets; it is the ff projection o dollar allocatioons to variouss costs and exxpenses needded to run or bbusiness, giveen operate the rojected reveenues p o Most ddetailed and mmost used buudget; preparred on monthhly basis for thhe year o Firms BOD responssible for apprroving all budgets aapital budgett: highlights aa firms spendding plans forr major asset (PPE) purchann ses that ofte C reequire large ssums of moneey Caash budget: eestimates a fieed cash inflowws and outfloirm can use t rms project ws that the fo plan for any caash shortagess or surplusess during a giveen period o Assist managers in anticipating bborrowing, deebt payment,, operating exxpenses and sshort term i nvestments o Identi ffy projected increase or deecrease in cassh for the moonth, and alsoo maintain minimaance (safety leevel) um cash bal Paage 2 of 11
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