HLTHAGE 4Z06 Chapter Notes - Chapter 10: Capital Structure, Prime Rate, Vivarium Inc.

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Published on 19 Apr 2013
School
McMaster University
Department
Health, Aging and Society
Course
HLTHAGE 4Z06
Professor
Chapter 10
Financial Managers oversee the financial resources of a firm, their objective is
to increase the firms’ value and thus shareholder’s wealth.
Finance (corporate finance) is the business function of making decisions
about a firm’s long term investments, how to pay for the them and managing
risks.
Responsibilities of Financial Managers (3 Major Ones)
Cash Flow Management: the pattern in which cash flows into and out of the
firm must be managed so that there is always enough cash on hand to seize
opportunity and operate
oIdle cash represent loss of potential profits
Financial Control: checking actual performance against plans, budgets are
the backbone of financial control.
Financial Planning: how a business will reach a financial goal in the future.
Short-Term (Operating) Expenses
Accounts Payable: unpaid bills owed to suppliers plus wages and taxes due
within the upcoming year. Largest single category of short-term debt for most
firms.
Accounts Receivable: funds due from customers who have bought on credit,
tie up funds.
oCredit policies control which buyers are eligible for which type of
credit.
Inventories: goods currently held that will sell thing the year. Too little results
in lost sales while too much inventory results in opportunity costs of tied up
cash. 3 types of inventories:
oRaw materials
oWork-in-process: partway through production process
oFinished goods
Working Capital: current assets minus current liabilities, 20% of sales income
is devoted to working capital by large companies, reducing it add to earnings.
Long-term capital expenses are not normally sold, require large investments,
and commit funds over a long period of time.
Sources of Short-Term Funds
Trade Credit: credit granted from selling firm to buying firm
oOpen-book credit: seller ships without a formal agreement
oPromissory notes: before merchandise is shipped, buyer signs legal
binding to pay
oTrade draft: buyer signs trade acceptance to take acceptance of the
shipped goods
Secured Short-Term Loans differ in terms of what the nature of the collateral
is:
oInventory Loans: Inventory is more valuable as collateral when it can
be readily converted into cash.
oAccounts Receivable as Collateral: called “pledging accounts
receivable,” important to service companies that do not maintain
inventories (e.g. a low office_
Factoring Accounts Receivable (is discussed in Ch.8)
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Document Summary

Financial managers oversee the financial resources of a firm, their objective is to increase the firms" value and thus shareholder"s wealth. Finance (corporate finance) is the business function of making decisions about a firm"s long term investments, how to pay for the them and managing risks. Financial control: checking actual performance against plans, budgets are the backbone of financial control. Financial planning: how a business will reach a financial goal in the future. Short-term (operating) expenses: accounts payable: unpaid bills owed to suppliers plus wages and taxes due within the upcoming year. Largest single category of short-term debt for most firms: accounts receivable: funds due from customers who have bought on credit, tie up funds. credit, credit policies control which buyers are eligible for which type of. Inventories: goods currently held that will sell thing the year. Too little results in lost sales while too much inventory results in opportunity costs of tied up cash.

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