• 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
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
o Idle 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
• Accounts Receivable: funds due from customers who have bought on credit,
tie up funds.
o 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. 3 types of inventories:
o Raw materials
o Work-in-process: partway through production process
o Finished 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
o Open-book credit: seller ships without a formal agreement
o Promissory notes: before merchandise is shipped, buyer signs legal
binding to pay
o Trade draft: buyer signs trade acceptance to take acceptance of the
• Secured Short-Term Loans differ in terms of what the nature of the collateral
o Inventory Loans: Inventory is more valuable as collateral when it can
be readily converted into cash.
o Accounts 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)
‘ • Unsecured Short-term loans usually require that the borrower maintain a
‘compensating balance’ (keeping a portion of the loan with the lender in a
o Line of credit: borrow can draw money up to a maximum amount.
o Revolving Credit Agreements: line of credit in which the borrower pays
interest on the fluctuating line of credit, plus a fee for extending the
credit (commitment fee).
o Commercial paper: unsecured notes sold for