BAM101 Chapter Notes - Chapter 11: Dbrs, Corporate Bond, Making Money
Finance, Securities, and Risk Management
Introduction
In today’s competitive markets, effective financial planning is critical.
Ensuring that funds are available for both short-term and long-term needs is a key function of the
finance department.
We’ll explore the various options that must be weighed and optimized to help a company achieve
success in the markets in which they operate.
Our discussion will also include an overview of the securities markets and we’ll conclude with a look at
risk management.
As you begin this module, please refer to the timeline and make note of any assessments or important
dates. If you have any questions, ask your instructor.
Modes of Learning
For this module, the following modes of learning will be used:
• Online Readings
• Textbook Readings
• Self-Quizzes
• Media
• Narrated Experience
Learning Outcomes
By the end of this module you will be able to:
1. Identify the various responsibilities of a finance department
2. Discuss the importance of properly managing inventory
3. Identify and discuss short-term sources of funds
4. Contrast two forms of debt-financing with equity financing
5. Discuss what should be considered when determining the form of long-term financing to be
used
6. Contrast mutual funds with exchange-traded funds
7. Discuss the key areas that must be evaluated and dealt with in an effective risk management
plan
Key Terms and Concepts
Listed below are some important key terms and concepts within this module.
• Finance
• Cash-flow management
• Financial planning
• Short-term funds
• Long-term funds
• Bonds
• Equity financing
• Securities
• Stock exchange
• Mutual funds
• Exchange-traded funds
• Risk management
Finance: Obtaining & Managing Funds for the Firm
The finance department plays a key role in the success of a business.
This department often looks after the following:
• Plans the long-term investments and determines how they will be funded
• Ensures that bills are paid on time
• Collects funds that are owed
• Sets up facilities for both short-term and long-term borrowing
• Ensures that the firm has enough cash to meet its obligations
• Sets budgets and ensures that they are adhered to
• Manages risks within a defined framework
Why Cash Flow Management Is Important
Ensuring that the right amount of cash is available when needed is a key function of the finance
department.
If a cash shortage is projected for a particular month, the company will likely use short-term borrowing
to meet its need.
On the other hand, if excess cash is available, the finance department will invest it on a short-term basis
to generate interest income.
Simply having cash sitting idle in an account is not prudent nor effective.
What Do the Numbers Say?
It is important that financial managers closely monitor the various financial numbers that the firm
generates.
Actual results are compared to projected (budgeted) numbers to see where changes may need to be
made.
If a company has experienced a 10% increase in expenses but sales are down 1%, the financial manager
must explore the reason(s) for this.
This constant vigilance is needed to help a company stay on budget and to understand where changes
may need to be made to reflect the current economic climate.
Planning for the Future
Recall in Managing for Success, we asked “Where are we headed and how will we get there?”
The financial plan provides the roadmap from a financing perspective of how the firm’s strategic goals
will be achieved.
Adjustments will be made along the way; however, this plan lays the foundation for the company’s
future success.
What May Happen If…
1. A firm regularly pays its bills late?
2. A firm is inefficient at collecting overdue payments?
In the first scenario, the firm may build a very poor credit record which can affect their operations in a
number of ways:
• Some firms may not wish to do business with them due to the credit risk
• Other firms may only sell them goods “cash-on-demand” meaning that payment in full is
required at the time of purchase (perhaps a certified cheque may be required which adds to the
company’s expenses)
• If a firm offers credit terms, they may be very restrictive
In the second scenario, the company who is inefficient at collecting overdue funds may experience a
cash shortage. This may result in the company borrowing short-term funds to meet its own cash
obligations which impacts the bottom-line.
A proper accounts payable and accounts receivable structure and execution is required to keep the
funds flowing in a positive manner.
Properly Managing Inventory
Although past sales patterns can be used to try to project future inventory needs, a costly misjudgment
can be a big financial blow to a firm.
In the production process, raw materials (inventory) are needed. Goods that are in production are
known as work-in process inventory. The final products that are ready to be shipped and sold are
known as finished-goods inventory.
If too much raw material is purchased and the demand for the product is much lower than anticipated,
the company will have incurred great expense but not generated an adequate return (via sales revenue).
If on the other hand not enough product is produced, the company loses sales which often will go to a
competitor(s).
Companies must constantly evaluate their inventory needs and produce accordingly.
