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Chapter 5-8

COMM101 Chapter Notes - Chapter 5-8: Greenwashing, Cellular Manufacturing, Investment


Department
Commerce
Course Code
COMM101
Professor
Leanne Hagarty
Chapter
5-8

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BU121 Chapter 5-8 Notes
Finance
Textbook
Chapter 5
Role of Finance and financial manager
o Financial management - art/science of managing a company’s money to meet goals
o A financial manager uses financial statements and other information prepared by accountants to
make financial decisions
They focus on cash flows, and plan and monitor the company’s cash flows to ensure that
cash is available when needed
o Key activities of a financial manager
Financial planning - preparing the financial plan (project revenues, expenditures and
financing needs over a given period
Investment (spending money) - investing funds into projects and securities that provide
high returns to their risks
Financing (raising money) - obtaining funding and seeking the best balance between
debt and equity
o Main goal is to maximize value of company to owners
Financial manager has to consider long and short term results of actions
Short term gain is associated with forgoing long term benefit (could be
detrimental to company)
o Opportunity for profit - return
o Potential for loss - risk
Higher the risk, higher the return (risk-return tradeoff)
o Financial managers needs to consider these factors, which include changing patterns of market
demand, interest rates, general economic conditions, market conditions and social issues
(environmental effects and equal employment opportunity policies)
Financial Planning
o Financial plan - guides the business towards its goals and maximization of value
o To prepare a plan, the financial manager must consider: existing and proposed products,
resources available to produce them, and financing needed to support production and sales
Forecasts and budgets are also essential (should be part of the integrated planning
process that links strategic plans to performance measurement
o Forecasts - projections of future developments within the company
Short-term forecasts - projects revenues, cost of goods, and operating expenses over a
one-year period.
Form the basis for cash budgets
Long-term forecasts - cover a period longer than a year (2-10 years)
Management can assess financial effects of various business strategies
Shows where funding for these activities is expected to come from
Lenders ask borrowers for forecasts that cover the length of the loan, then they
evaluate the risk of the loan and see if they have adequate cash flow to pay off the debt
They then structure the loan terms and covenants based on those statements
o Budgets
Formal written forecasts of revenues/expenses that set spending limits based on short
term forecasts
Used to compare against actual revenues and expenses, determine whether
management needs to alter operations if there is a difference between the two
Several types of budgets include:
Cash Budgets
Cash inflows/outflows and helps company plan for shortages/surpluses
Capital Budgets

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Forecasts purchases for fixed assets and covers a period of several years to
ensure that the company will have enough funds to buy assets it needs
Operating Budgets
Combine sales forecasts with estimates of production costs and operating
expenses to forecast profits
How organizations use funds - short term expenses, and obtain funds - short and long term - debt and
equity
o Short term expenses
Outlays used to support current selling and production activities.
Cash management - making sure enough cash is on hand to pay bills as needed
Companies keep a minimum cash balance to cover any unexpected expenses or changes
in projected cash flows
Financial manager arranges loans to cover shortfalls
If cash inflows can be predicted, then company does not need to keep such a large
minimum cash balance but if seasonal, then they do
Financial manager wants to invest surpluses in short term investments (low risk, high
return) such as T-bills, certificates of deposits and commercial paper
International companies also face many challenges, which include:
Dealing with foreign currency, different practices/regulations and regulations
when moving money across borders (financial managers must be aware of local
customs and adapt centralization strategies accordingly)
Financial manager also wants to shorten time between purchase of inventory and
collection of cash (outflows vs inflow)
Three strategies include: collecting money owed by customers asap, paying
suppliers as late as possible without damaging reputation, and turn inventory
quickly to minimize funds tied in it.
Managing A/R is also beneficial
Can do this by setting credit policies and credit terms to ensure customers pay
on time, and collection policies which outline the procedure of collecting
overdue accounts
Inventory
About 20% of total assets in a typical manufacturing company
Different managers have different aims for inventory levels
o Long-term expenditures
Capital expenditures - investing in fixed assets that provide benefits over a year
Mostly done to replace older fixed assets or develop new products
Capital budgeting - process of analyzing long-term projects and selecting the one that
provides the best returns and max value
o Obtaining short-term funds
Unsecured loans - do not have to pledge assets as security
Three main types:
Trade credit (A/P) - seller extends credit to buyer so buyer doesn’t have to pay
now (time is between purchase date and date of when they pay)
Bank loans - often used to finance seasonal businesses. Includes lines of credit
(agreement between bank and borrower that specifies max amount of short
term borrowing the bank will make available to them) and revolving credit
agreement (allows borrower to borrow up to max amount allowed then no
more until they pay it off)
Commercial paper - IOU from a financially strong corporation. Used since the
interest rates are lower than bank rates

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Secured short-term loans - borrower has to pledge collateral as security and the lender
has the right to take it if borrower doesn’t pay (they like to take inventory - tends to be
liquid)
Factoring - selling off A/R accounts at a discount to a factor company (don’t have to
worry about collections and bad debts, since factor company assumes all risk and
collection)
o Debt vs. equity financing
Debt
Assumes financial risk - chance company cannot make the payments
6 C’s of Credit to determine risk of borrower defaulting
o Character - past history of borrower to repay loan
o Capacity - ability to pay back
o Capital - amount of money borrower has access to
o Collateral - pledge of specific assets by borrower
o Conditions - issues that affect businesses (economics, competition)
o Confidence - borrower assures loan will be repaid
Equity
Permanent form of financing, don’t have to make interest/loan payments, but
gives shareholders a right to vote in management decisions
Balance is key
Long-term debt financing
Term loan - loan with maturity date >1 year, must be repaid with regular
payments that cover interest and principle
Bonds - long term debt, usually issued in multiples of 1k, maturities of 10-30
years, coupon rate - percentage of bond’s par value paid as interest
Mortgage loan - loan with real estate as collateral
Equity financing
New issues of common shares - securities that represent an ownership interest
in a corporation, first sale is an IPO - which are risky and expensive
Dividends and retained earnings - payments to shareholders from corp profits,
can come in the form of share dividends (paying in shares instead of cash),
dividends are an indicator of the health of a company, retained earnings -
profits reinvested into the company
Preferred shares - regular dividends outlined when shares are issued, more
important compared to common shares
Venture Capital - mostly used by new/growing companies, venture capitalists
look for companies with high potential and possible high returns for investment
- done by buying shares at low price, then selling them at high price when
company become successful - may also direct the company through a seat on
the board of directors
Future/trends
o Expanding role of the CFO - after the financial crisis, they are more visible and active in company
management. They serve as a partner and fiduciary of the board. They need to have a broad view
of company operations to communicate with other members, and they are also key players
relating to IT, HR, and supply chain. They must have interpersonal skills and be team players to
motivate employees and work with them in other functional areas
o Enterprise risk management - approach to identifying, monitoring, managing elements of a
company’s risk. Company wide effort to try and eliminate risk that causes financial loss. Credit
risk includes loss as a result of a credit quality decline of the debt issuer. Market risk includes loss
affiliated with negative movements in the market prices of securities, commodities and
currencies. Operational risk is risk of unexpected losses from deficiencies in management info
and procedures
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