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financial management notes.docx

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Dave Swanston

Financial Management Notes • Finance: function in a business that acquires funds for firm and manages those funds within firm and manages those funds within the firm • Financial Management: job of managing a firm’s resources so it can meet its goal and objectives • Financial Managers: managers who make recommendations to top executives regarding strategies for improving the financial strength of a firm • Financial Planning: key responsibility of financial manager in a business o Forecasting both short term and long term financial needs o Forecasting Financial Needs • Short Term Forecast: predicts revenues, costs, and expenses for a period of one year or less • Cash flow forecast: forecast that predicts the cash inflows and outflows in future periods, usually months or quarters • Long Term Forecast: predicts revenues, costs, expenses for a period longer than one year, and sometimes as far as 5 or 10 years into future • Budget: financial plan sets forth management’s expectations and on basis of those expectations, allocates use of specific resources throughout firm Types of Budgets Established in Firm’s Financial Plan • Operating Budget: budget that ties together all of a firm’s other budgets; it = projection of dollar allocations to various costs and expenses needed to run or operate the business, given projected revenues • Capital Budget: budget highlights firm’s spending plans for major asset purchases that often require large sums of money • Cash Budget: budget that estimates a firm’s projected cash inflows and outflows that the firm can use to plan for any cash shortages or surplus during a given period. Establishing Financial Controls • Financial Control: process in which a firm periodically compares its actual revenues, costs and expenses with its projected ones Need for Funds • Capital needs increase for various reasons like managing day to day needs of business, controlling credit operations, acquiring needed inventory, making capital expenditures(investments in tangible long term assets such as land, buildings, etc) Alternative Sources of Funds • Debt Financing: funds raised through various forms of borrowing that must be repaid Financial Management Notes • Equity Financing: funds raised from operations within firm or through sale of ownership in firm • Short term financing: borrowed funds that are needed for one year or less • Long term financing: borrowed funds that are needed for a period longer than one year Trade Credit • Trade credit: practice buying g/s now and paying for then later • Promissory Note: written contract with a promise to pay Different Forms of Short Term Loans • Secured Loan: loan backed by something valuable, such as property • Unsecured Loan: loan that’s not backed by any specific assets • Line of Credit: given amt of unsecured funds a bank will lend to a business • Revolving Credit Agreement: line of credit that is guaranteed by bank • Commercial Finance Companies: organizations that make short term loans to borrowers who offer tangible assets as collateral Factoring Accounts Receivable Factoring: process of selling accounts receivable for cash Commercial Paper Commercial Paper: unsecured promissory notes of $100,000 and up that mature in 365 days or less Obtaining Long Term Financing Ask 3 major questions 1. What are organization’s long term goals and objectives 2. What are financial requirements needed to achieve these long term goals and objectives 3. What sources of long term capital are available and which will best fit our needs Debt Financing Debt Financing Borrowing Money from Lending Institutions • Term loan agreement: promissory note that requires the borrower to repay loan in specified instalments • Risk/Return trade of
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