Chapter 10 Notes

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Management (MGT)
Janelle Leboutillier

Management Chapter 10: Financial Decisions The Role of the Financial Manager Financial managers: those managers responsible for planning and overseeing the financial resources of a firm Finance: the business function involving decisions about a firms long-term investments and obtaining the funds to pay for those investments o Four responsibilities: determining long-term investments; obtaining funds; conducting firms everyday financial activities; help manage risks Objectives of the Financial Manager To increase firms value (and stockholders wealth) by making decisions to improve status (in corporations, profits = increase in value of common stock) Responsibilities of Financial Manager Cash flow management: managing the pattern in which cash flows into the firm in the form of revenues and out of the firm in the form of debt payments (idle cash should be invested) Financial control: the process of checking actual performance against plans to ensure that the desired financial status is achieved (sales are unpredictable so financial adjustments may need to be made) < budgets provide measuring stick to evaluate performance Financial planning: a description of how a business will reach some financial position it seeks for the future; includes projections for sources and uses of funds Why Do Businesses Need Funds Failure to make contractually obliged payments can lead to bankruptcy Short-Term (Operating) Expenditures Accounts payable: unpaid bills owed to suppliers plus wages and taxes due within the upcoming year Accounts receivable: funds due from customers who have bought on credit o Credit policy: rules governing a firms extension of credit to customers (way of predicting payment schedules) < credit usually allowed to customers who have ability to pay, vice versa o Ex. 210, net 30 means that customers have 2% discount if they pay within 10 days, must pay full price within 30 days Inventory: materials and goods currently held by the company that will be sold within the year (too much means money cant be spent elsewhere, too little means potential sales are lost) o Raw materials inventory: that portion of a firms inventory consisting of basic supplies used to manufacture products for sale (ex. Levi Straus has rolls of denim) o Work-in-process inventory: that portion of a firms inventory consisting of goods partway through the production process (ex. Cut out but not sewn jeans) o Finished goods inventory: that portion of a firms inventory consisting of completed goods ready for sale (completed jeans) Working capital: difference between a firms current assets and current liabilities (liquid asset) o Working capital = inventories + accounts receivable (- accounts payable) o Usually is 20% of sales (working capital is not useful cash flow, less working capital raises earnings permanently) < less WC saves money Long Term Capital Expenditures Long term capital expenditures are not normally sold or converted to cash, acquisition requires large investment, represent a binding commitment of company funds that continues into the future, more carefully planned than short term expenditures Fixed assets: items that have a lasting use or value
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