MGTA04-Introduction to Management II
Ch.12 Financial Decisions (pg.209-224)
The Role of the Financial Manager
- Production Managers are responsible for planning and controlling the output of goods
- Marketing Managers must plan and control the development and marketing of the
- Financial Managers: Managers responsible for planning and overseeing the financial
resources of a firm.
- Finance (Corporate Finance): The business function involving decisions about a firm’s
long-term investments and obtaining the funds to pay for those investments.
- Corporate Finance typically involves four responsibilities:
Determining a firm’s long term investments.
Obtaining funds to pay for those investments.
Conducting the firm’s everyday financial activities.
Helping to manage the risks that the firms take.
Objectives & Responsibilities of the Financial Manager
- Financial Managers collect funds, pay debts, establish trade credit, and obtain loans,
control cash balances and plan for future financial needs.
- Financial Manager’s objective is to increase the firm’s value, and thus stockholders
- In sole proprietorships and partnerships, profits translate directly into owner’s wealth,
and in corporations, profits translate into an increase in the value of common stock.
- Responsibilities of the Financial Managers falls into three categories: Cash Flow
Management, Financial Control & Financial Planning
Cash Flow Management
- To increase a firm’s value, financial managers must ensure that it always has enough
funds on hand to purchase the materials and human resources that it needs to produce
goods and services.
- 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.
- If excess cash balances are allowed to sit idle instead of being invested, the firm loses the
cash it could have earned.
- By locating idle cash and putting it to work, firms not only gain additional income, but
also can avoid having to borrow from outside sources. MGTA04-Introduction to Management II
- Financial Control: A process of checking actual performance against plans to ensure
that the desired financial status is achieved.
- Excessively high revenues could be deposited in short-term interest bearing accounts.
- Lower-than-expected revenues may necessitate short term borrowing to meet current debt
- Budgets are often the backbone of financial control.
- Discrepancies indicate the need for financial adjustments so that resources are used to the
- Financial Plan: A description of how a business will reach some financial position it
seeks for the future; includes projections for sources and uses of funds.
- In constructing the plan, a financial manager must ask several questions:
What amount of funds does the company need to meet intermediate plans?
When will it need more funds?
Where can it get the funds to meet both its short-term and its long term needs?
- Managers must also assess the relative costs and benefits of potential funding sources.
Why do Businesses Need Funds?
Short-Term (Operating) Expenditures
- To handle these expenditures, financial managers must pay attention to accounts payable,
accounts receivable, and to inventories.
- The Measures used by some firms in managing the funds known as the working capital.
Accounts Payable and Accounts Receivable
- Accounts Payable can be defined as the unpaid bills owed to the suppliers plus wages and
taxes due within the upcoming year.
- To plan for funding flows, financing managers wants to know in advance the amounts of
new accounts payable as well as when they must be repaid.
- Accounts Receivable consists of funds due from customers who have bought on credit.
- Accounts Receivables represent an investment in products in which a firm has not yet
received payment, as they temporarily tie up its funds.
- The seller wants to receive payment as quickly as possible.
- Credit Policy: Rules governing a firm’s extension of credit to customers.
- Inventory: Materials and goods currently held by the company that will be sold within
- Failure to manage inventory can have grave financial consequences. MGTA04-Introduction to Management II
- There are 3 types of inventories: raw materials, work-in-process, & finished goods.
- Raw Materials Inventory: That portion of a firm’s inventory consisting of basic
supplies used to manufacture product for sales.
- Work-in-process Inventory: That portion of a firm’s inventory consisting of goods
partway through the production process.
- Finished Goods Inventory: That portion of a firm’s inventory consisting of completed
goods ready for sale.
- Working Capital is the difference between a firm’s current assets and current liabilities.
- Also, it is a liquid asset out of which current debts can be paid.
- Company calculates its working capital by adding up the following:
Inventories (raw materials, work-in-process, & finished goods on hand)
Accounts Receivable (minus accounts payable)
- There are two important pluses:
Every dollar that is not tied up in working capital becomes a dollar of more useful
Reduction of working capital raises earnings permanently.
- Reducing working capital thus means saving money.
Long-Term (Capital) Expenditures
- Companies need funds cover long-term expenditures for fixed assets.
- Fixed Assets are items that have a lasting use or value, such as land, buildings, and
Sources of Short-Term Funds
- Firms can call on many sources for the funds they need to finance day-to-day operations
and to implement short-term plans.
- Sources include trade credit, secured & unsecured loans and factoring accounts
- Accounts payable are not merely expenditure.
- Trade Credit: The granting of a credit by a selling firm to a buying firm.
- Open-Book Credit: Form of trade credit in which sellers ship merchandise on faith that
payment will be forthcoming.
- Promissionary Note: Form of trade credit in which buyers sign promise-to-pay
agreements before merchandised by sellers.
- Trade Acceptance: Trade draft that has been signed by the buyer.
Secured Short-Term Loans
- Bank loans are a vital source of short-term funding.
- Secured Loans: A short-term loan in which the borrower is required to put up collateral.
- Collateral: Any asset that a lender has the