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Chapter 12

ch.12-Financial Decisions.pdf

6 Pages

Management (MGT)
Course Code
Chris Bovaird

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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 and services. - Marketing Managers must plan and control the development and marketing of the products. - 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 wealth. - 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 - 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 obligations. - Budgets are often the backbone of financial control. - Discrepancies indicate the need for financial adjustments so that resources are used to the best advantage. Financial Planning - 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. Inventories - Inventory: Materials and goods currently held by the company that will be sold within the year. - 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 - 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 cash flow.  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 machinery. 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 receivable. Trade Credit - 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
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