Textbook Notes (362,842)
Canada (158,078)
MGTA02H3 (361)
Chapter 10

Chapter 10

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University of Toronto Scarborough
Management (MGT)
Chris Bovaird

Chapter 10: Financial Decisions The Role of the Financial Manager Terms:  Financial managers: those 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 necessary to pay for those investments. Finance typically involves:  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 firm takes. Objectives of the Financial Manager:  Financial managers do the following:  Collect funds  Pay debts  Establish trade credit  Obtain loans  Control cash balances  Plan for future financial needs  The financial manager’s overall objective is to increase a firm’s value – thus stockholder’s wealth.  In all words, financial managers must ensure that a company’s earnings exceed its costs – in other words, that it makes a profit.  In sole proprietorships and partnerships, profits represent an increase in the owner’s wealth.  In a corporation, profits translate into an increase in the value of common stock. Responsibilities of the 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.  Financial control: the process of checking actual performance against plans to ensure that the desired financial status is achieved.  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. Why do Business need Funds? Short-term (operating) Expenditures:  Accounts payable: unpaid bills owed to suppliers plus wages and taxes due within the next year.  Accounts receivable: consists of funds due from customers who have bought on credit.  Credit policy: rules governing a firm’s extension of credit from customers. Inventories:  Inventory: materials and goods currently held by the company that will be sold within the year.  Raw materials inventory: that portion of a firm’s inventory consisting of basic supplies used to manufacture products for sale.  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.  It is a liquid asset out of which current debts can be paid.  A company calculates its working capital by adding up the following:  Inventories – raw materials, working in process and finished goods on hands  Accounts receivable (minus accounts payable)  The benefits of reducing sums in working capital are:  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.  The second advantage results from the fact that money costs money (in interest payments and the like).  Reducing working capital, therefore, means saving money. Long-term (capital) expenditures:  Long term expenditures are usually more carefully planned out than short term outlays because they pose special problems.  They differ from short-term outlays in the following ways, all of which influence the ways that long-term outlays are funded:  Unlike inventories and other short-term assets, they are not normally sold or converted into cash.  They represent a binding commitment of company funds that continues long into the future. So
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