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Chapter 10

Chapter 10 Notes

Management (MGT)
Course Code
Janelle Leboutillier

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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
oFour 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
Accounts receivable: funds due from customers who have bought on credit
oCredit 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
oEx. 2/10, 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 can’t be spent elsewhere, too little means potential sales are lost)
oRaw 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)
oWork-in-process inventory: that portion of a firms inventory consisting of goods
partway through the production process (ex. Cut out but not sewn jeans)
oFinished 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)
oWorking capital = inventories + accounts receivable (- accounts payable)
oUsually 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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