Textbook Notes (381,081)
CA (168,341)
UTSC (19,304)
MGT (1,095)
MGTA02H3 (363)
Chapter 10

Chapter 10 Textbook Notes

7 Pages
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Department
Management (MGT)
Course Code
MGTA02H3
Professor
Chris Bovaird

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MGTA04 / 01
Chapter 10: Financial Decisions
- Financial mangers SODQDQGFRQWUROWKHDFTXLVLWLRQDQGGLVSHUVDORIWKHFRPSDQ\¶V
financial assets
- the business activity known as finance (or corporate finance) typically involves four
responsibilities: a) determining a ILUP¶VORQJ-term investments
b) obtaining funds to pay for those investments
FFRQGXFWLQJWKHILUVHYHU\GD\ILQDQFLDODFWLYLWLHV
d) helping to manage the risks that the firm takes
Objectives of the Financial Manager
- Financial managers collect funds, pay debts, establish trade credit, obtain loans, control
FDVKEDODQFHVDQGSODQIRUIXWXUHILQDQFLDOQHHGV2EMHFWLYHLVWRLQFUHDVHDILUP¶VYDOXH
- $FFRXQWDQWVFUHDWHGDWDWRUHIOHFWDILUP¶VILQDQFLDOVWDWXVDQGILQDQFLDOPDQDJHUVPDNH
decisions for improving that status
- 3URILWVWUDQVODWHVWRDQLQFUHDVHLQRZQHU¶VZHDOWK for sole proprietorships/partners; profits
translates to an increase in the value of common stock for corporations
Responsibilities of the Financial Manager
- Responsibilities RIWKHILQDQFLDOPDQDJHULQLQFUHDVLQJDILUP¶VZHDOWKIDOOLQWRWKUHH
general categories: cash flow management, financial control, and financial planning
Cash Flow Management
- 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
- Funds that are not needed immediately should be invested to earn more money for the firm
- Cash flow management is 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
- Firms are learning to put their idle funds/cash to work in order to gain additional income
and avoid having to borrow from outside sources (savings on interest payments)
Financial Control
- Financial control is the process of checking actual performance against plans to ensure
that the desired financial status is achieved
- E.g. planned revenues based on forecasts usually turn out to be higher or lower than actual
o Higher: cash can be deposited in short-term interest-bearing accounts or used to
pay off short-term debt
o Lower: may necessitate short-term borrowing to meet current debt obligations
Financial Planning
- A financial plan is a description of how a business will reach some financial position it
seeks for the future; includes projections for sources and uses of funds
- When constructing a plan, the financial manager must ask several questions:
o What amount of funds does the company need to meet immediate plans?
o When will it need more funds?
o Where can it get the funds to meet both its short-term and its long-term needs?
- The financial manager must develop a clear picture of why a firm needs funds
The Role of the Financial Manager (pg. 221 ± 223)
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MGTA04 / 02
- The financial manager must distinguish between two different kinds of financial outlays:
short-term (operating) expenditures and long-term (capital) expenditures
Short-Term (Operating) Expenditures
- Firms incurs short-term expenditures regularly in its everyday business activities
- Pays attention to accounts payable, accounts receivable, and to inventories
Accounts Payable
- Accounts payable are unpaid bills owed to suppliers plus wages and taxes due within the
upcoming year
- To plan for funding flows, financial managers want to know in advance the amounts of
new accounts payable as well as when they must be repaid
Accounts Receivable
- Accounts receivable consists of funds due from customers who have bought on credit
- A sound financial plan requires financial managers to project accurately both how much
credit is advanced to buyers and when they will make payments on their accounts
Credit Policies
- Predicting payment schedules is a function of credit policy UXOHVJRYHUQLQJDILUP¶V
extension of credit to customers)
- Typically, credit is extended to customers who have the ability to pay and who honour
their obligations, credit is denied to firms with poor payment histories
- Credit policy also sets payment terms (e.g. 2/10, net 30; selling company offers a 2%
discount if the customer pays within 10 days, customer has 30 days to pay regular price
- The higher the discount, the more incentive buyers have to pay early
Inventories
- Inventories are materials and goods currently held by the company that will be sold within
the year. While holding inventory, the firm ties up their funds in it
- Failure to manage inventory can have grave financial consequences
o Too little inventory: unable to make potential sales
o Too much inventory: ties up the firms funds which cannot be used elsewhere
- There are three basic types of inventories:
o Raw materials inventory ± SRUWLRQRIWKHILUP¶VLQYHQtory consisting of basic
supplies used to manufacture products for sale (e.g. Levi, huge rolls of denim)
o Work-in-process inventory ± SRUWLRQRIDILUP¶VLQYHQWRU\FRQVLVWLQJRIJRRGV
partway through the production process (e.g. cut-out but not-yet-sewn jeans)
o Finished goods inventory - SRUWLRQRIDILUP¶VLQYHQWRU\FRQVLVWLQJRIFRPSOHWHG
goods ready for sale (e.g. completed blue jeans ready for shipment to dealers)
Working Capital
- :RUNLQJFDSLWDOLVWKHGLIIHUHQFHEHWZHHQDILUP¶VFXUUHQWDVVHWVDQGFXUUHnt liabilities
- Company calculates working capital by adding up inventories (raw materials, work-in-
process, and finished goods) and accounts receivable (minus accounts payable)
- Large companies typically devote 20 cents of every sales dollar to working capital
- Benefit of reducing working capital:
o Every dollar that is not tied up in working capital becomes a dollar of useful cash flow
o Reduction in working capital raises earnings permanently
o Since borrowing money is costly, able reduce the amount of interest payment needed
Why Do Businesses Need Funds? (pg. 223 ± 224)
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Description
MGTA04 01 Chapter 10: Financial Decisions The Role of the Financial Manager (pg. 221 223) - Financial mangers 5O,3,3.43974O9K0,.6:L8L9L43,3L85078,O419K0.425,38 financial assets - the business activity known as finance (or corporate finance) typically involves four responsibilities: a) determining a 1L728O43J-term investments b) obtaining funds to pay for those investments . .43:.9L3J9K01L7280;07,1L3,3.L,O,.9L;L9L08 d) helping to manage the risks that the firm takes Objectives of the Financial Manager - Financial managers collect funds, pay debts, establish trade credit, obtain loans, control .,8K-,O,3.08,35O,31471:9:701L3,3.L,O3008 -M0.9L;0L894L3.70,80,1L728;,O:0 - ..4:39,398.70,90,9,94701O0.9,1L7281L3,3.L,O89,9:8,31L3,3.L,O2,3,J0782,N0 decisions for improving that status - !741L9897,38O,90894,3L3.70,80L34Z3078Z0,O9K for sole proprietorshipspartners; profits translates to an increase in the value of common stock for corporations Responsibilities of the Financial Manager - Responsibilities 419K01L3,3.L,O2,3,J07L3L3.70,8L3J,1L728Z0,O9K1,OOL3949K700 general categories: cash flow management, financial control, and financial planning Cash Flow Management - 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 - Funds that are not needed immediately should be invested to earn more money for the firm - Cash flow management is 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 - Firms are learning to put their idle fundscash to work in order to gain additional income and avoid having to borrow from outside sources (savings on interest payments) Financial Control - Financial control is the process of checking actual performance against plans to ensure that the desired financial status is achieved - E.g. planned revenues based on forecasts usually turn out to be higher or lower than actual o Higher: cash can be deposited in short-term interest-bearing accounts or used to pay off short-term debt o Lower: may necessitate short-term borrowing to meet current debt obligations Financial Planning - A financial plan is a description of how a business will reach some financial position it seeks for the future; includes projections for sources and uses of funds - When constructing a plan, the financial manager must ask several questions: o What amount of funds does the company need to meet immediate plans? o When will it need more funds? o Where can it get the funds to meet both its short-term and its long-term needs? - The financial manager must develop a clear picture of why a firm needs funds www.notesolution.com
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