MGTA02H3 Chapter Notes - Chapter 12: Capital Structure, Financial World, Revolving Credit
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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
- 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.
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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.
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