RSM100Y1 Chapter 20: CHAPTER 20-Financial Decisions and Risk Management
CHAPTER
20:
FINANCIAL DECISIONS
AND
RISK
MANAGEMENT
Role of the
financial manager
- production
manager
must plan and control output of goods and services;
marketing manager
must plan and control
development
and
marketing
of products
-
financial managers
plan and control the
financial resources
of a firm; it
oversees
the
acquisition
and
spiral
of
the firm¶s assets
-
Finance involves: determined
a firm¶s long term
investments, obtaining
funds to pay for the investments,
conducting the firm¶s
everyday financial activities, helping
to
manage
the risks that the firm takes
Objectives of the
financial manager
- collect funds, pay debts,
establish
trade credit, obtain
loans,
control
cash
balances
and plan for future
financial needs. Overall
goal is to
increase
a ILUPV¶
value,
and thus the
stockholder¶s wealth
- make
decisions
for
improving financial
status of a firm
- Must
ensure
that firm¶s
earnings
exceed costs to earn a profit
-
Sole proprietorships
and
partnerships,
profit => owner¶s wealth; corporation, profit =>
increase
in
value
of
common stock
Responsibilities of the
financial manager
- 3 categories:
1) Cash flow
management
- FM must
ensure
that a firm has enough funds on hand to
purchase
materials
and the HR that it needs to produce goods and services
-
involves overseeing
how cash flows into the firm in the form of revenues and to in the form of debt
payments
2)
financial
control - FM must be prepared to make
adjustments
for actual
financial changes
that occur each
day.
-
financial
control is the process of checking actual
performance against
plans to
ensure
that the desired
financial
status is achieved
- Must monitor revenue
inflows
and make
appropriate
adjustments
- Budgets are
crucial, provides
a
means
to how
performance
is measured
3)
Financial planning
- must
have
a
financial
plan - a description of how a
business
will reach a financial
position that it
seeks
for the future. Must address the amount of funds that the company needs to meet
immediate
plans, when it will need more funds, where it can get the funds to meet short term and long
term needs
- FM must be able to
understand
why firm needs funds
- Must
assess relative
costs and
benefits
of
potential
funding sources
Why do
businesses
need funds? 2 types of
financial
outlays:
www.notesolution.com
1) Short
Term (operating)
expenditures:
-
every
day
business
actives.
- FM must pay
attention
to:
A)
accounts
payable
- the unpaid
bills
owed to
suppliers
plus wages and taxes due within the upcoming year
-
financial managers
need to know in
advance
the A/P as well as when they need to be paid.
This
requires
coordination
with other managers
B) accounts receivables - the funds due from customers who bought on credit
- need to know how much credit is
advanced
to
buyers
and when they will make payments
CREDIT POLICIES:
need to
have rules
governing a firm¶s
extension
of credit to customers.
There
are
standards as to which
buyers
are
eligible
for credit and for what type of credit.
INVENTORIES:
the
materials
and goods
currently
held by the company that will be sold within a
year.
If you
don¶t
have
enough
inventory,
you can¶t make
sales.
Too much
inventory means money
that could
have
been
used
elsewhere. Types
of
inventories includes
raw
materials (basic supplies
needed to
manufacture
products
for
sales),
work in process
(goods
that are partway through the production
process), finished
goods inventory
(completed
goods
ready
for sale)
C) Working Capital
- the
difference
between a firm¶s current
assets
and current liabilities.
-
liquid
asset out of which current debts can be paid off
- Need to add up the
inventories
and the accounts receivables
(minus
a/p)
Long
Term (capital) expenditures
- long term
expenditures
are
carefully planned because
they are not
normally
sold or
converted
to cash, their
acquisition requires
a
large investment,
they
represent
a binding
commitment of company funds long into the future
Sources of Short
Term Funds
- the sources to get funds for
daily/short
term operations
Trade Credit - a short term loan, the
granting
of credit by a
selling
firm to a
buying
firm
- open book credit =
sellers
ship merchandise on faith that
payment
is coming
-
Promissory
notes -
legal
binding note that by law
obligates
them to pay
-
Trade
draft -
buyers
must sign
statements
of
payment
terms attached to merchants
-
Trade
acceptance - once the trade draft is
signed
by the buyer, it becomes accepted
Secured short term
loans
- bank
loans usually require promissory
note where the buyer has to pay back the
initial
amount plus interest.
- secured
loans
- banks
require
the borrower to put up a
collateral
- an asset that te
lender
has the right to
take over if the borrower doesn¶t pay the loan
- Lower
interest
rates
INVENTORY LOANS: inventory
is a
collateral
asset. It is more
valuable
if the
inventory
is
readily convertible
to
cash
A/R AS
COLLATERAL:
the process of using a/r as a
collateral
is
called pledging
accounts
receivables.
If the
borrower can¶t pay, the
lender
takes over the funds that the customers of the borrower owe the firm
- if the
assets
aren¶t enough to cover the loan, the borrower must make up the difference
- For
service companies
that don¶t
have
an
substantial inventory,
this is their main source of collateral
Factoring A/R - a way for a firm to
raise
funds =
factoring
=
selling
the firm¶s a/r
- the
financial institution
is the factor
Unsecured short term
loans
- borrower is not
required
to put up a
collateral
. Bank does
require
the borrower
to
maintina
a
compensating balance
- a portion of the loan amount on deposit with the bank in a non interest
bearing
account
-
different
types of
unsecured
loans:
www.notesolution.com
Document Summary
Role of the financial manager - production manager must plan and control output of goods and services; marketing manager must plan and control development and marketing of products. Financial managers plan and control the financial resources of a firm; it oversees the acquisition and spiral of the firms assets. Finance involves: determined a firms long term investments, obtaining funds to pay for the investments, conducting the firms everyday financial activities, helping to manage the risks that the firm takes. Objectives of the financial manager - collect funds, pay debts, establish trade credit, obtain loans, control cash balances and plan for future financial needs. Overall goal is to increase a 1728 value, and thus the stockholders wealth. Make decisions for improving financial status of a firm. Must ensure that firms earnings exceed costs to earn a profit. Sole proprietorships and partnerships, profit => owners wealth; corporation, profit => increase in value of common stock.
