MGMT 1 Chapter 18: MGMT 1—Chapter 18

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Grace Mc Laughlin

MGMT 1—Chapter 18: Financial Management • The Role of Finance and Financial Managers: o Finance: The function in a business that acquires funds for the firm and manages those funds within the firm o Finance activities include preparing budgets; doing cash flow analysis; and planning for the expenditure of funds on such assets as plant, equipment, and machinery o Financial management: The job of managing a firm’s resources so it can meet its goals and objectives o Financial managers: Managers who examine financial data prepared by accountants and recommend strategies for improving the financial performance of the firm o o The Value of Understanding Finance: ▪ Three of the most common reasons a firm fails financially: • Undercapitalization (insufficient funds to start the business) • Poor control over cash flow • Inadequate expense control o What is Financial Management? ▪ Financial managers are responsible for paying the company’s bills at the appropriate time, and for collecting overdue payments to make sure the company does not lose too much money to bad debts ▪ Finance functions such as buying merchandise on credit (account payable) and collecting payment from customers (account receivable) are key components of the financial manager’s job ▪ It’s also essential that financial managers stay abreast of changes or opportunities in finance, such as changes in tax laws. • Financial Planning: o Financial planning means analyzing short-term and long-term money flows to and from the firm; its overall objective is to optimize the firm’s profitability and make the best use of its money o Three steps of financial planning: ▪ Forecasting the firm’s short-term and long-term financial needs ▪ Developing budgets to meet those needs ▪ Establishing financial controls to see whether the company is achieving its goals o Forecasting Financial Needs: 2 ▪ Short-term forecast: Forecast that predicts revenues, costs and expenses for a period of one year or less ▪ Cash flow forecast: Forecast that predicts the cash inflows and outflows in the future periods, usually months or quarters ▪ Long-term forecast: Forecast that predicts revenues, costs, and expenses for a period longer than 1 year, and sometimes as far as 5 or 10 years into the future ▪ The long-term financial forecast gives top management as well as operations managers, some sense of the income or profit potential of different strategic plans o Working with the Budget Process: ▪ Budget: A financial plan that sets forth management’s expectations, and, on the basis of those expectations, allocates the use of specific resources throughout the firm ▪ Capital budget: A budget that highlights a firm’s spending plans for major assets purchases that often require large sums of money ▪ Cash budget: A budget that estimates cash inflows and outflows during a particular period like a month or a quarter ▪ Operating (master) budget: The budget that ties together the firm’s other budgets and summarize its proposed financial activities o Establishing Financial Controls: ▪ Financial control: A process in which a firm periodically compares its actual revenues, costs, and expense with its budget • The Need For Operating Funds: o The capital needs of a business change over time 3 o Managing Day-by-Day Needs of the Business: ▪ Funds have to be available to meet the daily operational costs of the business ▪ Financial managers must ensure that funds are available to meet daily cash needs without compromising the firm’s opportunities to invest money for its future ▪ Money has a time value o Controlling Credit Operations: ▪ The problem with selling on credit is that as much as 25 percent of the business’s assets could be tied up in its credit accounts (accounts receivable) ▪ One convenient way to decrease the time and expense of collecting accounts receivable is to accept bank credit cards o Acquiring Needed Inventory: ▪ A carefully constructed inventory policy helps manage the firm’s available funds and maximize profitability ▪ Just-in-time inventory control and other such methods can reduce the funds a firm must tie up in inventory o Making Capital Expenditures: ▪ Capital expenditures: Major investments in either tangible long-term assets such as land, buildings, and equipment or intangible assets such as patents, trademarks, and copyrights o Alternative Sources of Funds: ▪ Debt financing: Funds raised through various forms of borrowing that must be repaid 4 ▪ Equity financing: Money raised from within the firm, fro
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