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Chapter 10

BUS 101 Chapter 10: BUS101 Chapter 10 Notes

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BUS 101
John Caslione

BUS 101 Study Guide Exam 3 Chapter 10: Financial Management: Work within organizations of all types, including forprofit, nonprofit and governmental entities. Their role is to manage the organizations financial resources Financial Institutions: Firms that specialize in financial products EX: Banking, Insurance, and Leasing Investments and Securities: This area of finance encompasses careers related to the securities market (i.e. stocks and bonds) and the investment activities of individuals, firms and other organizations. Financial professionals working in the investment field could be investment advisors, stockbrokers and securities analysts Risk vs. Return: Investors and lenders usually demand higher earnings or a higher interest rate to be compensated for incurring additional risk The riskier a decision, the higher possible return if all goes well Time value of money: Individuals usually prefer to have good things sooner and prefer to put off bad things until later EX: Investors demand a premium in exchange for waiting to get their money later, and borrowers are willing to pay an additional amount to postpone making the payment until later Cash Flow: Financial managers recognize that cash pays the bills, not profits. While a given transaction may generate positive profits, the timing of cash inflows and outflows may be such that the bills need to be paid before the sales revenue has been collected from customers. Asset Valuation: The value of an asset in an organization is its ability to generate positive cash flow over time Diversification: The probability of one thing going wrong on any one day is higher than the probability of everything going wrong on that day Rather than investing everything in one company or one industry, financial professionals have shown that spreading your funds across a variety of investment opportunities can earn higher returns in the long run because the risk is diversified The Financial Planning Process: Forecasts: Prediction of the upcoming financial needs of the firm Budgets: A roadmap to guide the activities of the firm Prepared to demonstrate how the firm plans to allocate its financial assets to achieve the forecasted goals Reflects the financial managers solutions to any predicted cash flow shortfalls that were identified during the forecasting process Controls:
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