Chapter 15.docx - Chapter 15: Financial Decisions and Risk...

Chapter 15: Financial Decisions and Risk Management
LO-1: the role of the financial manager
 Financial managers plan and control the acquisition and dispersal of the company’s financial
assets
 Finance: the business function involving decisions about a firm’s long-term investments and
obtaining the funds to pay for those investments
o 4 responsibilities
 Determining a firm’s long-term investments
 Obtaining funds to pay for those investments
 Conducting the firm’s everyday financial activities
 Managing the risks that the firm takes
 Objectives of the financial manager
o Objective is to increase a firm’s value and stockholders’ wealth  collect funds, pay debt,
establish trade credit, obtain loans, control cash balances, and plan for future financial
needs
 Responsibilities of the financial manager
o 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 payment
 By putting idle cash to work, firms gain additional investment income
o Financial control: the process of checking actual performance against plans to ensure
that the desired financial status is achieved
o Financial planning: a description of how a business will reach some financial position it
seeks for the future; includes projections for sources and uses of funds
 What funds are needed to meet immediate plans? When will the firm need
more funds? Where can the firm get the funds to meet both its short- and its
long-term needs?
LO-2:
why businesses need funds
 Short-term (operating) expenditures
o Accounts payable
o Accounts receivable
 Credit policy: the rules governing a firm’s extension of credit to customers
o Inventory: materials and goods currently held by the company that will be sold within
the year
 Raw-materials inventory: firm buys to use in its production process
 Work-in-process inventory: consist of goods partway through the production
process
 Finished-goods inventory: refers to items that are ready for sale
 Long-term (capital) expenditures
o More carefully planned out than short-term outlays. Their acquisition requires a very
large investment (cover fixed assets)
LO-3: sources of short-term funds

- Firms can call on many sources of funds they need to finance day to day
operations and to implement short-term plans
 Trade credit: the granting of credit by a selling firm to a buying firm
o Open-book credit: buyers receive merchandise along with invoices stating credit terms.
Sellers ship products on faith that payment will be forthcoming (gentlemen’s agreement)
o Promissory notes: agreement states when and how money will be paid
o Trade draft: forms of credit in international transactions
 Secured short-term loans
o Secured loans: a short-term loan in which the borrower is required to put up collateral
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