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

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Chapter 15: Financial Decisions and Risk Management1. The Role of the Financial Manager-Responsibilities of financeoDetermining a firm’s long-term investmentsoObtaining funds to pay for those investmentsoConducting the firm’s everyday financial activitiesoManaging the risks that the firm takes-Overall objective of financial managers is to increase a firm’s value and stockholders’ wealthResponsibilities of the Financial Managera) Cash-Flow Management-Cash-Flow Management– Managing the pattern in which cash flows into the firm in the form ofrevenues and out the firm in the form of debt payments-Cash not at use = lost opportunity for interestb) Financial Control-Financial Control– The process of checking actual performance against plans to ensure that thedesired financial outcome occurs.-Because sales are unpredictable, control involves monitoring revenue inflows and making appropriatefinancial adjustments-Budgets are important in financial controloProvide the “measuring stick” for performance evaluationc) Financial Planning-Financial Plan– A description of how a business will reach some financial position it seeks for thefuture; includes projections for sources and uses of fundsoA financial manager must develop a clear picture of why a firm needs funds, as well as the costsand benefits of potential funding sources.2. Why Businesses Need Funds-Failure to make a contractually obligated payment can lead to bankruptcy and the dissolution of thefirm-Short-term (operating) expenditures and long-term (capital) expendituresoShort term = typically 1-year, Long term = >1yrShort-Term (Operating) Expendituresa) Accounts Payable-Due within a year; commonly the largest single category of short-term debt-Financial managers need to know the amounts of new accounts payable as well as the due dates forthem to plan for funding flows.b) Accounts Receivable-Refers to funds due from customers who have bought on credit-Represents an investment in products for which a firm has not yet received payment, temporarily tie upfunds-A sound financial plan requires financial managers to project accurately how much credit is advancedand when the payment will be due.
Credit Policy-Credit Policy– The rules governing a firm’s extension of credit to customers.oExtended to customers who can pay and obligate the debtoDenied to firms with poor payment histories-Credit policy also sets terms for the payment (Ex. 2/10, net 30)o2/10 = Means that there is a 2% discount if paid within ten daysoNet 30 = Means that the full amount is due in 30 days-By adjusting the discount rate, firms can create incentive for firms to make earlier paymentsc) Inventories-Inventory– Materials and goods that it will sell within the year-Too little = loss of potential sales; Too much = tied up funds that could’ve been used elsewhere-Raw-materials Inventory– Basic supplies a firm buys to use in its production process-Work-in-process Inventory– Consists of goods partway through the production process-

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