FinanceS10 - WCOB 1023 Business Foundations Finance...

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WCOB 1023 Business Foundations Finance Introduction to Financial Management What is Financial Ma n agement? Managing the firm’s finances is complex — activities include financial planning, investing money, and raising funds. Financial managers need an understanding of the firm’s business and industry, as well as having roles in creativity and leadership. The primary goal of the financial manager is to maximize the value of the firm to its owners. The focus of financial managers is on cash flows—the inflows and outflows of cash. Financial managers plan and monitor the firm’s cash flows to ensure that cash is available when needed. Financial management is the art and science of managing a firm’s money so it can meet its goals. How Do Organizations Use Funds? Any company needs money to operate. Moreover, a company that wants to make money, will first need to spend money. Revenues from sales of the firm’s products should be the chief source of funding, but it may not always come in when it is needed to pay the bills. Typically, companies have to pay for the costs of manufacturing or purchasing their products before they can sell them. Moreover, even when they sell them, customers may take their time before paying their bills. Financial managers must track how money is flowing into and out of the firm. They determine how available funds will be used, and how much money is needed. Then they choose the best sources to obtain the required funding. Financial management is closely related to accounting. While accounting’s main function is to collect and present financial data, financial managers focus on cash flows—the inflows and outflows of cash. As stated above, the main goal of the financial manager is to maximize the value of the firm to its owners. In order to do that, the financial manager has to consider both short- and long-term consequences of the firm’s actions. Maximizing profits is one approach, but not the only one. Financial managers strive for balance between the opportunity for profit (return) and the potential for loss (risk). A basic principle in finance is that the higher the risk, the greater the return that is required . This concept is called the risk-return trade-off . Short-term (current) expenses Short-term (current) expenses include operating expenses, such as wages, supplies, utilities, etc., as well as inventory (merchandise) purchases. The financial manager’s goal is to manage current expenses so that the firm has enough cash to pay its bills and to support accounts receivable and inventory. 1 | P a g e
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WCOB 1023 Business Foundations Finance Cash management is the process of making sure that a firm has enough cash on hand to pay bills as they come due and to meet unexpected expenses. Cash Management involves the following rules of thumb: o Pay for current expenses through current cash collections (sales). o
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This note was uploaded on 03/16/2011 for the course WCOB 1023 taught by Professor Sandeepgoyal during the Spring '08 term at Arkansas.

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FinanceS10 - WCOB 1023 Business Foundations Finance...

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