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CHAPTER 18 Terms

Understanding Business

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CHAPTER 18 - Financial Management Finance acquiring funds for the firm and managing those funds within it - activities include: preparing budgets, cash flow analyses, expenditure planning - plant, equipment and machinery Financial Management managing a firm’s resources so it can meet its goal and objectives - seeing that the firm pays its bills at the right time and collecting accounts receivables to ensure the firm doesn’t lose too much $$ to bad debts - vital that they stay abreast of changes or opportunities in finance and tax management and prepare to adjust to them Financial Managers examine financial data prepared by accountants and make recommendations to top execs regarding strategies fro improving the financial health of the firm - financial planning is a key responsibility - must understand accounting info to make sound decisions A CFO controls both accounting and finance functions in medium and large firms Finance is a critical activity in profit-seeking and non-profit organizations Three common easy for a firm to fail financially: Undercapitalization (lack of startup funds), poor cash flow control, inadequate expense control Importance of understanding finance Financial Management - see above Financial Planning - analyzing short-term and long-term financial needs - three steps: 1. Forecasting short-term and long-term financial needs 2. developing budgets to meet those needs 3. establishing financial control to see how well the company is meeting goals Short-Term Forecast predicts revenues, costs and expenses for 1 year or less - critical accuracy is the foundation for most other financial plans Cash Flow Forecast predicts the cash inflows and outflows in future periods, usually months or quarters - based on expected sales revenues and various costs and expenses incurred and when they’ll come due Long-Term Forecast predicts revenues, costs and experiences for longer than 1 year, sometimes as far as 5-10 years into the future - gives top management some sense of the income or profit potential possible with different strategic plans Budget a financial plan that sets forth management’s expectations and allocates the use of specific measures throughout the firm - guidelines that help anticipate borrowing, debt repayment, operating expenses and short-term investments Capital Budget - highlights spending plans for major asset purchase often requiring large sums of money Cash Budget -
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