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chp 17

planning, obtaining, and managing the company’s funds to accomplish its objectives as effectively and efficiently as possible.
An organization’s financial objectives include meeting expenses, investing in assets, and maximizing its overall worth, which is often measured by the value of the firm’s common shares.
financial manager
are the executives who develop and carry out their firm’s financial plan and decide on the most appropriate sources and uses of funds. hey are among the most vital people on the corporate payroll.

Financial managers are responsible for meeting expenses, investing in assets, and increasing profits to shareholders. Solid financial management is critical to the success of a business.

chief financial officer (CFO)
the chief financial officer (CFO) usually reports directly to the company’s chief executive officer (CEO) or chief operating officer (COO).
In some companies, the CFO is also a member of the board of directors.

Moreover, CFOs often serve as independent directors on other firms’ boards, such as Telus, Tim Hortons, and Microsoft.

vice-president of financial planning
responsible for preparing financial forecasts and analyzing major investment decisions related to new products, new production facilities, and acquisitions.
responsible for all of the company’s financing activities, including cash management, tax planning and preparation, and shareholder relations. also work on the sale of new security issues to investors
chief accounting manager. functions include keeping the company’s books, preparing financial statements, and conducting internal audits.
risk-return trade-off
financial managers try to maximize the wealth of their firm’s shareholders by striking the right balance between risk and return. Often, the decisions that involve the highest potential returns expose the firm to the greatest risks.

financial professionals continually balance risks with expected financial returns.

Financial managers must also adapt to the internal changes and the changes in the financial system.

risk and return
Risk is the uncertainty of gain or loss;
return is the gain or loss that results from an investment over a specified period of time.

An increase in a firm’s cash on hand reduces the risk of being unable to meet unexpected cash needs. But cash alone does not earn much, if any, return. Firms that fail to invest their surplus funds in an income-earning asset—such as in securities—reduce their potential return or profitability.

financial planning
a document that specifies the funds needed by a firm for a given period of time, the timing of cash inflows and outflows, and the most appropriate sources and uses of funds.

the financial plan must reflect both the amounts and timing of inflows and outflow of funds.

-Operating plans are short-term financial plans that focus on no more than a year or two in the future.
-Strategic plans are financial plans that have a much longer time horizon, up to five or 10 years.”

financial planning questions
The financial plan addresses three questions: What funds will be required during the planning period? When will funds be needed? Where will funds be obtained?
financial plan is based on forecasts of several items:
production costs, purchasing needs, plant and equipment expenses, and sales activities for the period covered. Financial managers use forecasts to decide on the specific amounts needed and the timing of expenses and receipts.
Three steps are involved in the financial planning process:
1.forecasting sales over a future period of time, this is the key variable in any financial plan: without any accurate sales forecast, the firm will have difficulty accurately estimating other variables, i.e. productions costs and purchasing needs.

2.estimating the expected level of profits over the planning period. This longer-term projection involves estimating expenses i.e. purchases, employee, compensation, and taxes. Many expenses are the result of sales.

3.deciding on the additional assets needed to support the additional sales.
technical term i.e. chemical manufacture require asset intensity.
Retailing i.e. Costco is less asset-intensive.

financial control
A good financial plan also includes financial control.
Financial control is a process of comparing actual revenues, costs, and expenses with the forecasted amounts. This comparison may show differences between projected and actual figures. It is important to discover any differences early so quick action can be taken.
managing assets
assets consist of what a firm owns, also represent uses of funds.
To grow and prosper, companies need to obtain additional assets.
Sound financial management requires assets to be acquired and managed as effectively and efficiently as possible.
short-term assets= current assets
These assets consist of cash and assets that can be, or are expected to be, converted into cash within a year. he major current assets are cash, market- able securities, accounts receivable, and inventory.
cash and marketable securities
The major purpose of cash is to pay for day-to-day expenses.

Most organizations try to keep a minimum cash balance so they have funds available for unexpected expenses.

managing cash and marketable securities
the cash budget is one tool for managing cash and marketable securities.

It shows expected cash inflows and outflows for a period of time. i.e. shows which months the firm will have surplus cash and will be able to invest in marketable securities and which months when it will need additional cash.

some firms hoard large amounts of cash and marketable securities for reasons. i.e. they may be planning to soon use these funds to make a large investment, pay dividends to shareholders, or repurchase outstanding bonds.

accounts receivable
Accounts receivable are uncollected credit sales. They can represent a significant asset.

The financial manager’s job is to collect the funds owed to the firm as quickly as possible, while still offering sufficient credit to customers to attract and generate increased sales.

In general, a more liberal credit policy means higher sales but also increased collection expenses, higher levels of bad debt, and a higher investment in accounts receivable.

2 functions of management of accounts receivable
1. deciding on an overall credit policy.
the overall credit policy is often the result of competitive pressures or general industry practices.

2. deciding which customers will be offered credit.
managers must consider the importance of the customer and the customer’s financial health and repayment history.

tool for assess account receivable
calculate the accounts receivable turnover over two or more time periods in a row.
If the receivables turnover shows signs of slowing, it means that, on
average, credit customers are paying later. this trend may need further investigation.
inventory management
i.e. retailer, and heavy-equipment manufacturer caterpillar, inventory represent the largest single asset.
i.e. electric utilities and transportation companies have no inventory.

inventory include not only acquiring goods, but also costs of ordering, storing, insuring, and financing.

businesses take on the costs of stock-outs and the costs of lost sales due to insufficient inventory. Financial managers try to minimize the cost of inventory. But production, marketing, and logistics also play important roles in determining proper inventory levels.

Trends in the inventory turnover ratio—can be early warning signs of difficulties ahead. i.e. when inventory turnover has been slowing for several quarters in a row, inventory is rising faster than sales.

capital investment anlaysis
the process financial managers use when deciding whether to invest in long-lived assets.

long-lived assets are expected to produce economic benefits for more than one year. these investments often involve large amounts of money.

Firms make two basic types of capital investment decisions: 1. expansion and 2.replacement. Replacement decisions involve upgrading assets by substituting new assets for older assets.

Financial managers must estimate all the costs and benefits of a proposed investment. his task can be very difficult, especially for very long-lived investments. Companies should only pursue those investments that offer an acceptable return—measured by the difference between benefits and costs.”

managing international assests
Managing international assets creates several challenges for financial managers. One of the most important challenges is dealing with exchange rates.
why do firms often invest excess cash in marketable securities?
cash earns little return; most firms invest their excess cash in marketable securities. these are low-risk securities that either have short maturities or can be easily sold in secondary markets. Money market instruments are popular choices for firms that have excess cash.
2 aspects of accounts receivable management
1. an overall credit policy (whether to offer credit and if so what terms of credit to offer)
2. deciding which customers will be offered credit
difference between an expansion decision and replacement decision.
expansion decision involves decision about offering new products or building or acquiring new production facilities.

replacement decision considers whether to replace an existing asset with a new asset.

expanding into Canada is high cost. CEO need to consider the expected profit and the strategic benefits from the expansion.
have to suspend any serious activity of international markets due to the sheer magnitude of expansion.
capital structure
only two types of funding: debt and equity.

Debt capital consists of funds obtained through borrowing.
Equity capital consists of funds provided by the firm’s owners when they reinvest their earnings, make additional contributions, liquidate assets, issue shares to the general public, or raise capital from outside investors.

The mix of a firm’s debt and equity capital is known as its capital structure.

company uses more debt, the risk to the company increases: the firm needs to make the interest payments on the money borrowed, regardless of the amount of cash low coming into the company.

Choosing more debt increases the fixed costs a company must pay, which makes a company more sensitive to any change in sales revenues. Debt is frequently the least costly method of raising additional financing dollars, which is why it is so frequently used.

leverage and capital structure decitions
increasing the rate of return on funds invested by borrowing funds.
mixing short-term and long-term funds
dividend policy
short-term funding options
why firms generally rely more on long-term funds than short-term funds?
Although short-term funds are generally less expensive than long-term funds, short-term funds expose the firm to additional risks. The cost of short- term funds can vary greatly from year to year. In addition, short-term funds can sometimes be difficult to obtain.
important factor in deciding on firm’s dividend policy?
The main factor in deciding on a firm’s dividend policy is its investment opportunities. Firms with more profitable investment opportunities often pay less in dividends than firms that have fewer such opportunities.
short-term loans
trade credit
Trade credit is extended by suppliers when a buyer agrees to pay for goods and services at a later date. Trade credit is relatively easy to obtain and costs nothing unless a cash discount is offered.
sources of long-term financing
commercial paper
-an attractive short-term financing option because: large amounts of money can be raised at interest rates that are usually lower than the interest rates charged by banks.
3 sources of short-term funding?
1. trade credit,
2. short-term loans from banks and other financial institutions
3.commercial paper.
public sales of shares and bonds
private placements
venture capitalists
private equity funds
hedge funds
tender offer
the most common type of security sold privately
corporate debt securities
sovereign wealth fund
is a government-owned investment company. These companies invest in a variety of financial and real assets, such as real estate. Although most investments are based on the best risk-return trade-off, investment decisions are also influenced by political, social, and strategic considerations.
leveraged buyout or LBOs
In an LBO—a leveraged buyout—public shareholders are bought out, and the firm reverts to private status. LBOs are usually financed with large amounts of borrowed money.
2 types of divestiture
1.selloffs and 2.spinoffs.
In a selloff, assets are sold by one firm to another firm.
In a spinoff, a new firm is created from the assets divested. Shareholders of the divesting firm become shareholders of the new firm.
a transaction where 2 or more firms combine into one company.
include a buyer and a seller (target).

Financial managers evaluate a proposed merger or acquisition in much the same way they evaluate any large investment—by comparing the costs and benefits.

one firm buys the assets of another firm and assumes that firm’s obligations.

To acquire another company, the buying firm typically needs to offer a premium for the target’s shares—in other words, a price higher than the current market price.

Synergy is the term used to describe the benefits produced by a merger or acquisition. It refers to the idea that the combined firm is worth more than the buyer firm and the target firm are worth individually.

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