ZeePedia buy college essays online


Introduction to Business

<<< Previous FINANCIAL MANAGEMENT:The Role of the Financial Manager, Short-Term (Operating) Expenditures
 
img
Introduction to Business ­MGT 211
VU
Lesson 45
FINANCIAL MANAGEMENT
The job of the financial manager is to increase the firm's value by planning and controlling the
acquisition and dispersal of its financial assets. This task involves three key responsibilities:
cash-flow management (making sure the firm has enough available money to purchase the
materials it needs to produce goods and services), financial control (checking actual
performance against plans to ensure that desired financial results occur), and financial
planning (devising strategies for reaching future financial goals).
To finance short-term expenditures, firms rely on trade credit (credit extended by suppliers)
and loans. Secured loans require collateral (legal interest in assets that may include
inventories or accounts receivable). Unsecured loans may be in the form of lines of credit or
revolving credit agreements. Smaller firms may choose to factor accounts receivable (that is,
sell them to financial institutions).
Long-term sources of funds include debt financing, equity financing, and the use of preferred
stock. Debt financing uses long-term loans and corporate bonds (promises to pay holders
specified amounts by certain dates), both of which obligate the firm to pay regular interest.
Equity financing involves the use of owners' capital, either from the sale of common stock or
from retained earnings. Preferred stock is a hybrid source of funding that has some of the
features of both common stock and corporate bonds. Financial planners must choose the
proper mix of long-term funding. All-equity financing is the most conservative, least risky, and
most expensive strategy. All-debt financing is the most speculative option.
Businesses operate in an environment pervaded by risk. Speculative risks involve the prospect
of gain or loss. Pure risks involve only the prospect of loss or no loss. Firms manage their risks
by following some form of five-step process: identifying risks, measuring possible losses,
evaluating alternative techniques, implementing chosen techniques, and monitoring programs
on an ongoing basis. Four general methods for dealing with risk are risk avoidance, control,
retention, and transfer.
Insurance companies issue policies only for insurable risks--those that meet four criteria. First
the risk must be predictable in a statistical sense; the insurer must be able to use statistical
tools to forecast the likelihood of a loss. A loss must also pass the test of casualty, which
indicates the loss is accidental rather than intentional. Potential losses must also display un-
connectedness--they must be random and occur independently to other losses. Finally,
losses must be verifiable in terms of cause, time, place, and amount.
Liability insurance covers losses resulting from damage to people or property when the
insured is judged responsible. Property insurance covers losses to a firm's won buildings,
equipment, and financial assets. Life insurance pays benefits to the survivors of a policyholder
and has a cash value that can be claimed before the policyholder's death. Health insurance
covers losses resulting from medical and hospital expenses.
The Role of the Financial Manager
Corporate finance typically entails four responsibilities: determining a firm's long-term
investments, obtaining funds to pay for those investments, conducting the firm's everyday
financial
activities,
and
helping
to
manage
the
risks
the
firm
takes.
Responsibilities of the Financial Manager include planning and controlling the acquisition and
dispersal of a firm's financial resources.
163
img
Introduction to Business ­MGT 211
VU
i.
Cash-Flow Management--management of cash inflows and outflows
to ensure adequate funds for purchases and the productive use of
excess funds.
ii.
Financial Control--process of checking actual performance against
plans to ensure that desired financial results occur.
iii.
Financial Planning--A financial plan shows the funds a firm will need
for a period of time, as well as the sources and uses of those funds. A
strategy for reaching some future financial position.
Why Do Businesses Need Funds?
It takes capital to run a business. There are numerous expenditures, which can be classified
into two broad categories.
Short-Term (Operating) Expenditures
i.
Accounts Payable--unpaid bills plus wages and taxes due within the
upcoming year.
ii.
Accounts Receivable--funds due from customers who have bought on
credit. Credit Policy--rules governing a firm's extension of credit to
customers.
iii.
Inventories--materials and goods which are held by a company but
which will be sold within the year. The goal is to maintain an adequate
supply without incurring more costs than necessary for storage,
handling, insurance, and taxes.  Three types of inventories-raw
materials inventory, work-in-process inventory, and finished-goods
inventory.
iv.
Working Capital--liquid current assets out of which a firm can pay
current debts. Calculated by adding inventories (raw materials, work-in-
process, and finished goods on hand) and accounts receivable (minus
accounts payable).
Long-Term (Capital) Expenditures
Companies need funds to cover long-term expenditures on fixed assets. Long-
term expenditures are not normally sold or converted into cash, require a very
large investment, and represent a binding commitment of company funds that
continues long into the future.
1. Sources of Short-Term Funds
a. Trade Credit--when a company buys products or supplies on credit from its
suppliers, postponing payment.
i.
Open-Book Credit--form of trade credit in which sellers ship
merchandise on faith that payment will be forthcoming. Granting of
credit by one firm to another.
ii.
Promissory Note--form of trade credit in which sellers insist that
buyers sign a legally binding agreement before merchandise is shipped.
iii.
Trade Draft--form of trade credit in which a document stating the
promised date and amount of payment due, is attached to the
merchandise shipment by the seller.
164
img
Introduction to Business ­MGT 211
VU
Secured Short-Term Loans
Secured loans are those backed by some specific valuable item or items,
known as collateral, which may be seized by the lender, should the borrower
fail to repay the loan.
i.
Inventory Loans use inventory as a collateral asset.
ii.
Accounts Receivable--accounts receivable are used as collateral,
known as pledging accounts receivable.
Factoring Accounts Receivable -- A firm can raise funds rapidly by factoring: selling the
firm's accounts receivable. They are sold at a discount.
Unsecured Short-Term Loans
i.
Line of Credit--standing arrangement in which a lender agrees to
make available a specified amount of funds upon the borrower's
request.
ii.
Revolving Credit Agreement--arrangement in which a lender agrees
to make funds available on demand and on a continuing basis.
iii.
Commercial Paper--short-term securities, or notes, containing a
borrower's promise to pay. Matures in 270 days or less.
2. Sources of Long-Term Funds
a. Debt Financing--used to cover long-term expenses such as assets (generally
repaid in more than one year).
i.
Long-Term Loans usually issued by commercial banks. Interest rates
fluctuate over time, and financial managers try to time their borrowing to
take advantage of drops in interest rates.
ii.
Corporate Bonds--Terms of a bond, including the amount to be paid,
the interest rate, and the maturity date differ from company to company
and from issue to issue. They are spelled out in the bond contract, or
bond indenture.
Equity Financing -- use of common stock and/or retained earnings to rise long-term funding.
i.
Common Stock--selling ownership to raise money.
ii.
Retained Earnings--reinvesting profits in the company rather than
issue a dividend
iii.
Financial Burden on the Firm--a firm cannot deduct paid-out
dividends as business expenses but it can deduct the interest it pays on
bonds. However, debt is a legal obligation to repay regardless of
changes in economic conditions.
Hybrid Financing: Preferred Stock -- Preferred stock is a "hybrid" because it has some of
the features of both corporate bonds and common stocks. Provides a fixed dividend, is paid
dividends before common stock, and has no voting rights.
Choosing between Debt and Equity Financing -- relative mix of a firm's debt and equity
financing.
165
img
Introduction to Business ­MGT 211
VU
i.
Indexes of Financial Risk--To help understand and measure the
amount of financial risk they face, financial managers rely on published
indexes for various investments.
The Risk-Return Relationship -- principle that, whereas safer investments tend to offer
lower returns, riskier investments tend to offer higher returns.
3. Financial Management for Small Business
Establishing Bank and Trade Credit -- obtaining a line of credit begins with finding a bank
that can-and will-support a small firm's financial needs. Liberal trade credit terms with
suppliers let small firms increase short-term funds and avoid additional borrowing from banks.
i.
Long-Term Funding--with unproven repayment ability, start-up firms
can expect to pay higher interest rates than older firms. A Business
Plan detailing financial needs may help attain financing.
Venture Capital -- outside equity financing provided in return for part ownership of the
borrowing firm.
Planning for Cash-Flow Requirements -- Cash-flow planning is especially critical for small
businesses. By anticipating shortfalls, a financial manger can seek funds in advance and
minimize their cost.
4. Risk Management
a. Coping with Risk
Speculative Risk -- risk involving the possibility of gain or loss.
Pure Risk -- risk involving only the possibility of loss or no loss.
Risk Management--process of conserving the firm's earning power and assets
by reducing the threat of losses due to uncontrollable events.
i.
Step 1: Identify Risks and Potential Losses
ii.
Step 2: Measure the Frequency and Severity of Losses and their Impact
iii.
Step 3: Evaluate Alternatives and Choose the Techniques That Will
Best Handle the Losses
Risk Avoidance--practice of avoiding risk by declining or ceasing to
participate in an activity.
Risk Control--practice of minimizing the frequency or severity of losses
from risky activities.
Risk Retention--practice of covering a firm's losses with its own funds.
Risk Transfer--practice of transferring a firm's risk to another firm. A
Premium is the fee paid by a policyholder for insurance coverage
iv.
Step 4: Implement the Risk-Management Program
v.
Step 5: Monitor Results
The Contemporary Risk Management Program -- Virtually all business decisions involve risk
having financial consequences. The company's chief financial officer (CFO) has a major voice
in applying the risk management process.
Insurance as Risk Management
Companies may choose to transfer the risk of loss to an insurance company, which will agree
to compensate them for certain types of losses.
166
img
Introduction to Business ­MGT 211
VU
i.
Insurable versus Uninsurable Risk--Insurance companies must avoid
certain risks. Insurers divide potential sources of lost in insurable and
uninsurable risks. An insurable risk must meet four criteria:
1. Predictability
2. Casualty
3. un-connectedness
4. Verifiability.
ii.
The Insurance Product
1. Liability Insurance--insurance covering losses resulting from
damage to people or property when the insured is judged
responsible.
2. Workers' Compensation Coverage--coverage provided by a
firm to employees for medical expenses, loss of wages, and
rehabilitation costs resulting from job-related injuries or disease.
3. Property Insurance--insurance covering losses resulting from
physical damage to or loss of the insured's real estate or
personal property.
4. Business Interruption Insurance--insurance covering income
lost during times when a company is unable to conduct business.
5. Life Insurance--insurance paying benefits to the policyholder's
survivors.
6. Group Life Insurance--insurance underwritten for a group as a
whole rather than for each individual in it.
7. Health Insurance--insurance covering losses resulting from
medical and hospital expenses as well as income lost from injury
or disease.
8. Disability Income Insurance--insurance providing continuous
income  when  disability  keeps  the  insured  from  gainful
employment.
9. Special Health Care Providers
a. health maintenance organization (HMO)--organized
health care system providing comprehensive care in
return for fixed membership fees
b. preferred provider organization (PPO)--arrangement
whereby selected professional providers offer services at
reduced rates and permit thorough review of their service
recommendations
c. point-of-service (POS) plan-plan that allows member
patients to select a primary care doctor who provides
medical services but may refer patients to other providers
in the plan
10. Special Forms of Business Insurance
a. Key Person Insurance--special form of business
insurance designed to offset both lost income and
additional expenses.
b. Business Continuation Agreement--special form of
business insurance whereby owners arrange to buy the
interests of deceased associates from their heirs.
THE END
167
Table of Contents:
  1. INTRODUCTION:CONCEPT OF BUSINESS, KINDS OF INDSTRY, TYPES OF TRADE
  2. ORGANIZATIONAL BOUNDARIES AND ENVIRONMENTS:THE ECONOMIC ENVIRONMENT
  3. BUSINESS ORGANIZATION:Sole Proprietorship, Joint Stock Company, Combination
  4. SOLE PROPRIETORSHIP AND ITS CHARACTERISTICS:ADVANTAGES OF SOLE PROPRIETORSHIP
  5. PARTNERSHIP AND ITS CHARACTERISTICS:ADVANTAGES AND DISADVANTAGES OF PARTNERSHIP
  6. PARTNERSHIP (Continued):KINDS OF PARTNERS, PARTNERSHIP AT WILL
  7. PARTNERSHIP (Continued):PARTNESHIP AGREEMENT, CONCLUSION, DUTIES OF PARTNERS
  8. ORGANIZATIONAL BOUNDARIES AND ENVIRONMENTS:ETHICS IN THE WORKPLACE, SOCIAL RESPONSIBILITY
  9. JOINT STOCK COMPANY:PRIVATE COMPANY, PROMOTION STAGE, INCORPORATION STAGE
  10. LEGAL DOCUMENTS ISSUED BY A COMPANY:MEMORANDUM OF ASSOCIATION, CONTENTS OF ARTICLES
  11. WINDING UP OF COMPANY:VOLUNTARY WIDNIGN UP, KINDS OF SHARE CAPITAL
  12. COOPERATIVE SOCIETY:ADVANTAGES OF COOPERATIVE SOCIETY
  13. WHO ARE MANAGERS?:THE MANAGEMENT PROCESS, BASIC MANAGEMENT SKILLS
  14. HUMAN RESOURCE MANAGEMENT:Human Resource Planning
  15. STAFFING:STAFFING THE ORGANIZATION
  16. STAFF TRAINING & DEVELOPMENT:Typical Topics of Employee Training, Training Methods
  17. BUSINESS MANAGERíS RESPONSIBILITY PROFILE:Accountability, Specific responsibilities
  18. COMPENSATION AND BENEFITS:THE LEGAL CONTEXT OF HR MANAGEMENT, DEALING WITH ORGANIZED LABOR
  19. COMPENSATION AND BENEFITS (Continued):MOTIVATION IN THE WORKPLACE
  20. STRATEGIES FOR ENHANCING JOB SATISFACTION AND MORALE
  21. MANAGERIAL STYLES AND LEADERSHIP:Changing Patterns of Leadership
  22. MARKETING:What Is Marketing?, Marketing: Providing Value and Satisfaction
  23. THE MARKETING ENVIRONMENT:THE MARKETING MIX, Product differentiation
  24. MARKET RESEARCH:Market information, Market Segmentation, Market Trends
  25. MARKET RESEARCH PROCESS:Select the research design, Collecting and analyzing data
  26. MARKETING RESEARCH:Data Warehousing and Data Mining
  27. LEARNING EXPERIENCES OF STUDENTS EARNING LOWER LEVEL CREDIT:Discussion Topics, Market Segmentation
  28. UNDERSTANDING CONSUMER BEHAVIOR:The Consumer Buying Process
  29. THE DISTRIBUTION MIX:Intermediaries and Distribution Channels, Distribution of Business Products
  30. PHYSICAL DISTRIBUTION:Transportation Operations, Distribution as a Marketing Strategy
  31. PROMOTION:Information and Exchange Values, Promotional Strategies
  32. ADVERTISING PROMOTION:Advertising Strategies, Advertising Media
  33. PERSONAL SELLING:Personal Selling Situations, The Personal Selling Process
  34. SALES PROMOTIONS:Publicity and Public Relations, Promotional Practices in Small Business
  35. THE PRODUCTIVITY:Responding to the Productivity Challenge, Domestic Productivity
  36. THE PLANNING PROCESS:Strengths, Weaknesses, Threats
  37. TOTAL QUALITY MANAGEMENT:Planning for Quality, Controlling for Quality
  38. TOTAL QUALITY MANAGEMENT (continued):Tools for Total Quality Management
  39. TOTAL QUALITY MANAGEMENT (continued):Process Re-engineering, Emphasizing Quality of Work Life
  40. BUSINESS IN DIGITAL AGE:Types of Information Systems, Telecommunications and Networks
  41. NON-VERBAL COMMUNICATION MODES:Body Movement, Facial Expressions
  42. BUSINESS ORGANIZATIONS:Organization as a System
  43. ACCOUNTING:Accounting Information System, Financial versus Managerial Accounting
  44. TOOLS OF THE ACCOUNTING TRADE:Double-Entry Accounting, Assets
  45. FINANCIAL MANAGEMENT:The Role of the Financial Manager, Short-Term (Operating) Expenditures