Chapter 18 Financial Management

Money has time value. What does this mean?

-TVM( time value of money) means $ is worth more today because it earns interest over time; loses value from inflation

What three primary financial problems cause firms to fail?

-Undercapitalization (not enough start-up funds) -poor control over cash flow (more money goes out than comes in) -inadequate expense control(spend too much money)

What's the difference between debt and equity financing?

-debt financing refer to funds raised by borrowing (going into debt) -equity financing is raising money from selling ownership in the company, including to venture capitalist, or within the firm ( through retained earnings)

Name three finance functions important to the firm's overall operations and performance.

-forecasting the short-term and long-term financial needs -developing budgets to meet those needs -establishing financial controls to see whether the company is achieving its goals

What is the role and responsibilities of financial managers?

-plan -budget -control funds -obtain funds -collect funds -conducts audits -managed taxes -inadequate expense control

What are the major sources of long-term financing?

-selling bonds -borrowing from individuals, banks, other financial institutions

What's are the three major form of equity financing available to a firm?

-selling stocks -retained earnings -venture capital

What type of debt financing issued by company or government and considered a long-term obligation

Bonds

Identify three different types of budgets

Capital budget Cash budget Operating or master budget

What is the purpose of preparing budgets in an organization?

It sets forth management's expectations for revenues and becomes the organization's primary guide for the financial operations as well as expected financial needs

What type of equity financing where stockholders become the owner of the company?

Stocks

What is commercial paper?

a corporation's unsecured promissory note maturing in 270 days or less

What is a promissory note?

a written promise to pay a specified amount of money on demand or at a definite time

Why is accounts receivable a major financial concern to the firm?

because 25% of its assets could be tied up in A/R. This would force business to use its own funds to pay for goods and services sold to customers who use credit for their purchases

What does an invoice containing the term net 2/10, net 30 mean?

means the buyer can take a 2% discount if invoice is paid within 10 days, otherwise total bill is due in 30 days

What is leverage, and why do firm choose to use it?

raising needed funds through borrowing to increase the firm's rate of return -enhances the firm's ability to increase profits

What's the difference between a secured and unsecured loan?

secured loan is backed by collateral unsecured loan does not required collateral ( more difficult to obtain)

What are the two major forms of debt financing available to a firm?

selling bonds and borrowing from individuals, banks, and other financial institutions.

How do short-term and long term financial forecast differ?

short term forecast predicts revenues, cost & expenses for a period of a year or less long term forecast predicts revenues, cost & expenses for a period longer than one year and sometimes five or ten years

What is factoring?

the process of selling accounts receivable for cash

What's the primary reason an organization spends a good deal of its available funds on inventory and capital expenditures?

to increase customer's demands such as land for future expansion, manufacturing plants to increase production capabilities, research to help new product ideas, and equipment to maintain or exceed level of output

What's difference between trade credit and a line of credit?

trade credit is buying goods or services now and paying for them later ( short-term funding) line of credit is given amount of unsecured short term funds a bank will lend to a business provided the funds are readily available