Summary
Summary Chapter 16
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Chapter 16 of Introduction to Business: Processes and context
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Mastering FinancialManagement
Finances are necessary for the efficient operation of any business firm.
Without money, creditors and lenders can’t be paid, employees don’t get pay checks and
business may close its doors and cease to exist
16.1: Why financial management
It can make the difference between success and failure.
Without financial planning, firms would not be able to fund its R&D efforts. Effective
financial management enables a firm to buy other companies that strengthen or
complement its position in key areas, pay its bills on time, pay employees, taxes, and
distribute dividends to stock holders.
Managers and employees must find the money needed to keep a business operating and
fund all the objectives.
16.1.1: The need for financial management
Financial management consists of all activities concerned with obtaining money and
using it effectively. It can be viewed as a two sided problem.
o One side: use of funds often dictate the type or types of financing needed by a
business
o Other side: activities a business can undertake are determined by the types of
financing available.
Financial managers must ensure funds are available when needed, that they are obtained
at the lowest costs, and used efficiently. Moreover:
o Financing properties are established in line with organisational objectives
o Spending is planned and controlled
o Sufficient financing is available when needed
o A firm’s credit customers pay their bills on time
o Bills are paid promptly to protect the firm’s credit rating and ability to borrow
o Funds required for paying taxes are available when needed.
o Excess cash is invested in certificates of deposit, government securities or
conservative marketable securities.
16.1.2: Financial reform after the economic crisis
Financial managers had it easier when the economy stabilised. Yet, something needed to
be done to stabilise the financial system.
In the crisis that affected businesses, more regulations and reforms became of high
priority.
Obama made a law: which created an economic foundation which encourages job
growth, protects consumers, end financial bailouts, and prevents another financial crisis.
Debate about strength of the law. The impact of new regulations could increase the time
and cost of obtaining both short- and long-term financing
, 16.1.3: Careers in Finance
Executive level: chief financial officer. A CFO is a high-level corporate executive who
manages a firm’s finances and reports directly to the company’s chief executive officer.
Other titles: bank officer, consumer credit officer, financial analyst, financial planner, etc.
Certain traits necessary: honesty, a strong background in accounting, know how to use a
computer to analyse data, be an expert at written and oral communication.
16.2: The need for financing
Money is necessary for starting a business and to keep it going.
Initial investment and possible borrowing should start a business. Then, revenues should
be used to pay expenses.
Temporary financing: necessary when expenses are high or sales low.
16.2.1: Short-term financing
Short-term-financing is money that is used for a year or less.
Business practices may affect the cash flow, and create the need for STF. Cash flow is the
movement of money in and out of an organisation. The goal is to have sufficient money
coming in, to cover the firm’s outflows.
Second need for short-term finance: speculative production. Speculative production
refers to the time lag between actual production of goods and when they are sold.
Third: increase inventory. Firms need to build up their inventories before peak selling
periods. To obtain this merchandise inventory, it uses short-term financing and repays the
loans when the merchandise is sold
16.2.2: Long-term financing
Long-term financing is money that will be used for longer than a year. It is needed to
start a new business.
It is also needed for business mergers and acquisitions, new product development, long-
term marketing activities, replacement of equipment that has become obsolete, and
expansion of facilities.
16.2.3: Risk-return ratio
Business firms will find it more difficult to raise short- and long-term financing.
o Financial reform and increased regulations will lengthen the process required to
obtain financing
o Lenders and investors are more cautious about who receives financing.
Financial managers must develop a strong plan that describes how the money will be
used and repaid.
The risk-return ratio is based on the principle that a high-risk decision should generate a
higher financial returns. Managers want a high return, however not that high of a risk.
16.3: Planning – the basis of sound financial management
A financial plan is a plan for obtaining and using the money needed to implement an
organisation’s goals/objectives.
16.3.1: Developing the plan
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