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Summary Chapter 16
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Chapter 16 of introduction to business, required course for first year IBA
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Mastering FinancialManagement
Finances are necessary for the efcient operaton of any business frrm
Without roney, creditors and lenders can’t be paid, erployees don’t get pay checks and
business ray close its doors and cease to exist
16.1: Why finincna mningemeit
It can rake the diference between success and failurem
Without fnancial planning, frrs would not be able to fund its R&nD efortsm Efectie
fnancial ranagerent enables a frr to buy other corpanies that strengthen or
corplerent its positon in key areas, pay its bills on tre, pay erployees, taxes, and
distribute diiidends to stock holdersm
Managers and erployees rust fnd the roney needed to keep a business operatng and
fund all the objectiesm
16.1.1: The need for fnancial management
Financial management consists of all actiites concerned with obtaining roney and
using it efectielym It can be iiewed as a two sided problerm
o One side: use of funds ofen dictate the type or types of fnancing needed by a
business
o Other side: actiites a business can undertake are deterrined by the types of
fnancing aiailablem
Financial ranagers rust ensure funds are aiailable when needed, that they are
obtained at the lowest costs, and used efcientlym Moreoier:
o Financing propertes are established in line with organisatonal objecties
o Spending is planned and controlled
o Sufcient fnancing is aiailable when needed
o A frr’s credit custorers pay their bills on tre
o Bills are paid prorptly to protect the frr’s credit ratng and ability to borrow
o Funds required for paying taxes are aiailable when neededm
o Excess cash is iniested in certfcates of deposit, goiernrent securites or
conseriatie rarketable securitesm
16.1.2: Financial reform after the economic crisis
Financial ranagers had it easier when the econory stabilisedm Yet, sorething needed to
be done to stabilise the fnancial systerm
In the crisis that afected businesses, rore regulatons and reforrs becare of high
prioritym
Obara rade a law: which created an econoric foundaton which encourages job
growth, protects consurers, end fnancial bailouts, and preients another fnancial crisism
Debate about strength of the lawm The irpact of new regulatons could increase the tre
and cost of obtaining both short- and long-terr fnancing
, 16.1.3: Careers in Finance
Executie leiel: chief fnancial ofcerm A CFO is a high-leiel corporate executie who
ranages a frr’s fnances and reports directly to the corpany’s chief executie ofcerm
Other ttles: bank ofcer, consurer credit ofcer, fnancial analyst, fnancial planner, etcm
Certain traits necessary: honesty, a strong background in accountng, know how to use a
corputer to analyse data, be an expert at writen and oral corrunicatonm
16.2: The ieed for finincig
Money is necessary for startng a business and to keep it goingm
Inital iniestrent and possible borrowing should start a businessm Then, reienues should
be used to pay expensesm
Terporary fnancing: necessary when expenses are high or sales lowm
16.2.1: Short-term fnancing
Short-term-fnancing is roney that is used for a year or lessm
Business practces ray afect the cash fow, and create the need for STFm Cash foo is the
roierent of roney in and out of an organisatonm The goal is to haie sufcient roney
coring in, to coier the frr’s outlowsm
Second need for short-terr fnance: speculatie productonm Speculative production
refers to the tre lag between actual producton of goods and when they are soldm
Third: increase inientorym Firrs need to build up their inientories before peak selling
periodsm To obtain this rerchandise inientory, it uses short-terr fnancing and repays
the loans when the rerchandise is sold
16.2.2: Long-term fnancing
Long-term fnancing is roney that will be used for longer than a yearm It is needed to
start a new businessm
It is also needed for business rergers and acquisitons, new product deieloprent, long-
terr rarketng actiites, replacerent of equiprent that has becore obsolete, and
expansion of facilitesm
16.2.3: Risk-return ratio
Business frrs will fnd it rore difcult to raise short- and long-terr fnancingm
o Financial reforr and increased regulatons will lengthen the process required to
obtain fnancing
o Lenders and iniestors are rore cautous about who receiies fnancingm
Financial ranagers rust deielop a strong plan that describes how the roney will be
used and repaidm
The risk-return ratio is based on the principle that a high-risk decision should generate a
higher fnancial returnsm Managers want a high return, howeier not that high of a riskm
16.3: Paniicig – the bnscs of souid finincna mningemeit
A fnancial plan is a plan for obtaining and using the roney needed to irplerent an
organisaton’s goals/objectiesm
16.3.1: Developing the plan
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