Financial Management Module 8 Overview

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Questions and Answers

What is the role of a financial manager, and why are they an important resource to business leaders?

Financial managers are responsible for managing and acquiring financial resources to meet the goals or objectives of a company. They help businesses plan and monitor their finances to maximize wealth. This makes them an important resource for business leaders as they rely on financial managers for sound advice and strategies to manage their finances effectively.

The financial planning process involves three steps. Which of these is NOT one of the three steps in the financial planning process?

Preparing the income statement and balance sheet. (correct)

Forecasting both short-term and long-term financial needs.

Establishing financial control to see how well the company is following the financial plans.

Developing budgets to meet anticipated needs.

Why do firms need funds?

Firms need funds to manage day-to-day operations, finance their credit, manage inventory, make capital expenditures, and ensure they can take advantage of the time value of money.

What are the three main sources of funds?

Operations, debt financing, and equity financing. Signup and view all the answers

Define the management’s expectations of revenues and allocating the use of specific resources throughout the company in the context of financial planning.

This refers to what is known as a budget. It outlines the company's predicted financial performance based on anticipated revenues and how resources will be allocated across different departments and operations. Signup and view all the answers

Which of these is NOT a type of budget used in financial planning?

Long-term budget Signup and view all the answers

What are the main components of the cash budget?

Projected cash outflows and inflows. Signup and view all the answers

What is the purpose of financial control?

Financial control is a process where a business regularly compares its actual performance, including revenues, costs, and expenses, against its budget. This helps to identify discrepancies, understand deviations from the plan, and make adjustments accordingly. Signup and view all the answers

What are the two key objectives of safeguarding assets within financial control?

Detection and prevention. Signup and view all the answers

What is typically the main difference between debt and equity financing?

Debt financing involves borrowing money, while equity financing involves selling ownership in the company. Signup and view all the answers

Which type of financing typically has a maturity date?

Debt financing Signup and view all the answers

Interest payments on debt are typically tax-deductible.

True Signup and view all the answers

Which of the following is NOT usually considered a source of equity financing?

Bank loans Signup and view all the answers

Explain the main difference between common shares and preferred shares.

Common shares represent the most basic form of ownership in a firm, granting voting rights and a share in the company's residual value – what's left after all liabilities are paid. Preferred shares are a special class of ownership with a fixed dividend rate and priority in receiving dividends, but they typically have no voting rights. They also usually have a higher claim on the company's assets. Signup and view all the answers

What is the main reason why companies want to maintain a minimum cash balance?

To handle unexpected expenses and opportunities. Signup and view all the answers

Which of these is an effective technique to improve cash management?

Speed up cash collections and slow down cash payments. Signup and view all the answers

Which of the following activities would NOT typically involve long-term financing?

Workers' salaries. Signup and view all the answers

When a business doesn't have the funds to do what it needs to be successful, it is referred to as underfunded.

False Signup and view all the answers

Study Notes

Financial Management Module Overview

Module 8 covers Financial Management, encompassing various aspects of financial planning, the role of financial managers, and the importance of cash.

The Role of Financial Managers

Financial management involves overseeing financial resources to achieve company objectives.
Financial managers examine financial data, create plans, oversee execution, and strive to maximize company wealth.
Financial managers are crucial to business leaders due to their expertise in financial planning and resource management.

Financial Planning Process

Financial planning involves three key steps:
- Forecasting both short-term and long-term financial needs.
- Developing budgets to meet anticipated needs.
- Establishing financial controls to monitor adherence to plans.

Importance of Cash and Operating Funds

Daily operations require funds for monthly expenses and unforeseen emergencies.
Companies require funds to manage credit terms for customers, especially B2B. This includes managing credit and collections.
Managing inventory to satisfy customer demand. This includes just-in-time inventory and inventory turnover ratio.
Making capital Daily operations require funds for monthly expenses and emergencies, managing credit terms in B2B transactions, handling inventory to meet demand, making capital expenditures for long-term assets, and effective cash flow management due to the time value of money. to invest in long-term assets.
Cash flow management is vital as money has a time value, meaning money available now is worth more than the same amount in the future.

Sources of Funds

Operations: Retained earnings from company profits.
Debt financing: Loans from creditors or other institutions.
Equity financing: Funding from the company's owners.

Debt Financing

Debt financing is a source of funds obtained from creditors or institutions who are not owners of the business.
Terminology:
- Interest rates (fixed or variable, simple or compounding)
- Covenants (financial or non-financial)
- Repayment (terms)
- Security (secured or unsecured with collateral)

Short-Term Debt Financing

Trade credit: Buying goods/services now and paying later.
Line of credit: Pre-approved borrowing limit.
Factoring accounts receivable: Selling outstanding invoices to a third party.
Short-term bank loans: Loans with relatively short terms.

Long-Term Debt Financing

Term Loans: Loans with longer repayment periods.
Amortization: Process of distributing principal and interest over the term of the loan.

Equity Financing

Equity financing involves obtaining funds from the business's owners or shareholders.
Companies may issue stocks to raise equity funds for growth or other investments.
Dividends: Distributed profits to shareholders.

Debt vs. Equity Financing

Debt financing involves borrowing money that must be repaid with interest.
Equity financing involves selling ownership in the company, in the form of stock.
Debt vs. Equity comparisons: Differences exist in repayment agreements, management influence (owner influence), and taxes.

Minimum Cash Balance

Maintaining a minimum cash balance allows companies the ability to meet unexpected expenses.

Improving Cash Management

One effective technique for improving cash management is to speed up cash collections and slow down payments.

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Description

This quiz covers the essentials of Financial Management as outlined in Module 8. Explore the roles of financial managers, the financial planning process, and the significance of cash in operations. Enhance your understanding of how effective financial management contributes to business success.