BU121 FINAL PART 2 Essays

Submitted By consummatecanuck
Words: 6108
Pages: 25

BU121 Final Exam Review
Finance
Financial Management is made up of:
Accounting
Provides information
Finance
Makes decisions about the acquisition (how are we going to get the money? Stocks/bonds etc), disposition (what will we do with it) and management of capital with the help of financial information

Ultimate Objective  MAXIMIZE SHAREHOLDER WEALTH
Must ensure 2 things
Viability
Liquidity - having enough cash now to cover bills
Stability - seeing how long term effects ill hit the company
Profitability
Need a balance as risk leads to more potential profitability, but naturally is risky
Risk vs. Return Tradeoff
Must be balanced all the time

Finance Department’s Responsibilities
Budgeting
Determining financial resources required
Financing
Obtaining financial resources required (ie. How we will raise capital)
Managing Financial Resources Effectively
Working Capital Management
Short term funds
Investing
The long term investments to make the money we are trying to make
A dollar kept in the form of liquid cash to pay bills with could have alternatively been put in a risk form to earn more profits

Specific Responsibilities of Finance Department
Financing and Investing
Working capital management – current assets and current liabilities
Raising funds
Investing decisions
Accounting and Control
Maintaining records
Controlling financial activities, identifying deviations
Managing payroll, inventory, taxes, fixed assets etc.
Forecasting and Long Range Planning
Forecasting costs, market conditions, funds needed, returns on proposals
Using forecasts and historical data to plan future
Pricing
Determining impact of policies on future profitability
Credit and Collection, Insurance, Incentive Plan

3 Major Financing Decision Areas -Investing, Assets. Dividends

Budgeting/Financial Planning
3 Steps
Forecasting Financial Needs
Short-term – cash flow forecast
Long-term
Integrated, work with other functional areas to see what is needed
Developing Budgets to meet those needs
Master Budget
Operating Budget
Capital Budget – building, major equipment
Cash Budget – short term cash flow planning tool
Establishing Financial Control
Deviations from Budget
Seeing if you have stuck to your plan, compare budgeted numbers with actual numbers and check deviations

Advantages of Budgeting
Planning
Compels managers to plan
Facilitates Control
Establishes goals/standards against which actual performance can be measured
Motivation
By clarifying goals and providing a yardstick for rating performance
By giving goals and rewarding for reaching them d
Communication in the Organization
Promotes communication and coordination among subunits of the organization – “Systems Approach”
Interdependent parts working together in a system, everyone collaborates as budgets have to be checked by next/higher level

Negative Aspects of Budgeting
Rewards Waste and Penalizes Thrift
Money is taken from thrifty departments and given to wasteful ones
Individuals not consulted
People feel restrained by the budgets they had no say in setting
Should consult people first as they will be happier to work within budget
Evaluative Device
Perceived as a threat
Giving someone a budget without consulting them then penalizing them for not meeting it is twice as bad
Scapegoat for Lost Opportunities
People justify lost opportunities by saying they don’t meet budget

Cash Budget

Receipts
Money coming in from receivables

Disbursements
Things you spend money on

Cash Excess (Deficiency)
Will I have enough? How can I get what I need?

Minimum Cash Balance Desired
A buffer zone/cushion – will cover you if assumptions are wrong

Borrowing Required/ Surplus or Repayment
Shows what you have to do with the lack of/excess cash

Worksheet
Based on historical measures of amounts and timing of cash flows in working capital cycle

Ex. -You need to prepare a cash budget for the months of June, July and August and the minimum cash balance can be $6 000.

-Assume that sales are forecasted at $10…