Financial Management

Front 1

Five Functions of Financial Management

Back 1

1) Financing Function
2) Capital Budgeting Function
3) Financial Management Function
4) Corporate Governance Function
5) Risk Management Function

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Financing Function

Back 2

raising capital to support the firm's operations and investment programs.

Front 3

Capital Budgeting Function

Back 3

Selecting the best projects in which to invest firm resources, based on consideration of risks and return.

Front 4

Financial Management Function

Back 4

Managing the firm's internal cash flows and its capital structure(mix of debt and equity financing) to minimize the financing costs and ensure that the firm can pay its obligations when due.

Front 5

Corporate Governance Function

Back 5

developing an ownership and corporate governance system for the firm that will ensure managers act ethically and in the best interest of stockholders.

Front 6

Risk Management Function

Back 6

managing the firm's exposure to all types of risk.

Front 7

Working Capital Management

Back 7

managing and financing the current assets and current liabilities of the firms. The primary focus of working capital management is managing inventories and receivables.

Front 8

Cash Conversion Cycle

Back 8

the length of time that a firm makes payments to suppliers and when it receives cash inflows.

Front 9

Inventory Conversion Period

Back 9

the average time required to convert materials into finished goods and sell those goods.

Avg Inventory/Sales Per Day

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Receivable Collection Period

Back 10

the average time required to collect accounts receivable.

Avg Receivables/Credit Sales per day

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Payables Deferral Period

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the average length of time between the purchase of materials and labor and the payment of cash for them.

Avg Payables/Purchases per day

Front 12

Cash Conversion Cycle Formula

Back 12

CC=Inventory Conversion Period+Receivable Conversion Period-Payables Deferral Period.

Front 13

Effective working capital management involves

Back 13

shortening the cash conversion cycle as much as possible without harming operations. Improves profitablility, because the longer the cash conversion cycle the greater the need for financing.

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Speculative Balances

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cash kept to take advantage of favorable business opportunities, such as an acquisition.

Front 15

Precautionary Balances

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cash that is kept to meet emergencies, such as strikes or natural disasters.

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Float

Back 16

key technique for cash management. Time that elapses relating to mailing, processing, and clearing checks. Effective cash management involves extending float for cash disbursements, and shortening for cash receipts.

Front 17

Zero Balance Accounts

Back 17

Cash Management Technique involves maintaining a regional bank account to which just enough funds are transferred daily to pay the checks presented. It is cost effective if the firms saves on interest costs from the longer float is adequate to cover any additional fees for service charges or account maintenance.

Front 18

Lockbox System

Back 18

customer payments are sent to a post office box that is maintained by a bank. (Increases internal control because the firm's employees do not have access to cash receipts)

Front 19

Concentration Banking

Back 19

Customers in an area make payments to a local branch office rather than firm headquarters.

Front 20

Official Bank Checks

Back 20

a way to transfer funds that is slower than wires, but less expensive. Often referred to as (depository transfer checks)

Front 21

International Cash Management

Back 21

multinational firms can use various systems, including electronic systems, to manage the cash accounts they hold in various countries. Management may decide to transfer funds to a country where there is a higher interest rate.

Front 22

Minimum investement required

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some investments , such as high yield cd's require larger investments.

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Safety

Back 23

the risk to principal

Front 24

Marketability(Liquidity)

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relates to the speed at which the investment can be liquidated.

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Yield

Back 25

Generally, the higher the yield the better. However, additional yield come with higher risk or longer maturity.

Front 26

Treasury (T) Bills

Back 26

short term obligation of the federal government.

Front 27

Treasury Notes

Back 27

government obligations with maturities from one to ten years.

Front 28

Treasury Inflation Protected Securities (TIPS)

Back 28

government obligations that pay interest that equates to a real rate of return specified by the US treasury, plus principal at maturity that is adjusted for inflation.

Front 29

Federal Agency Securities

Back 29

offering of govt agencies, such as the Federal Home Loan Bank. Offer liquidity, and pay slightly higher yields thatn treasury issues.

Front 30

Certifiactes of Deposit

Back 30

savings deposits at financial instituions. 2 Tier market. ($500-$10000) with low interest rates, and large ($100,000) with higher interest rates.

Front 31

Commercial Paper

Back 31

Large unsecured short term promissory notes issue to the public by large creditworthy corporations. 2 to 9 month maturity period.

Front 32

Banker's Acceptance

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A draft drawn on a bank for payment when presented to the bank.

Front 33

Eurodollar certificate of deposit

Back 33

eurodollars are US dollars held on deposit by foreign banks and in turn lent by the banks to anyone seeking dollars.

Front 34

Money Market Funds

Back 34

shares in a fund that purchase higher yielding bank cd's, commercial paper, and other large denomination, higher yielding securities.

Front 35

Money Market Accounts

Back 35

similar to savings accounts, funds are used to invest in higher yielding bank cd's, commercial paper, etc.

Front 36

Equity and Debt Securites

Back 36

mgt may decide to invest in the publicly traded stocks and bonds of other corporations.

Front 37

2 goals of Inventory Management

Back 37

-ensure adequate inventories to sustain operations.
-minimize inventory costs, including carrying costs.

Front 38

Production Pattern

Back 38

Level Production, or Seasonal Production.

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Level Production

Back 39

working at a consistent level of effort to manufacture the annual forecasted amount of inventory. Results in inventory buildups during slow periods, and can have higher holding costs.

Front 40

Seasonal Production

Back 40

Increasing production during periods of peak demand and reducing production during slow periods. May result in additonal operating costs for overtime wages.

Front 41

Inventory Management

Back 41

1) Production Pattern
2) Inventory and Inflation
3)Supply Chain
4)Economic Order Quantity
5)Inventory Management and MRP
6)Just In Time Purchasing
7)Just In Time Production
8)Enterprise Resource Planning Systems

Front 42

Inventory and Inflation

Back 42

Inventory Policy may be affected by inflation. If SIlver is used as a raw material, and the price of silver fluctuates.

Front 43

Supply Chain

Back 43

describes a good's production and and distribution. Flow of goods and services, from acquisition of raw materials through delivery of product to the consumer.

Front 44

Supply Chain Management

Back 44

Many firms use this to manage inventories and their relationships with their suppliers. Sharing of key information from the point of sale to the final consumer back to the manufacturer, to the manufacturer's suppliers, and to the suppliers' suppliers.

Front 45

Economic Order Quantity

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the amount to be ordered. Minimizes the sum of ordering and carrying costs. Carrying costs increase with order size, and Ordering costs decrease with order size.

Front 46

Materials Requirements Planning (MRP)

Back 46

a computerized system that manufactures finished goods based on demand forecasts. Demand forecasts are used to develop bills of materials that outline the components that go into the final products.

Front 47

MRP II

Back 47

an extension of MRP, features an automated closed loop system. Production planning drives the master schedule which drives the materials lans which is input to the capacity plan.

Front 48

Just in Time Purchasing

Back 48

a demand-pull inventory system which may be applied to purchasing so that raw material arrives just as it is needed. Primary benefit is reduction of inventories, ideally to zero.

Front 49

Just in Time Production

Back 49

demand pull system in which each component of a finished good is produced when needed by the next production stage.
-Emphasisez reduced production cycle time-setup time.
-Emphasize productio flexibility-
-Emphasize solving production problems immediately. JIT system, each worker is responsible for the quality of his or her own work.

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Enterprise Resource Planning

Back 50

enterprise wide computerized information systems that connect all functional areas within an organization.

Front 51

Receivable Management

Back 51

Effective receivables management involves systems for deciding whether or not to grant credit and for monitoring the receivables.

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Days Sales Outstanding

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Receivables/Sales Per Day

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Permanent Current Assets

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the amount of current assets that are required to operate the business in even the slowest periods of the year. Financed with long term financing such as stocks or bonds.

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Temporary Current Assets

Back 54

inventory, a/r that are financed with short term financing.

Front 55

Aggressive Financing of Current Assets

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when extensive amounts of short term debt is used to finance current assets.

Front 56

Conservative strategies for financing current assets

Back 56

financing some current assets with some long-term debt which involves a more stable interest rate.

Front 57

Self Liquidating Approach

Back 57

financing assets involves matching asset and liability maturiites.

Front 58

Sources of short term funds

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1) Accounts Payable
2)Short Term Bank Loans
3)Commercial Paper
4)Accounts Receivable Financing
5) Inventory Financing
6)Hedging to Reduce Interest Rate Risk

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Prime Rate

Back 59

the rate a bank charges its most creditworthy customers. The rate increases for customers with more credit risk.

Front 60

London Interbank Offered Rate

Back 60

this rate is important because of the availability of dollars for loan on the international market. US companies can decide to borrow money in the US financial markets, London, or any other major money market center. LIBOR reflects price of funds in the international market.

Front 61

Compensating Balances

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loan agreements may require the borrower to maintain an average demand deposit balance equal to some percentage of the face amount of the loan. Increases the effective interest rate of the loan, because the firm does not get use of the requirement.

Front 62

Letter of Credit

Back 62

an instrument that facilitates international trade. issued by the importer's bank, promises that the bank will pay for the imported merchandise when it is delivered. Reduces risk of nonpayment.

Front 63

Accounts Receivable Financing

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1)Pledging of Receivables
2)Factoring
3)Asset backed public offerings

Front 64

Pledging of Receivables

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pledging a/r involves committing the receivables as collateral for a loan form a financial institution. The financial inst. will evaluate the receivables to see if they are sufficient quality to serve as collateral. Interest rate will depend on the financial strength of the firm.

Front 65

Factoring

Back 65

when A/R are factored they are outright sold to a finance company. In such decisions, the finance company is often directly involved in the credit decisions, and will submit the funds to the firm upon acceptance of the account. The finance company is paid a fee of the invoices accepted.

Front 66

Asset Backed Public Offerings

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large firms hae begun floating public offerings debt collateralized by the firm's accounts receivables.

Front 67

Inventory Financing

Back 67

a firm may also borrow funds using its inventory as collateral. Depends on marketablity of the inventory.

Front 68

Blanket Inventory Lien

Back 68

This is simply a legal document that establishes the inventory as collateral for the loan. No physical control over inventory is involved.

Front 69

Trust Receipt

Back 69

an instrument that acknowledges that the borrower holds the inventory and that proceeds from sale will be put in trust for the lender. Each item is tagged and controlled by serial number. Also known as floor planning.

Front 70

Warehousing

Back 70

the most SECURE form of inventory financing. The inventory is stored in a public warehouse or under the control of public warehouse personnel. The goods can only be removed with the lender's permission.

Front 71

Hedging to reduce interest rate risk

Back 71

firms that must borrow signifcant amounts of short-term variable rate funds are exposed to high levels of interest rate risk. Mgt may decide to hedge the risk with derivatives purchased or sold in the financial futures market.