Managing the Firm's Finances

Describe how financial managers meet businesses short&- and long&- term needs for funds.

     To increase the firm's value to its owners, financial managers develop plans that identify the funds a company needs, when those funds are needed, and how those funds can be obtained. In the short run, firms need funds to cover their operating expenses. In the long run, they need funds to cover purchases' of land buildings, and equipment (capital expenses).

Identify five sources of short&-term financing for businesses.

     To finance their short&-term expenditures, firms rely on credit extended by suppliers (trade credit) and on secured and unsecured loans. Some very large firms issue commercial paper. Smaller firms may choose to factor their accounts receivable.

Distinguish between the various sources of long&-term financing and the financial risks involved with each type.

     Long&-term sources of funds include debt financing, equity financing, and preferred stock financing. Debt financing uses long&-term loans and corporate bonds, both of which obligate the firm to pay interest regularly. Equity financing involves the use of the owners' capital either from the sale of common stock or from retained earnings. Preferred stock funding has some of the features of both common stock and bonds. Financial planners must choose the proper mix of debt, equity, and preferred stock funding. The most conservative, least risky and most expensive strategy is the use of all&-equity financing. The most  speculative option is the use of all&-debt funding.

Describe how financial returns to investors are related to the risks they take.

     Financial managers and investors consider how safe or risky different investments can be. If the financial return in the future is certain, investors are willing to invest for a lower return But if the future return is uncertain, investors demand a greater potential return before they will invest.

Identify the areas of financial management of particular concern to small businesses.

     Finance and risk management are especially important for small businesses. They must establish bank and trade credit by taking steps to show their credit worthiness. They also need to use cash flow planning to gain credit and use it wisely in meeting their needs for funds.