1
Introduction to Business
Chapter 16: Understanding Financial Management and Securities
Markets
16.1 The Role of Finance and the Financial Manager
Finance involves managing the firm’s money. The financial manager must decide how much
money is needed and when, how best to use the available funds, and how to get the required
financing. The financial manager’s responsibilities include financial planning, investing
(spending money), and financing (raising money). Maximizing the value of the firm is the main
goal of the financial manager, whose decisions often have long-term effects.
16.1 Review Questions
1. What is financial management?
2. Why do all business decisions have financial consequences?
3. What do financial managers do, and what is their main focus?
4. What are the 3 key activities of financial managers?
5. What do financial plans project and when are they prepared?
6. What is the goal of investment?
7. The financing (raising money) activity is seeking a balance between what two types of
funding?
8. What is another word for the opportunity for profit?
9. What is it called if the investment does not achieve the expected level or return?
10. Describe the risk-return trade-off and provide an example.
16.2 How Organizations Use Funds
A firm incurs short-term expenses—supplies, inventory, and wages—to support current
production, marketing, and sales activities. The financial manager manages the firm’s
investment in current assets so that the company has enough cash to pay its bills and support
accounts receivable and inventory. Long-term expenditures (capital expenditures) are made for
fixed assets such as land, buildings, equipment and information systems. Because of the large
outlays required for capital expenditures, financial managers carefully analyze proposed
projects to determine which offer the best returns.
16.2 Review Questions
1. What do short-term expenditures support?
2. What are long-term expenses typically for?
For more free, peer-reviewed, openly licensed resources visit OpenStax.org.
, 2
3. What are short-term expenses often called?
4. What do short-term expenses typically result in?
5. What is cash management?
6. How are cash requirements estimated?
7. How do financial managers determine how much cash to keep available?
8. What do financial managers do with a surplus?
9. What are marketable securities, and what are the three most popular?
10. Describe commercial paper.
11. What tools are available to find short-term investments?
12. What are challenges of cash management with overseas operations?
13. How do financial managers shorten the time cash outflows and cash inflows?
14. What are 3 key strategies to collect money owed?
15. What kind of sales does accounts receivable oversee?
16. What does accounts receivable management involve?
17. How does technology help companies with their credit and collections performance?
18. What is the benefit of outsourcing.
19. What does the cost of inventory include?
20. What different views about inventory do managers have?
21. What are capital expenditures, and why do companies make them?
22. What is capital budgeting used for?
16.3 Obtaining Short-Term Financing
Short-term financing comes due within one year. The main sources of unsecured short-term
financing are trade credit, bank loans, and commercial paper. Secured loans require a pledge of
certain assets, such as accounts receivable or inventory, as security for the loan. Factoring, or
selling accounts receivable outright at a discount, is another form of short-term financing.
16.3 Review Questions
1. How are short-term loans shown on a balance sheet?
2. What are two types of short-term loans?
3. What are unsecured loans made on the basis of?
4. What are three types of unsecured loans?
5. What is trade credit, and how is it entered in the books?
6. What are different bank loan types?
7. What is the difference between a line of credit and a revolving credit agreement?
8. What another term for commercial paper, and why do big companies use it?
9. What do secured loans require?
10. What are main sources of secured loans?
For more free, peer-reviewed, openly licensed resources visit OpenStax.org.
Introduction to Business
Chapter 16: Understanding Financial Management and Securities
Markets
16.1 The Role of Finance and the Financial Manager
Finance involves managing the firm’s money. The financial manager must decide how much
money is needed and when, how best to use the available funds, and how to get the required
financing. The financial manager’s responsibilities include financial planning, investing
(spending money), and financing (raising money). Maximizing the value of the firm is the main
goal of the financial manager, whose decisions often have long-term effects.
16.1 Review Questions
1. What is financial management?
2. Why do all business decisions have financial consequences?
3. What do financial managers do, and what is their main focus?
4. What are the 3 key activities of financial managers?
5. What do financial plans project and when are they prepared?
6. What is the goal of investment?
7. The financing (raising money) activity is seeking a balance between what two types of
funding?
8. What is another word for the opportunity for profit?
9. What is it called if the investment does not achieve the expected level or return?
10. Describe the risk-return trade-off and provide an example.
16.2 How Organizations Use Funds
A firm incurs short-term expenses—supplies, inventory, and wages—to support current
production, marketing, and sales activities. The financial manager manages the firm’s
investment in current assets so that the company has enough cash to pay its bills and support
accounts receivable and inventory. Long-term expenditures (capital expenditures) are made for
fixed assets such as land, buildings, equipment and information systems. Because of the large
outlays required for capital expenditures, financial managers carefully analyze proposed
projects to determine which offer the best returns.
16.2 Review Questions
1. What do short-term expenditures support?
2. What are long-term expenses typically for?
For more free, peer-reviewed, openly licensed resources visit OpenStax.org.
, 2
3. What are short-term expenses often called?
4. What do short-term expenses typically result in?
5. What is cash management?
6. How are cash requirements estimated?
7. How do financial managers determine how much cash to keep available?
8. What do financial managers do with a surplus?
9. What are marketable securities, and what are the three most popular?
10. Describe commercial paper.
11. What tools are available to find short-term investments?
12. What are challenges of cash management with overseas operations?
13. How do financial managers shorten the time cash outflows and cash inflows?
14. What are 3 key strategies to collect money owed?
15. What kind of sales does accounts receivable oversee?
16. What does accounts receivable management involve?
17. How does technology help companies with their credit and collections performance?
18. What is the benefit of outsourcing.
19. What does the cost of inventory include?
20. What different views about inventory do managers have?
21. What are capital expenditures, and why do companies make them?
22. What is capital budgeting used for?
16.3 Obtaining Short-Term Financing
Short-term financing comes due within one year. The main sources of unsecured short-term
financing are trade credit, bank loans, and commercial paper. Secured loans require a pledge of
certain assets, such as accounts receivable or inventory, as security for the loan. Factoring, or
selling accounts receivable outright at a discount, is another form of short-term financing.
16.3 Review Questions
1. How are short-term loans shown on a balance sheet?
2. What are two types of short-term loans?
3. What are unsecured loans made on the basis of?
4. What are three types of unsecured loans?
5. What is trade credit, and how is it entered in the books?
6. What are different bank loan types?
7. What is the difference between a line of credit and a revolving credit agreement?
8. What another term for commercial paper, and why do big companies use it?
9. What do secured loans require?
10. What are main sources of secured loans?
For more free, peer-reviewed, openly licensed resources visit OpenStax.org.
