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Financial Management > Operating Funds
Operating Funds
• Day-to-Day Needs
• Capital Expenditures
• Alternate Sources of Funds
• Credit Operations
• Purchasing Inventory
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Financial Management > Operating Funds
Day-to-Day Needs
• The International Financial Reporting Standards (IFRS) defines operating cash
flow as cash generated from operations less taxation and interest paid,
investment income received and less dividends paid.
• "Cash and cash equivalents" on the balance sheet are the most liquid assets
found on this statement. They are assets that are readily convertible into cash,
such as money market holdings, short-term government bonds or Treasury bills,
marketable securities, and commercial paper.
• Cash flow forecasting or cash flow management is a key aspect of the financial
management of a business, because planning for future cash requirements can
help to avoid a liquidity crisis in the business.
Liquidity
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Financial Management > Operating Funds
Capital Expenditures
• Capital expenditures are needed to bring a project to a commercially operable
status. Whether a particular cost is capital or not depends on many factors, such
as accounting rules, tax laws, and materiality.
• Capital costs include expenses for tangible goods, such as the purchase of plants
and machinery, as well as expenses for intangibles assets, such as trademarks
and software development.
• A capital expenditure cannot be deducted in the year in which it is paid or incurred
and must be capitalized. The general rule is that if the acquired property's useful
life is longer than the taxable year, then the cost must be capitalized.
The construction of a building requires the use of
capital.
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Financial Management > Operating Funds
Alternate Sources of Funds
• Cash inflows and outflows can originate from three types of activities: operating,
investing, and financing.
• Operating activities that generate cash flows include receipts from the sale of
goods or services; receipts from the sale of loans, debt, or equity instruments in a
trading portfolio; and interest received on loans.
• Cash inflows from investing activities involve non-current assets, such as sales of
land, building, equipment, and marketable securities; loans from suppliers; and
payments related to mergers and acquisitions.
• Financing activities include the inflow of cash from investors, such as banks and
shareholders, proceeds from issuing short-term or long-term debt; sale of
Cash Flow Statement
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repurchased company shares (treasury stock); for non-profit organizations,
receipts of donor-restricted cash; and sale of the company's stock.
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Financial Management > Operating Funds
Credit Operations
• Credit is sometimes not granted to a person or business with financial instability
or difficulty. Companies frequently offer credit to their customers as part of the
terms of a purchase agreement.
• A line of credit is any credit source extended to a business or individual by a bank
or other financial institution and may take several forms.
• A revolving credit line provides a borrower with a maximum aggregate amount of
capital, available over a specified period of time; it allows the borrower to draw
down, repay, and re-draw credit amounts advanced to her by the available capital
during the term of the debt.
• In a loan, the borrower initially receives or borrows an amount of money, called
Loans can weigh a business down.
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the "principal,", from the lender and is obligated to pay back or repay an amount
with interest to the lender at a later time.
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Financial Management > Operating Funds
Purchasing Inventory
• The scope of inventory management includes items such as: stock replenishment
lead time, carrying costs of inventory, asset management, and inventory
forecasting.
• There are four basic reasons for keeping an inventory: time lags present in the
supply chain, the maintenance of inventory for consumption during variations in
lead time, inventories maintained to meet uncertainties in demand and supply,
and economies of scale.
• Purchasing refers to a business or organization acquiring goods or services to
accomplish the goals of its enterprise. Companies generally use operating funds
to finance their purchasing program.
Clothing Retailers Should Have Sufficient
Inventory On Hand
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• One of the goals of purchasing inventory is to acquire goods at the most
advantageous terms for the buying entity (the "Buyer").
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Appendix
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Financial Management
Key terms
• amortize To reduce (a debt, liability, etc. ) gradually or in installments.
• creditor A person to whom a debt is owed.
• debtor A person or firm that owes money; one in debt; one who owes a debt
• economies of scale The characteristics of a production process in which an increase in the scale of the firm causes a decrease
in the long-run average cost of each unit.
• expenditure Amount expended; expense; outlay.
• International Financial Reporting Standards International accounting standards that provide a common global language for
business affairs, so that company accounts are understandable and comparable across international boundaries.
• lead time The amount of time between the initiation of some process and its completion, e.g. the time required to manufacture
or procure a product; the time required before something can be provided or delivered.
• liquidity An asset's ability to become solvent without affecting its value; the degree to which it can be easily converted into cash.
• non-current assets assets and property not easily converted into cash; a fixed/non-current asset can also be defined as an
asset not directly sold to a firm's consumers/end-users
• Trademark A word, symbol, or phrase used to identify a particular company's product and differentiate it from other companies'
products.
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Financial Management
Cash Flow Statement
The cash flow statement shows cash inflows and outflows for a specific reporting period and distinguishes between three types of activities that generate
or use cash: operating, investing, and financing.
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Financial Management
Loans can weigh a business down.
The use of credit is a necessity in business and should be managed wisely.
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Flickr. "3D Shackled Loans | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/86530412@N02/8231672492/ View on Boundless.com
Financial Management
Clothing Retailers Should Have Sufficient Inventory On Hand
Inventory purchases should be carefully managed to prevent overstocking merchandise or having inventory shortages.
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Flickr. "Handmade wardrobe for Sidra | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/verypurpleperson/4564688357/ View on Boundless.com
Financial Management
The construction of a building requires the use of capital.
The funds used to construct and put a building into use are capital expenditures.
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Financial Management
Liquidity
Liquidity is essential for businesses, because it allows them to meet daily operating needs.
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Financial Management
Interest Rates
Long-term interest rate statistics for non-Euro countries plus Greece, Portugal, and Ireland.
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Financial Management
Which of the following is NOT a characteristic of cash and cash
equivalents?
A) Insignidicant risk of change in value
B) Refers to currency
C) Cash flow forecasting is a key aspect of financial management
D) Long-term
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Financial Management
Which of the following is NOT a characteristic of cash and cash
equivalents?
A) Insignidicant risk of change in value
B) Refers to currency
C) Cash flow forecasting is a key aspect of financial management
D) Long-term
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Financial Management
Which of the following capetal expendistures are capitalized?
A) All of these answers
B) Restoring property
C) Acquiring a new business
D) Upgrading an asset
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Financial Management
Which of the following capetal expendistures are capitalized?
A) All of these answers
B) Restoring property
C) Acquiring a new business
D) Upgrading an asset
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Financial Management
Which of the following cash inflows is considered to be an
investing cash flow?
A) Interest received on loans
B) Sales of repurchased shares
C) Dividends received
D) Payments of M&A
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Financial Management
Which of the following cash inflows is considered to be an
investing cash flow?
A) Interest received on loans
B) Sales of repurchased shares
C) Dividends received
D) Payments of M&A
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Financial Management
What in unique about an annuity loan repayment structure?
A) The borrower can draw down credit, repay and re-draw
B) The money is paid back in regular installments
C) Interest is paid only on money actually withdrawn
D) Each installment is the same amount
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Financial Management
What in unique about an annuity loan repayment structure?
A) The borrower can draw down credit, repay and re-draw
B) The money is paid back in regular installments
C) Interest is paid only on money actually withdrawn
D) Each installment is the same amount
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Financial Management
When a few suppliers' credentials and history are analyzed with
the purpose of selecting one, it is called:
A) Shopping
B) Buying
C) Blanketing
D) Mastering
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Financial Management
When a few suppliers' credentials and history are analyzed with
the purpose of selecting one, it is called:
A) Shopping
B) Buying
C) Blanketing
D) Mastering
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Financial Management
Attribution
• Wikipedia. "Operating cash flow." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Operating_cash_flow
• Wikipedia. "Cash and cash equivalents." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cash_and_cash_equivalents
• Wikipedia. "International Financial Reporting Standards." CC BY-SA 3.0
http://en.wikipedia.org/wiki/International%20Financial%20Reporting%20Standards
• Wikipedia. "Cash flow forecasting." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cash_flow_forecasting
• Wiktionary. "liquidity." CC BY-SA 3.0 http://en.wiktionary.org/wiki/liquidity
• Wikipedia. "Capital spending." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Capital_spending
• Wikipedia. "Capital expenditure." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Capital_expenditure
• Wiktionary. "expenditure." CC BY-SA 3.0 http://en.wiktionary.org/wiki/expenditure
• Wikipedia. "Capital cost." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Capital_cost
• Wiktionary. "amortize." CC BY-SA 3.0 http://en.wiktionary.org/wiki/amortize
• Wikipedia. "Trademark." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Trademark
• Wikipedia. "Cash flow forecasting." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cash_flow_forecasting
• Wikipedia. "Cash flow statement." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cash_flow_statement#Operating_activities
• Wikipedia. "non-current assets." CC BY-SA 3.0 http://en.wikipedia.org/wiki/non-current%20assets
• Wikipedia. "Loan." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Loan
• Wikipedia. "Line of credit." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Line_of_credit
• Wikipedia. "Revolving credit." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Revolving_credit
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Financial Management
• Wiktionary. "debtor." CC BY-SA 3.0 http://en.wiktionary.org/wiki/debtor
• Wiktionary. "creditor." CC BY-SA 3.0 http://en.wiktionary.org/wiki/creditor
• Wikipedia. "Credit (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Credit_(finance)
• Wikipedia. "Purchasing." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Purchasing
• Wikipedia. "Inventory turnover." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Inventory_turnover
• Wikipedia. "Inventory." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Inventory
• Wikipedia. "economies of scale." CC BY-SA 3.0 http://en.wikipedia.org/wiki/economies%20of%20scale
• Wiktionary. "lead time." CC BY-SA 3.0 http://en.wiktionary.org/wiki/lead+time
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