Reading and Speaking Tasks

I. Make up questions covering the content of the text and le your fellow students answer them.

II. Having read the text, what you can now say about:

• financial plan;

• financial control.

III. Work with a partner who read the text to produce a summary of the text. You need only mention the important points. Lesson 2. Firm's finances Text a: Short-Term and Long-Term Expenditures

Every company needs money to survive. Failure to make payments to suppliers can lead to bankruptcy and the dissolution of the firm. To maximize company profits, financial managers must distinguish between two different kinds of financial outlays: short-term (operating) expenditures and long-term (capital) expenditures.

Short-term (operating) expenditures

Short-term expenditures are the expenditures incurred regularly in a firm's everyday business activities. To manage these expenditures, financial managers must pay special attention to accounts payable, accounts receivable, and inventories.

Accounts Payable are unpaid bills to suppliers for materials. In drawing up a financial plan, financial managers must pay special attention to accounts payable, for this is the largest single category of short-term debt for most companies. But financial managers must also rely on other managers for accurate information about the quantity of supplies that will be required in an upcoming period. They must also consider the time period in which they must pay various suppliers. For example, a financial manager for a magazine needs information from production about both the amount of ink and paper needed to print the magazine and when these supplies will be needed. Obviously, it is in the firm's interest to withhold payment as long as it can. The longer it withholds payment, the longer it will have that cash available for investments or other uses.

Accounts Receivable are amounts due from customers who have purchased goods on credit. A sound financial plan also requires financial managers to project accurately both the amounts buyers will pay to the firm and when they will make these payments. Because they represent an investment in products on which the firm has not yet received payment, accounts receivable temporarily tie up some of the firm's funds. Clearly, it is in the firm's interest to receive payment as quickly as possible.

Given that it is in the self-interest of buyers to delay payment as long as possible, how can financial managers predict payment times? The answer lies in the development of a credit policy - the rules governing the extension of credit to customers. The credit policy sets standards as to which buyers are eligible for what type of credit. Financial managers extend credit to customers who have the ability to pay and honor their obligations to pay. They deny credit to firms with poor repayment histories. Information about such histories is available from many sources.

The credit policy also sets payment terms. For example, credit terms of «2/10; net 30» mean that the selling company offers a 2 percent discount if the customer pays within 10 days. The customer has 30 days to pay the regular price. Under these terms, the buyer would have to pay only $980 on a $1,000 invoice on days 1 to 10, but all $1,000 on days 11 to 30. The higher the discount, the more incentive buyers have to pay early. Sellers can thus adjust credit terms to influence when customers pay their bills. Often, however, credit terms can be adjusted only slightly without giving competitors an edge.

Inventories. Between the time a firm buys raw materials and the time it sells finished products, it has funds tied up in inventory, materials and goods that it will sell within the year. There are three basic types of inventories: raw materials, work-in-process, and finished goods.

The supplies a firm purchases to use in its production process are its raw materials inventory. Levy Strauss's raw materials inventory includes huge rolls of denim. Work-in-process inventory consists of goods part-way through the production process. Cut out but not yet sewn jeans are part of the work-in-process inventory at Levi's. The finished-goods inventory consists of those items ready for sale. Completed blue jeans ready for shipment to dealers are part of Levi's finished-goods inventory.

Failure to manage inventory can have grave financial consequences. Too little inventory of any kind can cost the firm sales. Too much inventory means that the firm has funds tied up that it cannot use elsewhere. In extreme cases, too much inventory may force a company to sell merchandise at low profits simply to obtain cash.

Long-term (capital) expenditures

In addition to needing funds to cover its operating expenditures, companies also need funds to cover long-term expenditures on fixed assets. Fixed assets are items that have a lasting use or value, such as land, buildings, and machinery.

Because they are so crucial to business success, long-term expenditures are usually more carefully planned than are short-term expenditures. But long-term expenditures pose special problems for the financial manager because they differ from short-term expenditures in several ways. First, unlike inventories and other short-term assets, they are not normally sold or converted into cash. Second, their acquisition requires a very large investment. Third, they represent an ongoing tie-up of the company's funds. All these features influence the ways in which long-term expenditures are funded.