1、Busn 101 Chapter 18,Financial Management,1,Goals,Finance Financial Management & Financial Managers Financial Planning Process Three Key Budgets in a Financial Plan Major reasons Why Firms Need Operating Funds Types of Financing for Operating Funds Short-term Financing Long-term Financing,2,Funds = C
2、ash,The word Fund almost always means Cash,3,What Is Finance?,Definition of Finance: The function in a business that acquires funds for the firm and manages those funds within the firm Definition of Finance: How to allocate scarce resources (debt & equity) across assets over time in order to earn a
3、return or achieve the organizations goals and objectives What should we invest in? Should we incur debt?,4,Financial Management & Financial Managers,Financial Management The job of managing a firms resources so it can meet its goals and objectives Preparing budgets Cash Flow analysis AR and AP and I
4、nventory and Cash sort-term cash management Capital Expenditures Risk and Uncertainty define the role of financial management Financial Managers Managers who make recommendations to top executives regarding strategies for improving the financial strength of a firm,5,Accountant Vs. Financial Manager,
5、Accountant,Financial Manager,Create accounting system Accrual Accounting (Not Cash Flow) Record transactions Create financial reports that provide useful information for decision making Look Back,Use financial information to make decisions about buying assets and incurring debt Cash Flow (Not Accrua
6、l Accounting ) Budgets Cash Flow Management What do we buy? How do we obtain funds (Equity or Debt)? Looking Forward,6,3 Most Common Ways For Firm To Fail Financially,Lack of Cash to start business Poor control over cash flows once the business is started Expenses too high,7,Financial Management Tas
7、ks,Manage Operational Cash In and Out: How should we finance Inventory? Can firm pay bills (Accounts Payable)? Can the firm collect from customers (Accounts Receivable)? What terms should we give customers? Small and medium sized businesses must pay especially close attention to these because they o
8、ften do not have large supplies of cash or easy access to debt,8,Financial Management Tasks,Cost Accounting and Auditing Financial Statements to assure that accounting numbers are reliable (usually accounting) Can firm pay taxes? Tax planning and tax implications to minimize cash flow out Forecastin
9、g & Budgets,9,Financial Management Tasks,Can firm Pay long-term debts? Can we pay dividends? Should we issue debt? Can we issue debt? Should we (or can we) issue Equity? What long-term assets should we buy?,10,18-11,Financial Planning Process Three Key Budgets in a Financial Plan,Financial Plan,Oper
10、ating Budget,Financial Controls,Cash Budget,Capital Budget,Long-term Forecasting,Short-term Forecasting,Feedback,Feedback,Financial Planning Process,Forecasting Financial Needs Working With The Budget Process Establishing Financial Controls,12,Forecasting Financial Needs,Short-term Forecast Cash Flo
11、w Forecast Long-term Forecast,13,Short-term Forecast,Forecast that predicts revenues, costs, and expenses for a period of one year or less Revenues and Expenses go into Income Statement; whereas costs are for things such as capital equipment where all the cots does not go as an expense into the Inco
12、me Statement This forecast is the foundation for most other financial plans Part of this Short-term Forecast may be in the form of a Cash Flow Forecast ,14,Cash Flow Forecast,Forecasts that predict the cash inflows and outflows in future periods, usually months or quarters Based on expected sales re
13、venue and on various costs and expenses incurred and when they will come due Past accounting data and current economic data is used to estimate future cash flows,15,Long-term Forecast,Forecast that predicts revenues, costs, and expenses for a period of longer than one year (usually 2 1o years) Long
14、term strategic goals affect this forecast Before you can complete this forecast you must ask questions like these: What business are we in now or in five years The answer helps decide: What long-term assets to buy What technology to invest in What research and development to invest in Can we pay the
15、 interest on long-term debt,16,Working With The Budget Process,Budget Capital Budget Cash Budget Operating Budget (Master Budget),17,Budget,A Financial Plan that sets forth managements expectations, and, on the basis of those expectations, allocates the use of specific resources throughout the firm
16、Budget is based on past financial statements (accounting). If the financial statements are not accurate, the budget will not be accurate Important Budgets: Capital Budget Cash Budget Operating Budget (Master Budget),18,Capital Budget,A budget that highlights a firms spending plans for major asset pu
17、rchases that often require large sums of money,19,Cash Budget,A budget that estimates a firms projected cash inflows and outflows that the firm can use to plan for any cash shortages or surpluses during a given period The Cash Budget is usually the last budget to be created because you need all the
18、other estimates of cash flow before you can complete the Cash Budget,20,Operating Budget (Master Budget),The budget that ties together all of the firms other budgets; it is the projection of dollar allocations to various costs and expenses needed to run or operate the business, given projected reven
19、ues,21,Financial Control,A process in which a firm periodically compares its actual revenues, costs and expenses with its budget,22,18-23,Major reasons Why Firms Need Operating Funds,Manage Daily Operations Controlling Credit Operations Acquire Inventory Capital Expenditures,Manage Daily Operations
20、& Controlling credit operations,Pay cash out for bills as late as possible while still earning the discount for paying early Collect cash in from customers as soon as possible, and offer attractive “pay early” terms Put excess money in bank to earn interest (time value of money) Borrow money short-t
21、erm if necessary to pay bills Use of credit cards to speed up customer collections But incur fee for this service,24,Acquire Inventory,Because you pay cash for inventory, when inventory sits on the shelf, cash is sitting on the shelf Managing a high inventory turnover may help to not keep cash on th
22、e shelf Inventory that sits on the shelf cannot earn a good return for the firm (unless the value of the inventory is rising faster than the rate of inflation and the rate of return required by the firm),25,Capital Expenditures,Major investments in either tangible long-term assets such as land, buil
23、dings, and equipment or intangible assets such as patents, trademarks, and copyrights or other businesses Capital Expenditures = Assets needed to run the business in order to make a return,26,Sources of funds,Debt Financing Funds raised through various forms of borrowing that must be repaid Equity F
24、inancing Funds raised from operations within the firm or through the sale of ownership in the firm Sort-term Financing Borrowed capital that will be repaid within one year Long-term Financing Borrowed Capital that will be repaid over a specific period longer than one year,27,18-28,Why Firms Need Fun
25、ds,Short-Term Funds Meeting monthly expenses Unanticipated emergencies Cash-flow problems Expanding current inventory Temporary promotional programs,Long-Term Funds New product development Replacing capital expenditure Mergers or acquisitions Expansion into new markets Building new facilities,Short-
26、term Financing,Trade Credit The practice of buying goods and services now and paying for them later 2/10, N 30 Promissory Note A written contract with a promise to pay a supplier or other creditor a specific sum of money at a definite time Customers that may not have good credit Family & Friends,29,
27、Short-term Financing,Secured Loan A loan backed by something valuable, such as property If you dont pay back the loan, the creditor can take the asset (collateral) Unsecured Loan A loan that is not backed by any specific asset Line of Credit A given amount of unsecured short-term funds a bank will l
28、end to a business, provided the funds are readily available Speeds up process so firm does not have to reapply for a loan each time it wants to borrow,30,Short-term Financing,Revolving Credit Agreement A line of credit that is guaranteed by the bank Commercial Finance Companies Organizations that ma
29、ke short-term loans to borrowers who offer tangible assets as collateral Factoring The process of selling Accounts Receivable for cash Factoring is not a loan Factoring can be expensive Pledging AR to get a loan Commercial Paper Unsecured promissory notes of $100,000 and up that mature (come due) in
30、 270 days (270/360 = 3/4 year) or less,31,Long-term Financing,Term-loan Agreement Bonds Equity Issue Stock Use Retained Earnings Venture Capital Long-term loans are usually more expensive than short-term loans,32,Term-loan Agreement,A promissory note that requires the borrower to repay the loan in s
31、pecific installments,33,Bonds,Bonds = Long-term debt 1 Bond usually means the corporation (or government) borrows $1000 (face value) Corporations usually issue many Bonds Bonds can be: Interest Only Pay interest each period and face value back on the maturity date Discount Pay all interest and Face
32、Value back on Maturity Date Bonds can be secured or unsecured loans Unsecured Bonds are called “Debentures”,34,Indenture Terms,The terms of agreement in a bond issue The written agreement between the corporation and the lender detailing the terms of the debt issue,35,Equity,Issue Stock Use Retained
33、Earnings,36,Venture Capital (Equity),Money that is invested in new or emerging companies that are perceived as having great profit potential,37,38,Bonds and Stocks:,Like stock, bonds bring capital (money) into the corporation so that it can invest in profitable projects Bondholders are creditors The
34、y have a fixed claim to cash flow Stockholders are owners They have a residual claim to cash flow,Differences Between Debt and Equity,Debt Not an ownership interest Creditors do not have voting rights Interest is considered a cost of doing business and is tax deductible Creditors have legal recourse
35、 if interest or principal payments are missed Excess debt can lead to financial distress and bankruptcy,Equity Ownership interest Common stockholders vote for the board of directors and other issues Dividends are not considered a cost of doing business and are not tax deductible Dividends are not a
36、liability of the firm and stockholders have no legal recourse if dividends are not paid An all equity firm can not go bankrupt,Debt Financing,Leverage Raising needed funds through borrowing to increase the firms rate of return (ROE Return On Equity) Loan Risk/Return Trade-off The principal that the greater the risk a lender takes in making loan, the higher the interest rate required Cost Of Capital The Rate Of Return a company must earn in order to meet the demands of its lenders and expectations of its equity holders,40,
