Finance and Financial Management

Finance and Financial Management

• Finance function in a business involves acquiring and managing funds within the firm
• Financial management involves managing a firm's resources to meet its goals and objectives
• Financial managers examine financial data and recommend strategies for improving financial performance

Financial Manager's Activities

• Obtaining funds
• Effectively controlling the use of funds
• Auditing
• Managing taxes
• Advising top management on financial matters
• Collecting funds (credit management)
• Controlling funds (funds management)
• Budgeting
• Planning

Reasons for Financial Failure

• Not enough capital
• Poor control over cash flow
• Inadequate expense control (overspending)

Financial Planning

• Involves analyzing short-term and long-term money flows to and from the company
• 3 key steps:
  • Forecasting firm's short-term and long-term financial needs
  • Developing budgets to meet those needs
  • Establishing financial controls to see if the company is achieving its goals

Forecasting

• Short-term forecast: predicts revenues, costs, and expenses for a period of one year or less
• Cash flow forecast: predicts cash inflows and outflows in future periods
• Long-term forecast: predicts revenues, costs, and expenses for a period longer than one year

Budgeting

• Sets forth management's expectations and allocates the use of specific resources throughout the firm
• Depends on balance sheet, income statement, statement of cash flows, and short-term and long-term financial forecasts
• Guides financial operations and expected financial needs

Financial Control

• A process in which a firm periodically compares its actual revenues, costs, and expenses with its budget
• Key needs for operational funds in a firm include:
  • Managing day-by-day needs of the business
  • Controlling credit operations
  • Acquiring needed inventory
  • Making capital expenditures

Alternative Sources of Funds

• Debt financing: funds raised through various forms of borrowing that must be repaid
• Equity financing: money raised from within the firm, from operations or through the sale of ownership in the firm (stock or venture capital)
• Short-term financing: funds needed for a year or less
• Long-term financing: funds needed for more than a year
• Trade credit: the practice of buying goods and services now and paying for them later

Loans and Financing

• Promissory note: a written agreement with a promise to pay a supplier a specific sum of money at a definite time
• Secured loan: backed by collateral
• Unsecured loan: doesn't require any collateral
• Long-term financing loans generally come due within 3 to 7 years but may extend to 15 or 20 years
• Term-loan agreement: a promissory note that requires the borrower to repay the loan in specified installments
• Risk/return trade-off: the principle that the greater the risk a lender takes in making a loan, the higher the interest rate required