Financial Management BOM Note PDF

NOTE 10: FINANCIAL MANAGEMENT 1) THE ROLE OF FINANCIAL MGT. 4.4 FINANCIAL PLAN. 1.1 FINANCIAL MANAGEMENT. - identify amount/type capital needed to achieve goal -planning for a firm’s money needs and managing the 4.5 BUDGETS ( IDENTIFY WHEN & W...

NOTE 10: FINANCIAL MANAGEMENT 1) THE ROLE OF FINANCIAL MGT. 4.4 FINANCIAL PLAN. 1.1 FINANCIAL MANAGEMENT. - identify amount/type capital needed to achieve goal -planning for a firm’s money needs and managing the 4.5 BUDGETS ( IDENTIFY WHEN & WHERE $ WILL BE allocation and spending of funds. SPENT ). 1.2 RISK/RETURN TRADE-OFF. - start-up budget : identify fund & spending needed to launch the company -The balance of potential risks against potential rewards. - operating budget : identify cash requirements & spending for current time of period 2) 3 FUNDAMENTAL CONCEPTS. - capital budget : plan funding for major capital 2.1 BALANCING SHORT-TERM AND LONG-TERM investments DEMANDS. - project budgets : plan funding & spend for specific -must have ready cash to pay salaries, bills, taxes project -must make strategic long-term investment 4.6 USES OF FUNDS. 2.2 BALANCING POTENTIAL RISKS AND POTENTIAL - payroll - taxes - rent - utilities - equipment REWARDS. - research - investments - dividends -every decision involves risk/reward trade-off 5) MANAGING ACCOUNTS RECEIVABLE AND -higher risk may lead to higher reward ACCOUNTS PAYABLE. The safest choice aren’t always the best choices 5.1 ACCOUNTS RECEIVABLE. 2.3 BALANCING LEVERAGE AND FLEXIBILITY. - amounts that are currently owned to firm - debt can be a tool, but also can be a trap - one way to manage cash flow effectively - can use debt strategically 5.2 ACCOUNTS PAYABLE. 3) DEVELOPING A FINANCIAL PLAN. - amounts that the company owes to its suppliers, 3.1 FINANCIAL PLAN lenders, and other parties - A document that outlines the funds needed for a - allows the firm to hold on to its cash, for as long as certain period of time possible. 4) FINDING AND ALLOCATING FUNDS. 6) MONITORING THE WORKING CAPITAL ACCOUNTS. 4.1 INTERNAL SOURCES - represent a firm’s cash on hand as well as economic value. - revenue from sales - that can be converted into inventory, acc rec, acc pay - investment income 7) THE BUDGETING PROCESS. - revenue selling assets 7.1 BUDGET 4.2 EXTERNAL SOURCES - planning & control tool that reflects expected - credit cards - secured loan revenue, operating expenses, cash receipts. - trade credit -commercial paper - equity 4.3 STRATEGIC PLAN ESTABLISH : - goals - obj - priorities 7.2 FINANCIAL CONTROL. 9.5 PROJECT BUDGET. - The process of analyse and adjust the basic financial - A budget that identifies the costs needed to plan to correct for deviations from forecasted events accomplish a particular project 7.3 HEDGING. 10) Financing Alternatives: Factors to Consider - protect against cost increase with contract 10.1 DEBT FINANCING. - that allow a company to buy supplies in the future at - arrange fund by borrowing money designated prices 10.2 EQUITY FINANCING. 7.4 ZERO-BASED BUDGETING. - selling ownership shares in the company - department starts from zero every year and must 11) CHARACTERISTICS DEBT & EQUITY FINANCING justify every item in the budget 8) 3 BIG ISSUE/CHALLENGE IN BUDGETING. 8.1 COMPANY HAVE LIMITED AMOUNT OF $ TO SPEND - manager need to make tough decision - project and department often in competition for resources 8.2 REVENUE AND COST DIFFICULT TO PREDICT. - sales forecast are never certain - fixed cost easy to predict, variable cost hard 8.3 NOT ALWAYS CLEAR HOW MUCH SHOULD BE 12) LENGTH OF TERM. SPENT. 12.1 SHORT-TERM FINANCING. - such as advertising - repaid within 1 year - might be out of line with current strategic need - used to cover current expenses 9) TYPES OF BUDGET 12.2 LONG-TERM FINANCING. 9.1 START-UP BUDGET - repaid in a period longer than one year - new company will need to spend to launch - used to cover long-term expenses such as assets operations 13) INTEREST RATES. 9.2 OPERATING BUDGET. 13.1 PRIME INTEREST RATE. - identifies all sources of revenue and coordinates the spending of those funds throughout the coming year. - the lowest interest rate offered on short-term bank loans to preferred borrowers - sometimes known as the master budget 14) OPPORTUNITY COST. 9.3 CAPITAL BUDGET. 14.1 LEVERAGE. - outlines expenditures for real estate, new facilities, major equipment, and other capital investments - The technique of increasing the rate of return on an investment by financing it with borrowed funds 9.4 CAPITAL INVSTMENT. 14.2 CAPITAL STRUCTURE. - Money paid to acquire something of permanent value in a business - A firm’s mix of debt and equity financing 15) FINANCING ALTERNATIVES: SHORT-TERM DEBT. 17) PUBLIC STOCK OFFERINGS. 15.1 TRADE CREDIT. 17.1 UNDERWRITER. - occurs when suppliers provide goods and services to - A specialized type of bank that buys the shares from their customers without requiring immediate payment the company preparing an IPO and sells them to investors 15.2 SECURED LOANS. 17.2 PROSPECTUS. - Loans backed up with assets that the lender can claim in case of default - E.G. property, equipment, accounts receivable 15.3 UNSECURED LOANS. - Loans that require a good credit rating but no collateral 15.4 COMPENSATING BALANCE. - borrower maintain some minimum amount of money on deposit at the bank - to protect the lender and increase the lender’s return 15.5 LINE OF CREDIT. - common example of an unsecured loan - which is an agreed-on maximum amount of money a bank is willing to lend a business 15.6 COMMERCIAL PAPER. - to repay a borrowed amount by a specified time with a specified interest rate 16) FINANCING ALTERNATIVES: LONG TERM LOANS. 16.1 LEASES. - An agreement to use an asset in exchange for regular payment; similar to renting 16.2 CORPORATE BONDS. - BONDS - SECURED BONDS - DEBENTURES - CONVERTIBLE BONDS 16.3 PRIVATE EQUITY. - Ownership assets that aren’t publicly traded; includes venture capital