Financial Management PDF

# The Need for Financial Management - Financial management - all the activities concerned with obtaining money and using it effectively. - Proper financial management must ensure that: - Funds are available when needed both now and in the future, obtained at the lowest possible cost, and used a...

# The Need for Financial Management - Financial management - all the activities concerned with obtaining money and using it effectively. - Proper financial management must ensure that: - Funds are available when needed both now and in the future, obtained at the lowest possible cost, and used as efficiently as possible. - Financing priorities are established in line with organizational goals and objectives. - Spending is planned and controlled. - A business's credit customers pay their bills on time, and the number of past due accounts is reduced. - Bills are paid promptly to protect the business's credit rating and its ability to borrow money. - The funds required for paying the business's taxes are available when needed to meet tax deadlines. - Excess cash is invested in conservative, marketable securities. # Careers in Finance - Typical job titles in finance include: - Chief financial officer - Financial manager - Consumer credit officer - Financial analyst - Financial planner - Insurance analyst - Investment account executive - Managers and employees in the finance area must: - Be honest - Have a strong background in finance, accounting, or mathematics - Know how to use a computer to analyze data - Be an expert at both written and oral communication # TABLE 16-1 Comparison of Short- and Long-Term Financing # Sources of Unsecured Short-Term Financing (slide 2 of 3) - **Trade Credit** - a type of short-term financing extended by a seller who does not require immediate payment after delivery of merchandise. - It is the most popular form of short-term financing, because most manufacturers and wholesalers do not charge interest for trade credit. - **Promissory Notes Issued to Suppliers** - **Promissory note** - a written pledge by a borrower to pay a certain sum of money to a creditor at a specified future date. - Promissory notes usually require the borrower to pay interest. - A promissory note offers two important advantages to the business extending the credit. - A promissory note is legally binding and an enforceable contract. - A promissory note is a negotiable instrument. # Sources of Unsecured Short-Term Financing (slide 3 of 3) - **Unsecured Bank Loans** - **Prime interest rate** - the lowest rate charged by a bank for a short-term loan. - Generally is reserved for large corporations with excellent credit ratings. - As a condition of an unsecured loan, a bank may require that a compensating balance be kept on deposit at the bank and that every commercial borrower clean up (pay off completely) its short-term loans at least once a year and not use short-term borrowing again for a period of 30 to 60 days. - **Commercial Paper** - **Commercial paper** - a short-term promissory note issued by a large corporation. - The interest rate a company pays when it sells commercial paper is tied to its credit rating and its ability to repay the commercial paper. # FIGURE 16-5 Average Prime Interest Rate in South Africa, 1950 to 2020 - The prime rate is the interest rate charged by South African banks when businesses with the 'best' # Venture Capital, Angel Investors, and Private Placements (slide 1 of 2) - **Venture capital** - money invested in small (and sometimes struggling) businesses that have the potential to become very successful. - Generally, a venture capital firm consists of a pool of investors, a partnership established by a wealthy family, or companies with money to invest. - In return for financing, these investors generally receive an equity or ownership position in the business and share in its profits. # Venture Capital, Angel Investors, and Private Placements (slide 2 of 2) - **Angel investor** - an investor who provides financial backing for small business startups or entrepreneurs. - Unlike venture capitalists, angel investors are often focused on helping a business or an entrepreneur succeed rather than earning huge profits. - Angel investors often provide more favourable financial terms when compared with venture capitalists and financial institutions. - **Private placement** - occurs when stock and other corporate securities are sold directly to insurance companies, pension funds, large institutional investors, or mutual funds. # Corporate Bonds (slide 2 of 3) - **Types of Bonds** - **Debenture bond** - a bond backed only by the reputation of the issuing company. - **Mortgage bond** - a corporate bond secured by various assets of the issuing company. - **Convertible bond** - a bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's common stock. # Corporate Bonds (slide 3 of 3) - **Repayment Provisions for Corporate Bonds** - **Bond indenture** - a legal document that details all the conditions relating to a bond issue. - A company may use one of three methods to ensure it has sufficient funds available to redeem a bond issue. - It can issue the bonds as serial bonds. - **Serial bonds** - bonds of a single issue that mature on different dates. - The company can establish a sinking fund. - **Sinking fund** - a sum of money to which deposits are made each year for the purpose of redeeming a bond issue. - A company can pay off an old bond issue by selling new bonds. - **Trustee** - an individual or an independent company that acts as a bond owner's representative.