Chapter 18 Financial Management PDF

Because learning changes everything. ® Chapter 18 Financial Management BUS 100 – Introduction to Business Alaa Hamade © 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No re...

Because learning changes everything. ® Chapter 18 Financial Management BUS 100 – Introduction to Business Alaa Hamade © 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill.  The Role of Finance and Financial Managers 1 Finance The function in a business that acquires funds for the firm and manages those funds within the firm. Finance activities include: Preparing budgets. Doing cash flow analysis. Planning for expenditures. © McGraw Hill 2  The Role of Finance and Financial Managers 2 Financial Management The job of managing a firm’s resources to meet its goals and objectives. Financial managers — Examine financial data and recommend strategies for improving financial performance. Accountants prepare reports about the company’s financial health while financial managers interpret the reports and make recommendations. Financial managers are responsible for: Obtaining funds. Effectively controlling use of funds. © McGraw Hill 3  Figure 18.1 What Financial Managers Do Access the text alternative for slide images. © McGraw Hill 4  The Role of Finance and Financial Managers 3 The Value of Understanding Finance Most common reasons a firm fails financially: 1. Undercapitalization. 2. Poor control over cash flow. 3. Inadequate expense control. What Is Financial Management? Financial managers are responsible for paying the company’s bills and collecting overdue payments. It’s essential that financial managers stay abreast of changes or opportunities in finance, such as changes in tax law. © McGraw Hill 5  Financial Planning 1 Financial Planning Involves analyzing short-term and long-term money flows to and from the company. Three key steps: 1. Forecasting the firm’s short-term and long-term financial needs. 2. Developing budgets to meet those needs. 3. Establishing financial controls to see if the company is achieving its goals. © McGraw Hill 6  Financial Planning 2 Forecasting Financial Needs Short-term forecast predicts revenues, costs, and expenses for a period of one year or less. Cash flow forecast — Predicts the cash inflows and outflows in future periods, usually months or quarters. Long-term forecast predicts revenues, costs, and expenses for a period longer than one year and sometimes as long as five or ten years. © McGraw Hill 7  Financial Planning 3 Working with the Budget Process Budget — Sets forth management’s expectations and allocates the use of specific resources throughout the firm. Budgets depend heavily on the balance sheet, income statement, statement of cash flows, and short-term and long-term financial forecasts. An effective budget depends on having accurate forecasts. The budget is the guide for financial operations and expected financial needs. © McGraw Hill 8  Financial Planning 4 Establishing Financial Controls Financial control — A process in which a firm periodically compares its actual revenues, costs, and expenses with its budget. Most companies hold at least monthly financial reviews. Identifies variances to the financial plan and allows the firm to take corrective action. © McGraw Hill 9  The Need for Operating Funds 1 Key Needs for Operational Funds Managing day-by-day needs of the business Meeting short-term financial obligations Controlling credit operations Managing deferred payments and credit cards Acquiring needed inventory JIT? Storage? Making capital expenditures. Capital expenditures — Major investments in either tangible long-term assets such as land, buildings, and equipment or intangible assets such as patents, trademarks, and copyrights. © McGraw Hill 10  The Need for Operating Funds 2 Alternative Sources of Funds Equity financing — Money raised from within the firm, from operations or through the sale of ownership in the firm (stock or venture capital). Debt financing — Funds raised through various forms of borrowing that must be repaid. Short-term financing — Funds needed for a year or less. Long-term financing — Funds needed for more than a year. © McGraw Hill 11  Obtaining Short-Term Financing 1 Trade Credit The practice of buying goods and services now and paying for them later. Businesses often get terms such as 2/10, net 30 when receiving trade credit. 2% discount if paid within 10 days, else full payment is due in 30 days Promissory note — A agreement with a promise to pay a supplier a specific sum of money at a definite time. Can be sold to a bank at a discount © McGraw Hill 12  Obtaining Short-Term Financing 2 Family and Friends Many small firms obtain short-term financing from friends and family. If asking for help from family or friends, it’s important both parties: 1. Agree to specific loan terms. 2. Put the agreement in writing. 3. Arrange for repayment the same way they would for a bank loan. © McGraw Hill 13  Obtaining Short-Term Financing 3 Commercial Banks Banks generally prefer to lend short-term money to larger, established businesses. During difficult economic times, bank loans can virtually disappear. Different Forms of Short-Term Loans Secured loan — Backed by collateral. Could be any asset the firm owns, including Accounts Receivable. Unsecured loan — Doesn’t require any collateral. Given to highly-regarded customers or those considered financially stable. © McGraw Hill 14  Obtaining Short-Term Financing 4 Factoring Accounts Receivable Factoring — The process of selling accounts receivable for cash. Factors (market intermediaries) charge more than banks, but many small businesses don’t qualify for loans. © McGraw Hill 15  Obtaining Short-Term Financing 6 Commercial Paper Unsecured promissory notes, in amounts of $100,000+ that come due in 270 days or less. Since commercial paper is unsecured, only financially stable firms can sell it. Credit Cards An estimated one-third of all small firms use credit cards to finance their businesses. Credit cards are convenient but costly for a small business. © McGraw Hill 16  Obtaining Long-Term Financing 1 Debt Financing Debt Financing by Borrowing from Lending Institutions: 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. A major advantage is that loan interest is tax-deductible. Risk/return trade-off — The principle that the greater the risk a lender takes in making a loan, the higher the interest rate required. © McGraw Hill 17  Obtaining Long-Term Financing 2 Debt Financing continued Debt Financing by Issuing Bonds: A bond is like an IOU with a promise to repay the amount borrowed, with interest, on a certain date. Secured bonds are issued with some form of collateral, such as real estate. Unsecured (debenture) bonds are backed only by the reputation of the issuer. © McGraw Hill 18  Obtaining Long-Term Financing 3 Equity Financing Equity Financing by Selling Stock. Equity Financing from Retained Earnings. Equity Financing from Venture Capital. Venture capital — Money that is invested in new or emerging companies that are perceived as having great profit potential. © McGraw Hill 19  Figure 18.6 Differences between Debt and Equity Financing Access the text alternative for slide images. © McGraw Hill 20