Module 8 - Financial Management - Student PDF

Module 08: Financial Management  Financial management and the BMC mage source: https://strategyzer.com/canvas/business-model-canvas 2 2 Topics for discussion 1. What is the role of a financial manager and wh...

Module 08: Financial Management  Financial management and the BMC mage source: https://strategyzer.com/canvas/business-model-canvas 2 2 Topics for discussion 1. What is the role of a financial manager and why are they an important resource to business leaders? 2. What are the three steps in the financial planning process? Describe the types of information created at each step. 3. They say “cash is king”. Why do firms need funds? 4. What are the three main sources of funds? Describe each source and provide examples. 3 3 Module 08: Financial Management The role and responsibility of financial managers  The role of financial managers Financial Management and management: acquisition of financial resources To meet goals or objectives Financial manager Examine the financial data prepared by accountants Develop financial plans Manage and monitor the execution of those plans to maximize wealth Image source: leremy/iStock/Thinkstock 5 5  The role of financial managers At Wells Fargo’s Consumer Lending Group, says Rewcastle, finance leaders emphasize “the ability to tell a story with a strategic viewpoint. It’s not just explaining the variances—what happened last month or last quarter. That’s a minimum expectation. We also look for the ability to interpret trends, and to provide actionable insights to business leaders about what those trends mean, and how they might affect the business three months or two years from now. We need leaders who can think two, three, four steps ahead, but also juggle multiple priorities and understand the interconnectedness of all the different pieces.” SOURCE: Strategy+Business, “The Redefined No of the CFO”, https://www.strategy-business.com/article/00307?gko=ff56f 6 6  The role of financial managers mage source: Loblaw Companies Limited 7 7 Module 08: Financial Management The financial planning process  Financial planning Figure: Figure 17.2, Understanding Canadian Business, 9th Cdn ed. © 2016 McGraw-Hill Education Limited 9 9  Financial planning Forecasting financial need Short-term predicting revenues, costs, forecast: and expenses and the related cash flows for a period of one Long-term year or less predicting revenues, costs, forecast: and expenses for periods longer than one year Image source: shoo_arts/iStock/Thinkstock 10 10  Financial planning The budget process Budget: management‘s expectations for revenues and, on the basis of those expectations, allocates the use of specific resources throughout the company Departmental/division budgets Departmental/division managers: Will submit a budget for approval Accountable to monitor actual versus budget Image source: Macrovector/iStock/Thinkstock 11 11 Financial planning The budget process Operating (master) ties together all of the budget: company’s other Capital budget: budgets plans for major asset purchases Cash budget: projected cash inflows/ outflows – Minimum balance (cushion) 12 12  Financial planning Establishing financial controls Financial control: process in which a firm periodically compares its actual revenues, costs, and expenses with its budget Safeguarding assets – Fraud detection prevention Image source: vasabii/iStock/Thinkstock 13 13 Financial planning The budget process – Operating (master) ________________________________________________________________________ budget WEINSTEIN MANUFACTURING COMPANY MONTHLY BUDGETARY CONTROL WORKSHEET ________________________________________________________________________ EXPENSE BUDGETED ACTUAL DIFFERENCE CATEGORY AMOUNT EXPENDITURE FROM BUDGET ________________________________________________________________________ Labour $162,500$195,000 +32,500+20.0% Raw materials 172,500 151,500 -21,000 -12.2% Utilities 6,500 6,300 -200 -3.1% Maintenance 9,750 8,950 -800 -8.2% Other variable expenses 16,750 18,000 +1,250 +7.5% Fixed overhead expenses 25,00025,000 0 0.0% TOTAL EXPENSES $393,000 $404,750 +11,750 +3.0% ________________________________________________________ 14 14  Test your knowledge Financial Managers identify three steps to financial planning. Which of the following is not one of the three key steps to financial planning? A. Forecasting both short-term and long-term financial needs. B. Developing budgets top meet anticipated needs.  C. Preparing the income statement and balance sheet. D. Establishing financial control to see how well the company is following the financial plans. 15 15  Test your knowledge The managers of Dakoti Clothing regularly compare their actual profits with the firm’s projected profits. When deviations occur, the managers use the feedback to take corrective action when necessary. The management of Dakoti Clothing is exercising financial: A. derivatives.  B. control. C. planning. D. budgeting. 16 16 Module 08: Financial Management Importance of cash and why firms need operating funds  The need for funds Manage day-to-day needs of the business – Need to pay monthly expenses – Cushion for unanticipated emergencies Image source: Vectoraart/iStock/Thinkstock 18 18  The need for funds Manage credit – Need to offer credit terms for customers (especially B2B) – Credit and collection management – Flip side – purchase on credit as well! Image source: ratch0013/iStock/Thinkstock 19 19  The need for funds Manage inventory – Need to have inventory on hand to satisfy customers Just-in-time inventory – Converting inventory to cash Inventory turnover ratio – Very Vegetarian: 1.9 times a year – Shoppers: Approx. 3 times a year 365/Inventory turnover ratio – Days to convert inventory into cash – Very Vegetarian: 192 days – Shoppers: 121 days Image source: Created by Dmitry Mirolyubov from the Noun Project 20 20  The need for funds Making capital expenditures – Need to invest in long-term assets or intangible assets that help to generate revenue Image source: Askold Romanov/iStock/Thinkstock; BoeniceboY/iStock/Thinkstock 21 21  The need for funds Cash flow management is important Money has time value – $100 today is worth more than $100 in a year – Earns interest over time Image source:www.wisdomtimes.com 22 22  Test your knowledge When a business doesn’t have the funds to do the things that it needs to do to be successful, it is referred to as: A. underfunded. B. under-utilized.  C. undercapitalized. D. out of luck. 23 23 Module 08: Financial Management Sources of financing Sources of funds Operations: From the company’s profits = retained earnings Debt financing: From creditors = liabilities Equity financing: From owners (e.g. shareholders) = share capital/owner’s contributions 25 25  Sources of funds - Operations mage source: Loblaw Companies Limited 26 26  Sources of funds - Operations Retained earnings Profits of a company can be: – Returned to owners (e.g. share buybacks or dividends) – Retained for future growth or to maintain current operations Startup: – Limited ability to obtain financing (debt or equity) – No interest costs Growth: – Find right balance between debt and equity – Owners/Shareholders may expect a return Image source: Jane_Kelly/iStock/Thinkstock 27 27  Sources of funds - Debt mage source: Loblaw Companies Limited 28 28 Sources of funds - Debt Debt terminology Interest rate Covenants – fixed or variable – financial – simple or – non-financial compounding Term Repayment – short vs long term – principal – amortization – interest Security – secured vs unsecured – collateral – guarantee Fun fact: governments and corporations borrow from you on a long-term basis through issuance of bonds 29 29  Sources of funds – Debt (short- term) Trade credit or company credit cards: – Practice of buying goods/services now and paying later – Most common source of short-term financing Line of credit: – a credit limit granted by a bank that can be used and repaid at any time – Secured or unsecured, interest is paid on the amount you borrow (not the limit) Factoring A/R – Selling accounts receivable to a factor for cash Image source: ARTQU/iStock/Thinkstock 30 30  Sources of funds – Debt (short- term) Banks and other financial institutions – Short term bank loans Collateral Guarantee Family and friends – Formalize Set the terms of the loan Document it – put it in writing Set the terms of repayment Image source: ARTQU/iStock/Thinkstock 31 31  Sources of funds – Debt (long- term) Term-loan: requires the borrower to repay the loan in specified installments (regular payments of interest and principal) – Banks assume more risk in granting long-term loans – Risk/return trade-off Collateral Higher interest rates Covenants – Maturity date Image source: Askold Romanov/iStock/Thinkstock 32 32  Sources of funds – Debt (long- term) Repayment terms and amortization Regular payments principal and interest (blended payments) When the principal balance is higher – more of each payment will cover interest As the principal gets smaller – more of each payment will cover principal Image source: © 1995 - 2015 by Timothy R. Mayes, Ph.D. via tvmcalcs.com 33 33 Sources of funds - Debt Borrowing funds – Advantages Creditors are not owners and have no ownership in your business A variety of sources (banks, credit unions, government, family & friends, suppliers etc.) – Disadvantages Can raise risk profile of company Interest cost Cash flow requirements (repayment of principal and/or interest) 34 34  Sources of funds - Equity mage source: Loblaw Companies Limited 35 35  Source of funds - Equity Equity financing Equity financing: selling ownership in the firm – Initial Public Offering (IPO) – Venture capital Stocks: represent ownership in a company Dividends: distributions of profit to shareholders Image source: Medioimages/Photodisc/Thinkstock 36 36  Sources of funds - Equity Issuing stocks – Common shares: most basic form of ownership in a firm Voting rights Residual value – Preferred shares:special class of ownership Non-voting Preference in receipt of dividends, dividend rate is fixed Higher claim on company assets Image source: vasabii/iStock/Thinkstock 37 37 Sources of funds - Equity Issuing stocks – Advantages Shareholders don’t have to be repaid at a designated time Dividends are optional No borrowing costs, no additional financial risk – Disadvantages Shareholders have voting rights Management decisions can be affected 38 38  Source of funds – Debt vs. Equity Figure: Figure 17.8, Understanding Canadian Business, 9th Cdn ed. © 2016 McGraw-Hill Education Limited 39 39 Module 08: Financial Management Test your knowledge  Test your knowledge The main reason why companies want to maintain a minimum cash balance is: A. the balance sheet always needs to reflect a cash balance. B. they are required by law. C. cash, in and of itself, can earn a very high rate of return. D. to make sure there is a pool of cash available to deal with an unexpected need. 41 41  Test your knowledge Which of the following presents an effective technique to improve cash management? A. Speed up cash payments and slow down cash collections. B. Speed up cash collections and slow down cash payments. C. Speed up both collections and payments of cash. D. Slow down both the payment and collections of cash. 42 42  Test your knowledge Which of the following would not normally involve long- term financing? A. Workers’ salaries. B. Plant expansion. C. Purchase of modern equipment. D. Purchase of a large tract of land. 43 43