Nickels_12e_UB_PPT_Instructor_Ch18_s.pptx

Chapter 18 Financial Management ©McGraw-Hill Education. 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 Education. Chapter Contents The Role of Finance and Financial Managers...

Chapter 18 Financial Management ©McGraw-Hill Education. 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 Education. Chapter Contents The Role of Finance and Financial Managers Financial Planning The Need for Operating Funds Obtaining Short-Term Financing Obtaining Long-Term Financing ©McGraw-Hill Education. Learning Objectives LO 18-1 Explain the role and responsibilities of financial managers. LO 18-2 Outline the financial planning process, and explain the three key budgets in the financial plan. LO 18-3 Explain why firms need operating funds. LO 18-4 Identify and describe different sources of shortterm financing. LO 18-5 Identify and describe different sources of long-term financing. ©McGraw-Hill Education. Name that Company This company spends over $8 billion a year on research to develop new products. It may take as long as 10 years before the products are approved and introduced to the market. Since long-term funding is critical in this business, high-level managers are very involved in the finance decisions. ©McGraw-Hill Education. The Role of Finance and Financial Managers 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 LO 18-1 ©McGraw-Hill Education. The Role of Finance and Financial Managers 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. Financial managers are responsible for: Obtain funds Effectively control use of funds LO 18-1 ©McGraw-Hill Education. Figure 18.1 What Financial Managers Do Jump to long description in appendix ©McGraw-Hill Education. LO 18-1 The Role of Finance and Financial Managers The Value of Understanding Finance Most common reasons a firm fails financially: 1. Undercapitalization 2. Poor control over cash flow 3. Inadequate expense control LO 18-1 ©McGraw-Hill Education. Financial Planning Financial planning involves analyzing short-term and longterm money flows to and from the company. Three key steps of financial planning: 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 LO 18-2 ©McGraw-Hill Education. Financial Planning 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. LO 18-2 ©McGraw-Hill Education. Financial Planning 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 longterm financial forecasts. The budget is the guide for financial operations and expected financial needs. LO 18-2 ©McGraw-Hill Education. Financial Planning Establishing Financial Controls Financial control — A process in which a firm periodically compares its actual revenues, costs, and expenses with its budget. LO 18-2 ©McGraw-Hill Education. The Need for Operating Funds 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 Capital expenditures — Major investments in either tangible longterm assets such as land, buildings, and equipment or intangible assets such as patents, trademarks, and copyrights. LO 18-3 ©McGraw-Hill Education. The Need for Operating Funds 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. LO 18-3 ©McGraw-Hill Education. Obtaining Short-Term Financing Trade Credit 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. Promissory note — A agreement with a promise to pay a supplier a specific sum of money at a definite time. LO 18-4 ©McGraw-Hill Education. Time Value of Cash One thing you can never have too much of is cash. Financial managers must make certain there is enough cash available to meet daily financial needs and still have funds to invest in its future. What does it mean when we say cash has a time value? LO 18-4 ©McGraw-Hill Education. © Voronin76/Shutterstock RF Obtaining Short-Term Financing 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 LO 18-4 ©McGraw-Hill Education. Obtaining Short-Term Financing Commercial Banks Banks generally prefer to lend short-term money to larger, established businesses. During difficult economic times, bank loans can virtually disappear. LO 18-4 ©McGraw-Hill Education. Obtaining Short-Term Financing Different Forms of Short-Term Loans Secured loan — Backed by collateral. Unsecured loan — Doesn’t require any collateral. LO 18-4 ©McGraw-Hill Education. Obtaining Long-Term Financing In setting long-term financing objectives, financial managers generally ask three questions: 1. What are the organization’s long-term goals and objectives? 2. What funds do we need to achieve the firm’s long-term goals and objectives? 3. What sources of long-term funding (capital) are available, and which will best fit our needs? LO 18-5 ©McGraw-Hill Education. Obtaining Long-Term Financing 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. LO 18-5 ©McGraw-Hill Education. Obtaining Long-Term Financing Debt Financing continued Debt Financing by Issuing Bonds Secured bond — A bond issued with some form of collateral, such as real estate. Unsecured (debenture) bond — A bond backed only by the reputation of the issuer. LO 18-5 ©McGraw-Hill Education. Obtaining Long-Term Financing 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. LO 18-5 ©McGraw-Hill Education. Figure 18.6 Differences between Debt and Equity Financing Jump to long description in appendix ©McGraw-Hill Education. LO 18-5