* * Chapter Eighteen Financial Management Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Learning Objectives Role & responsibilities of financial managers Obtaining Short-term Financing Obtaining Long-term Financing

* * Finance -- The function in a business that acquires funds for a firm and manages them within the firm. Finance activities include:  Preparing budgets  Creating cash flow analyses  Planning for expenditures WHAT’S FINANCE? The Role of Finance and Financial Managers LG1 18-3

* * Financial Management -- The job of managing a firm’s resources to meet its goals and objectives. FINANCIAL MANAGEMENT The Role of Finance and Financial Managers LG1 18-4

* * Financial Managers -- Examine financial data and recommend strategies for improving financial performance. Financial managers are responsible for:  Paying company bills  Collecting payments  Staying abreast of market changes  Assuring accounting accuracy FINANCIAL MANAGERS The Role of Finance and Financial Managers LG1 18-5

* * WHAT FINANCIAL MANAGERS DO LG1 The Role of Finance and Financial Managers 18-6

* * Undercapitalization Poor control over cash flow Inadequate expense control WHY DO FIRMS FAIL FINANCIALLY? The Value of Understanding Finance LG1 18-7

* * Financial planning involves analyzing short-term and long-term 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. FINANCIAL PLANNING Financial Planning LG2 18-8

* * 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. FINANCIAL FORECASTING Forecasting Financial Needs LG2 18-9

* * Managing day-by-day needs of the business Controlling credit operations Acquiring needed inventory Making capital expenditures KEY NEEDS for OPERATIONAL FUNDS in a FIRM The Need for Operating Funds LG

* * A firm can raise needed capital by borrowing money (debt), selling ownership (equity), or earning profits (retained earnings). ALTERNATIVE SOURCES OF FUND Alternative Sources of Funds LG

* * Debt Financing -- The funds raised through various forms of borrowing that must be repaid. Equity Financing -- The funds raised from within the firm from operations or through the sale of ownership in the firm (such as stock). USING ALTERNATIVE SOURCES of FUNDS Alternative Sources of Funds LG

* * DIFFERENCES BETWEEN DEBT and EQUITY FINANCING Comparing Debt and Equity Financing LG5 Types of Financing ConditionsDebtEquity Management influence None. Unless special conditions have been agreed on. Common stock holders have voting rights. Repayment Debt has a maturity date. Stock has no maturity date. Yearly obligationsPayment of interest. The firm isn’t legally liable to pay dividends. Tax benefits Interest is tax deductible. Dividends are not tax deductible

* * Short-Term Financing -- Funds needed for a year or less. Long-Term Financing -- Funds needed for more than a year. SHORT and LONG-TERM FINANCING Alternative Sources of Funds LG

* * WHY FIRMS NEED FINANCING Alternative Sources of Funds LG3 Short-Term FundsLong-Term Funds Monthly expensesNew-product development Unanticipated emergenciesReplacement of capital equipment Cash flow problemsMergers or acquisitions Expansion of current inventoryExpansion into new markets Temporary promotional programsNew facilities 18-15

* * Trade Credit -- The practice of buying goods or services now and paying for them later. Businesses often get terms 2/10 net 30 when receiving trade credit. Promissory Note -- A written contract agreeing to pay a supplier a specific sum of money at a definite time. TYPES of SHORT-TERM FINANCING Obtaining Short-Term Financing LG

* * Three questions of financial managers in setting long- term financing objectives: 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? SETTING LONG-TERM FINANCING OBJECTIVES Obtaining Long-Term Financing LG