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Chapter 19 Financial Management

Finance & Managers What is Financial Management? Finance Financial Manager Importance of Finance TA 19-1 What Financial Managers Do       1. This acetate is very good to work from to explain exactly what the job of a financial manager (CFO) entails. Students will find this as the first figure encountered in chapter nineteen. Quite honestly, our students tend to have limited understanding of the finance function within the mid-sized or large firm and need this bit of information explained to them.         2. One point that is critical to communicate to students, is that financial managers must understand accounting (and in fact many of them have backgrounds in accounting) but they are not accountants within the company. They are decision-makers and managers in the truest sense of the word. You might want to work through each of the functions of the financial manager and make certain students see exactly what’s involved in such a job. Students are often perked up when they hear that quite often next to the company CEO, the chief financial officer (CFO) is the highest paid person within an organization.       3. It’s also a good time with this acetate to reinforce exactly how the relationship between accounting and finance works. If students can catch on early, this chapter is easy for them to navigate.

Most Important Skills Needed by CFOs Source: CIO Enterprise

Non-Finance Functions of CFOs Source: CIO Enterprise

What Financial Managers Do

Where CFOs Get Their Financial Information TA 19-4 Where CFOs Get Their Financial Information 1. This acetate helps students understand where chief financial officers (CFOs) go for their information on financial issues. 2. While this acetate focuses on chief financial officers, it has implications for managers of all types at all levels of an organization. While newspapers are the predominant source of information, as students can see most get their information from many varied sources. 3. Ask students why newspapers are the most dominant source of financial information for CFOs? Students will probably recognize that it’s because they are the most current sources of information and are for the most part updated daily. The others can be either suspect in quality of information or suspect in terms of the timeliness of the information. Source: USA Today

Marketable Securities Certificates of Deposit Uses of Excess Funds Expansion Marketable Securities EXCESS Treasury Bills FUNDS Commercial Paper TA 19-7 Uses of Excess Funds 1. This acetate attempts to point out the key role the finance manager (normally the CFO) holds in an organization. Joy Covey, the former CFO of Amazon profiled at the beginning of this chapter, could be an effective example to point out to students. Joy was the key person responsible for managing any excess funds accumulated at Amazon. 2. A key point of this acetate is that it’s not just enough for the financial manager to raise capital. The financial manager must know the appropriate use for funds that the organization requires. Remember the simple equation: growth plus interest = increasing excess funds. Making effective use of funds builds additional capital. 3. The discussion of using funds in small business is also appropriate here. Students may recall from Chapter 6 that financing and the use of funds is a key factor in keeping a business operational. 4. See if students can relate the idea of excess funds in regards to their own lives. What if they received an unexpected inheritance from a distant relative? How would they maximize the use of the funds? Would they spend the money, put the money in their dresser drawer, or would they look for some form of investment? Certificates of Deposit Asset Purchases

Financial Planning Process Forecast Cash Flow Short-term & Long-term Uses Budget Cash Needs Operating, Cash, & Capital Compare Results Modify Forecasts & Budgets Control Differences Actual vs. Projected Flows

Financing Daily Operations- Cash Flows Money Received From: (Cash In) Business Expenses: (Cash Out) Credit Sales Cash Sales Investment Income Inventory Purchases Payment on Loans Payment on Assets Salaries Payable Supplies Taxes TA 19-6 Financing Daily Operations- Cash Flows 1. This acetate provides a clear example of the flow of cash in and out of the company. Make certain students understand where all the money flowing into the company is coming from and where it is headed. 2. It’s helpful to point out the necessity of sound financial management and control. This is especially true of small business enterprises. You might ask students if they plan effectively for their own cash flows and disbursements? Again, the focus on the need for funds is crucial. Cash flow is discussed extensively in the chapter and a key point for students to understand in the discussion of financial management. 3. Students should comprehend the different business expenses by now, but it could be an additional benefit to approach each expense one-by-one and point out their significance. It’s also worth noting that cash flow is particularly critical to meet short-term expenses of the business.

Budget Process Financial Plan- Financial Statements Types of Budgets Capital Cash Operating (Master) Financial Controls- Feedback

Ways to Cut Costs Slash travel, consulting, & entertainment budgets Unbundle product service/mix, charge for things once free Renegotiate purchasing contracts Form partnerships to share costs Put selected R&D, technology, etc. on hold Speed collections/slow payments Cut people outside core areas of production & sales

Need for Operating Funds Manage Daily Operations Manage Accounts Receivable Acquire Inventory Capital Expenditures

Sources of Funds Short-Term Long-Term Trade Credit Debt Promissory Notes Family/Friends Banks, etc. Secured Loan Unsecured Loan Factoring Commercial Paper Long-Term Debt Term-Loan Bonds Secured Unsecured Equity Stock Retained Earnings Venture Capital

Who Can Issue Bonds? Federal, state, and local governments Federal government agencies Corporations Foreign governments and corporations TA 19-8 Who Can Issue Bonds?         1. This is information students may find interesting. It is fully explained in the chapter and you can embellish the discussion as extensively as you wish.       2. Students should walk away from this discussion knowing that the government and private industry compete insofar as the sale of bonds to the investing public. The issue of investor security can easily be addressed here as well as the differences in interest rates paid on specific bonds depending on the issuer. Students should understand that U.S. Government bonds are considered the safest investment in the bond market. There is a high probability that students will be familiar with U.S. Government Savings Bonds, and may in fact have received such a bond as a gift. They clearly need to understand the difference between such bonds and issues involving investments in corporate bonds.       3. In our classes, students often raise questions concerning school bond issues or public infrastructure issues (roads, bridges, sewers, etc.) Again, this is a perfect opportunity to explain to the class why they got an afternoon off school to help work on a school bond issue or why they keep seeing television commercials about the need for sewer bonds in their community.       4. We have started assigning students (usually for extra credit) to go to the Internet and locate a bond offering from a foreign government or corporation. It’s surprising how many of them found the assignment interesting.

Sources of Equity Financing Retained Earnings Internal Sources Owner Contributions Sale of Partnerships Equity Capital TA 19-9 Sources of Equity Capital 1. This acetate should help students in distinguishing between equity capital generated from internal sources as opposed to external sources. 2. Students again may need a further explanation pertaining to retained earnings and venture capital. These two topics tend to cause some difficulties for students. Students may also not fully understand what is meant by the sale of partnerships. Some of our students see this as a sale of stock. See how yours handle the concept. It’s important for them to know that stock means corporation. Issuing stock is touched on briefly in this chapter and covered in the next chapter in a major section. External Sources Venture Capital Public Sale of Stock

Venture Capital Investments In Billions Source: National Venture Capital Association

Number of Venture Capital Deals Source: National Venture Capital Association

Leverage- Selling Bonds Making Use of Leverage Leverage- Selling Bonds Equity- Sale of Stock Common Stock $ 50,000 Bonds (@10%) $450,000 Funds Raised $500,000 Earnings $ 125,000 Less: Bond Interest $ 45,000 Total Earnings $ 80,000 Return to $80,000 Stockholders $50,000 Common Stock $500,000 Bonds (@10%) 0 Funds Raised $500,000 Earnings $ 125,000 Total Earnings $ 125,000 Return to $125,000 Stockholders $500,000 = = 160% = = 25%