Financial Decisions: Managing Financial Resources Mike’s Bikes Part III due Wednesday March 21 st in-class Mike’s Bikes Part II returned at the end of class today Next class: In-lab; Read pp and pp

Financial Management Responsible for planning & overseeing the financial resources of a firm including Cash flow management Managing the cash inflows and outflows Investing excess funds Financial control Checking actual performance against strategic plans to ensure that desired goals are achieved Preparing budgets to ensure that sufficient cash is on hand to meet operational & debt service needs Comparing actual and budgeted amounts Financial planning Projections of revenue flows Sources & planned uses of funds Timing of when funds will be required

Assets Economic resources owned by the firm Liabilities Amounts owed by the firm to others Owner’s equity Amounts contributed by shareholders and retained earnings The Accounting Equation is The Financing Equation =+

SDM: Financial Management Why does Shoppers’Drug Mart need financing?

SDM: Financial Management

How does Shoppers’ Drug Mart finance its operations?

SDM: Financial Management

Sources of Short-Term Funds Allows firms to cover operational expenses and implement short-term plans Trade credit Secured and unsecured loans Commercial paper Factoring accounts receivable

Sources of Long-Term Funds Debt financing seeking long-term funds through borrowing from external sources Equity financing seeking long-term funds through internal financing

Sources of Long-Term Funds: Debt Financing Long-term loans Borrowing money for 3 to 10 years at a fixed or floating rate Loans are quick to process and do not require divulging business plans or the purpose for the loan Corporate bonds A promise by the borrower to pay the lender an amount of money on the maturity date Interest payments are received in the interim Assets may be pledged against the bond

Sources of Long-Term Funds: Equity Financing Common stock A firm sells ownership rights by issuing shares Investors buy the stock hoping that it will appreciate Retained earnings Financing by retaining money in the firm and not paying dividends to shareholders

Overview: Financing Alternatives Debt sourcesEquity sources Short term uses Inventory, operations Bank loans and line of credit, Trade credit, Commercial paper Factoring A/R Retained earnings Shareholders Long term uses Buildings, property Bank loans Bonds Shareholders Reinvested profits, Venture capitalists

Comparing Debt and Equity Financing Debt FinancingConsiderationsEquity Financing Fixed deadline When must it be paid? No limit. Yes, regular and fixed. Will it make claims on income? Only residual claim. In liquidation, creditors come first. Will it have claims on assets? In liquidation, shareholders must wait until creditors are paid and preferred equity precedes common equity. NoWill it affect management control? May cause challenge for corporation control. Bond interest is tax deductible. How are taxes affected? Dividends are not tax deductible. Yes, many constraints. Will it affect management flexibility? No, few constraints.

SDM: Financial Management What sources of short-term funds does SDM use? What sources of long-term debt does SDM use? What sources of equity does SDM use? How do sources of debt financing differ from sources of equity financing?

SDM: Financial Management

SDM: Financial Management (2005) Debt sourcesEquity sources Short term uses Long term uses

SDM: Financial Management (2005) Debt sourcesEquity sources Short term uses Inventories $1,217M Accounts receivable $257M Bank indebtedness $164M Accounts payable $698M Commercial paper $470M Retained earnings $942M Long term uses Property $749M Goodwill $2,019M Long term Debt $325M Retained earnings $942M Common share capital $1,441

Perfect Posters Inc.: Financial Management Debt sourcesEquity sources Short term uses Inventory $21,250 Salaries and wages $55,100 Accounts payable $16,315 Wages Payable $3,700 Retained earnings $56,155 Long term uses Land $18,000 Building $65,000 Equipment $72,195 Notes payable $10,000 Bonds payable $30,000 Retained earnings $56,155 Common stock $40,000 Additional paid-in capital $15,000