Lecture 30

Chapter 20 Understanding Financial And Risk Management

Chapter Outline Role Of The Financial Manager Role Of The Financial Manager Why Do Businesses Need Funds? Why Do Businesses Need Funds? Sources Of Short-Term Funds Sources Of Short-Term Funds Sources Of Long-Term Funds Sources Of Long-Term Funds Financial Management For Small Business Financial Management For Small Business Risk Management Risk Management

Responsibilities Of Financial Management Determine Long-Term InvestmentsDetermine Long-Term Investments Obtain Funds To Pay For InvestmentsObtain Funds To Pay For Investments Conduct Everyday Financial ActivitiesConduct Everyday Financial Activities Assist In Managing RiskAssist In Managing Risk

Responsibilities Of Financial Manager Increase a company a firms valueIncrease a company a firms value Cash-Flow Management- Cash Inflows & OutflowsCash-Flow Management- Cash Inflows & Outflows Financial Control- Performance Vs. Planned ResultsFinancial Control- Performance Vs. Planned Results –Budgets are backbone of financial control Financial Planning- Strategies To Reach Goals/ObjectivesFinancial Planning- Strategies To Reach Goals/Objectives –Financial plan

Financial Plan How Much Does Company Need To Meet Immediate Needs?How Much Does Company Need To Meet Immediate Needs? When Will It Need More Funds?When Will It Need More Funds? What Are The Sources For Short-Term & Long-Term Funds?What Are The Sources For Short-Term & Long-Term Funds?

Short-Term Expenditures Operating NeedsOperating Needs Accounts PayableAccounts Payable Accounts ReceivableAccounts Receivable –Credit policy – 2/10, net 30 InventoriesInventories

Factors In Short-Term Needs Working CapitalWorking Capital AddsAdds –inventories –A/R minus A/P Current Assets – Current Liabilities

Long-Term Expenditures Capital NeedsCapital Needs Not Normally Converted Into CashNot Normally Converted Into Cash Requires Large InvestmentRequires Large Investment Binding, Long-Term Commitment By Company of its FundsBinding, Long-Term Commitment By Company of its Funds

Trade Credit Open-Book CreditOpen-Book Credit –Good faith agreement Promissory NotesPromissory Notes –Legally binding document to pay in future Trade Draft Vs. Trade AcceptanceTrade Draft Vs. Trade Acceptance

Trade Credit Trade Draft Vs. Trade AcceptanceTrade Draft Vs. Trade Acceptance –Attached to the merchandizing shipment –On receipt, the buyers signs it Tells about the payment and the dateTells about the payment and the date –After signing it becomes a trade acceptance

Secured Short-Term Loans CollateralCollateral Inventory LoansInventory Loans –Lends some portion of the inventory value Accounts ReceivableAccounts Receivable –Pledging –Factoring Purchaser of the A/R known as the factorPurchaser of the A/R known as the factor

Unsecured Short-Term Loans No CollateralNo Collateral Compensating BalanceCompensating Balance –Keep a portion of the loan amount with the bank in a non interest bearing account Line Of CreditLine Of Credit Revolving Credit AgreementRevolving Credit Agreement Commercial PaperCommercial Paper –Short-term securities containing the borrower promise to pay

Debt Financing Long-Term ObligationLong-Term Obligation Long-Term LoansLong-Term Loans –Often Arranged Quickly Limited number of parties involvedLimited number of parties involved –No Public Disclosure –Duration Matched To Needs –Clauses Make It Possible To Change Terms

Issues In Debt Financing Interest RatesInterest Rates –Fixed –Floating Corporate BondsCorporate Bonds –A promise to pay the holder a certain amount of money on a specified date –Large amount for a long period of time Bond IndenturesBond Indentures

Five “C’s” Of Credit Character Capacity Capital Conditions Collateral

Equity Financing Claim To EarningsClaim To Earnings Common StockCommon Stock –Dividends –Appreciation (Growth) Retained EarningsRetained Earnings Financial BurdenFinancial Burden Hybrid- Preferred StockHybrid- Preferred Stock

Stockholders’ Equity

Debt Vs. Equity Capital StructureCapital Structure Financial RiskFinancial Risk Investors’ Return ExpectationsInvestors’ Return Expectations

Risk-Return Relationship

Establishing Bank/Trade Credit Long-Term FundingLong-Term Funding –Established Company –New Business Business PlanBusiness Plan –Why money is needed –Amount –How the money will be used Venture CapitalVenture Capital –Part ownership

Risk Management Risk = Uncertain OutcomeRisk = Uncertain Outcome Speculative Risk- Gain Vs. LossSpeculative Risk- Gain Vs. Loss Pure Risk- Loss Vs. No LossPure Risk- Loss Vs. No Loss Risk ManagementRisk Management –Process of conserving the firms earning power and assets by reducing the threats of losses due to uncontrollable events

Risk-Management Process

Risk Alternatives AvoidanceAvoidance ControlControl RetentionRetention TransferTransfer

Criteria For Insurable Vs. Uninsurable Risk PredictabilityPredictability CasualtyCasualty UnconnectednessUnconnectedness VerifiabilityVerifiability

Business Insurance Products LiabilityLiability –Workers’ Compensation PropertyProperty

Employee Insurance Products LifeLife HealthHealth

Areas Of Potential Risk In E-Commerce Media LiabilityMedia Liability Errors And OmissionsErrors And Omissions Loss Of ServiceLoss Of Service