What is Financial Management? Financial management includes all the activities concerned with obtaining money and using it effectively. Sales revenues should be used to pay expenses and provide a profit Income and expenses may vary from month/month or year/year. Temporary financing may be needed when expenses are high and sales are slow or the opportunity to purchase a new plant or expand an existing one arises.

Corporate Cash Needs Short-Term Financing Cash-flow problems Current Inventory needs Monthly expenses Speculative production Short-term promotional needs Unexpected emergencies Long-Term Financing Business start-up costs Mergers and acquisitions New product development Long-term marketing activities Replacement of equipment Expansion of facilities

Short-Term Financing Short-term financing is money that will be used for one year or less. Operating cycle of a business [may be longer than one year] and is the amount of time between the purchase of raw materials and the sale of finished products to wholesalers, retailers or consumers.

Short-Term Financing... (continued) Cash flow is the movement of money into and out of an organization. Extension of credit to wholesalers, retailers, or customers can cause cash-flow problems to firms.

Short-Term Financing... (continued) Current inventory needs Speculative production refers to the time lag between the actual production of goods and when the goods are sold.  Most goods are manufactured from 4-9 months before they are actually sold to customers.  Must build their inventories before selling them before peak times.

Long-Term Financing  Long-term financing is money that will be used for longer than one year.

Financial Management Financing gets a business started in the first place. Then it supports the firm’s production and marketing activities, pays its bills, and when carefully managed, produces a reasonable profit.

Financial Management... (continued) Proper financial management ensures that:  Financing priorities are established in line with organizational goals and objectives.  Spending is planned and controlled.  Sufficient financing is available when it is needed, both now and in the future. (firm’s credit rating)  Excess cash is invested in certificates of deposit (CDs), government securities or conservative, marketable securities.

Financial Planning Financial Plan is a formula for obtaining and using the money needed to implement an organization’s goals. Process for developing the plan includes:  establishing organizational goals and objectives  determining how much money is needed to accomplish each goal and objective  identifying available sources of financing and decide which to use Review Figure 20.2, page 606

Financial Planning... (continued) 1)Establishing Organizational Goals and Objectives a)Goal – end result to achieve from 1-10 yrs. b)Objective – specific statements detailing what the organization will accomplish within a shorter period of time. c)Must be specific and measurable and able to translate into money costs.

Financial Planning... (continued) 2)Budgeting for Financial Needs a)Once goals and objectives are confirmed, a budget can be planned for a specific period including revenue and expenses. b)Budget is a financial statement that projects income and/or expenses over a specified future period. c)Sales Budget forecasts sales for a department(s) over a specific time. Review Figure 20.3, p 607

Financial Planning... (continued) d)Cash budget estimates cash receipts and expenditures over a specific time. Review Figure 20.4, p 607 d)Zero-base budgeting is a budgeting approach in which every expense in every budget must be justified. e)Capital budget is a financial statement that estimates a firm’s expenditures for major assets and its long-term financing needs.

Financial Planning... (continued) 3)Identifying Sources of Funds a)Sales revenue – greatest part of a firm’s financing b)Equity capital – provided by owner(s) or stock sales for start-up or expansion (generally used for long-term financing) c)Debt capital – borrowed capital provided as a line of (pre-approved) credit d)Proceeds from sale of assets – assets which no longer needed or don’t ‘fit in’ with company’s core business. (selling interest in related business to raise capital)