19-1 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. NickelsMcHughMcHugh Nickels Cover

19-2 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 1919 Financial Management

19-3 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Finance & Managers What is Financial Management?What is Financial Management? –Finance –Financial Manager Importance of FinanceImportance of Finance

19-4 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. What Financial Managers Do

19-5 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Financial Planning Process Forecast Cash Flow Short-term & Long-term Uses Budget Cash Needs Operating, Cash, & Capital Control Differences Actual vs. Projected Flows Compare Results Modify Forecasts & Budgets

19-6 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Financing Daily Operations- Cash Flows Money Received From: (Cash In)  Credit Sales  Cash Sales  Investment Income Business Expenses: (Cash Out)  Inventory Purchases  Payment on Loans  Payment on Assets  Salaries Payable  Supplies  Taxes

19-7 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Budget Process Financial Plan- Financial StatementsFinancial Plan- Financial Statements Types of BudgetsTypes of Budgets –Capital –Cash –Operating (Master) Financial Controls- FeedbackFinancial Controls- Feedback

19-8 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

19-9 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Need for Operating Funds Manage Daily OperationsManage Daily Operations Manage Accounts ReceivableManage Accounts Receivable Acquire InventoryAcquire Inventory Capital ExpendituresCapital Expenditures

19-10 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Sources of Funds

19-11 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Who Can Issue Bonds? 1.Federal, state, and local governments 2.Federal government agencies 3.Corporations 4.Foreign governments and corporations

19-12 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Sources of Equity Financing Equity Capital Internal Sources External Sources Retained Earnings Owner Contributions Sale of Partnerships Venture Capital Public Sale of Stock

19-13 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Making Use of Leverage Common Stock $ 50,000 Bonds $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 0 Funds Raised $500,000 Earnings $ 125,000 Total Earnings $ 125,000 Return to $125,000 Stockholders $500,000 = = 160% Leverage- Selling Bonds = = 25% Equity- Sale of Stock