1. * * Chapter Eighteen Financial Management Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2. WHAT’S FINANCE? * * Finance -- The function in a business that acquires funds for a firm and manages those funds within the firm. Finance activities include:  Preparing budgets  Creating cash flow analyses  Planning for expenditures The Role of Finance and Financial Managers LG1 18-2

3. Three common reasons a firm fails financially are: Undercapitalization Poor control over cash flow Inadequate expense control

4. FINANCIAL MANAGEMENT * * Financial Management -- The job of managing a firm’s resources to meet its goals and objectives. Financial managers examine financial data prepared by accountants and recommend strategies for improving the financial performance of the firm. The Role of Finance and Financial Managers LG1 18-4

5. WHAT FINANCIAL MANAGERS DO * * LG1 The Role of Finance and Financial Managers 18-5

6. Financial Planning Financial planning means analyzing short-term and long-term money flows to and from the firm. Objective is to Optimize the firm’s profitability Make the best use of its money

7. Financial Planning Three steps 1.Forecasting the firm’s short-term and long- term financial needs- short- and long-term forecast 2.Developing budgets to meet those needs 3.Establishing financial controls

8. Working with Budget A financial plan that sets forth management’s expectations, and, on the basis of those expectations, allocates the use of specific resources throughout the firm

9. Working with Budget Capital budget: highlights a firm’s spending plans for major asset purchases that require large sums of money, like property, buildings, and equipment. Cash budget estimates cash inflows and outflows during a particular period, like a month or a quarter. Operating budget: The budget that ties together the firm’s other budgets and summarizes its proposed financial activities. The most detailed a firm prepares

10. Establishing Financial Controls A process in which a firm periodically compares its actual revenues, costs, and expenses with its budget. Monthly financial review to ensure financial control

11. The need for Operating Fund Key areas include Managing day-to-day needs of the business Controlling credit operations Acquiring needed inventory Making capital expenditures

12. Alternative Sources of Fund A firm can raise needed capital by borrowing money (debt), selling ownership (equity), or earning profits (retained earnings). Table 18.5- Why firms need funds (short-term funds and long-term funds)

13. SHORT and LONG-TERM FINANCING * * Short-Term Financing -- Funds needed for a year or less. Long-Term Financing -- Funds needed for more than a year. (usually 2 to 10 years) Alternative Sources of Funds LG3 18-13

14. Short Term Financing * * Trade Credit. Family and Friends Commercial Banks secured loan ( with collateral) unsecured loan (no collateral Credit Card Debt Financing by Issuing Bonds LG5 18-14

15. USING ALTERNATIVE SOURCES of FUNDS * * Debt Financing -- The funds raised through various forms of borrowing that must be repaid. Equity Financing -- The funds raised from within the firm from operations or through the sale of ownership in the firm (such as stock). Alternative Sources of Funds LG3 18-15

16. DIFFERENCES BETWEEN DEBT and EQUITY FINANCING * * Comparing Debt and Equity Financing LG5 Types of Financing ConditionsDebtEquity Management influence None. Unless special conditions have been agreed on. Common stock holders have voting rights. Repayment Debt has a maturity date. Stock has no maturity date. Yearly obligationsPayment of interest. The firm isn’t legally liable to pay dividends. Tax benefits Interest is tax deductible. Dividends are not tax deductible. 18-16