1. 18 * * * Financial Management * * Nickels McHugh McHugh CHAPTER 1-1
McGraw-Hill/Irwin
Understanding Business, 8e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

2. Finance & Managers What is Financial Management? Finance
Financial Manager
Importance of Finance
See Learning Goal 1: Describe the importance of finance and financial management to an organization, and explain the responsibilities of financial managers.
See text pages:
Finance and Managers
This slide is very good to provide the basic definitions of finance and financial management. Quite honestly, our students tend to have limited understanding of the finance function.
 One point that is critical to communicate to students, is that financial managers must understand accounting (and in fact many of them have backgrounds in accounting) but they are not accountants within the company. They are decision-makers and managers in the truest sense of the word. You might want to work through each of the functions of the financial manager and make certain students see exactly what’s involved in such a job. Students are often perked up when they hear that quite often next to the company CEO, the chief financial officer (CFO) is the highest paid person within an organization.
 It’s also a good time with this slide to reinforce exactly how the relationship between accounting and finance works. If students can catch on early, this chapter is easy for them to navigate.

3. Most Important Skills Needed by CFOs
Also available on a Transparency Acetate
See Learning Goal 1: Describe the importance of finance and financial management to an organization, and explain the responsibilities of financial managers.
Most Important Skills Needed by CFOs
This slide clearly outlines the necessary skills required to be a chief financial officer for a firm.
CFOs are tasked with guarding the financial health of their organizations. This requires that they know what the financial numbers mean to the company. The tasks of a CFO also involve:
Serving as advocates for overall financial decisions.
Interpreting how the numbers relate to company tactics and goals.
Understanding how to drive change.
Communicating good and bad news, opportunities and times for financial restraint to their CEOs.
In addition to the skills listed on the acetate, The Levin Group of Corporate Advisors identifies another skill necessary for CFOs to perform in today’s dynamic business world. The term they use is “Emotional Intelligence.” To properly understand the business world and the organization, CFOs must master the following:
Conscious self-knowledge – recognize thoughts and emotions, strengths and weaknesses as they occur
Maintaining appropriate control – the ability to deal with situations without over-or-under reacting
Maintaining motivation – the ability to keep a healthy and realistic perspective
Recognizing others’ interests - the ability to recognize the needs and perspectives of others
Communicating with flexibility – the ability to vary your influence style based on the needs of your audience
As a class project, have the students get into groups and design a classified advertisement for a CFO. An advertisement for a CFO may look like this: “The ideal candidate will be experienced in the process of financial management and organizational change. The candidate will develop and monitor financial plans, target financial objectives and monitor financial performance. Strong computer modeling and spreadsheet skills required. The ability to apply financial skills to the broader context of total business. Ten to fifteen years of progressing experience in all phases of financial management.”
Source: CIO Enterprise

4. Women CFOs
As of May 2006, 35 of the 500 largest companies in the US had a female CFO
Five largest companies with female CFO: Citigroup, Home Depot, Verizon, Marathon Oil, and Medco Health Solutions
Top 3 reasons that helped women achieve their current position: Supportive boss, Supportive spouse, and culture of the organization
Also available on a Transparency Acetate
See Learning Goal 1: Describe the importance of finance and financial management to an organization, and explain the responsibilities of financial managers.
Women CFOs
This slide presents the some interesting facts about women CFOs in corporate America.
Students probably have heard of “Glass Ceiling” when it comes to women and corporate America. Only 7% of Fortune 500 companies have women CFOs – the top financial position in the company. However, that is a 350% gain over 1995 when only 10 women held the title.
Add this statistics in the mix: For more than 20 years, women have outnumbered men in undergraduate and graduate accounting programs and they comprise the majority of new hires at the public accounting firms. For the past decade they have earned 30-40% of all MBAs. So the qualifications are there, however, the numbers at the top are certainly not.
Share these interesting survey statistics with the students:
In a survey of 363 finance executives, 83% of men think that there is a glass ceiling for women in the finance function where as only 44% of women think so.
58% of women indicated that they were denied a promotion/raise in the past five years at least partly due to their gender.
(Source: cfo.com, June 1, 2006)
Source: cfo.com, June 1, 2006

5. Non-Finance Functions of CFOs
Also available on a Transparency Acetate
See Learning Goal 1: Describe the importance of finance and financial management to an organization, and explain the responsibilities of financial managers.
Non-Finance Functions of a CFO
This slide highlights the non-finance functions and skills of a chief financial officer.
Successful CFOs are required to wear many hats in the organization. While specific responsibilities of a CFO will vary between large and small companies, and public and closely held companies, the principals of control and treasury responsibilities transgress all boundaries.
Source: CIO Enterprise

6. What Financial Managers Do
Also available on a Transparency Acetate
See Learning Goal 1: Describe the importance of finance and financial management to an organization, and explain the responsibilities of financial managers.
See text pages: 484
What Financial Managers Do
This slide gives the student a broad overview of what responsibilities financial managers have within a corporation.
The CFOs responsibilities are rooted in the functions of “control” and “treasury.” The control function has its basis in the budgeting process:
The budget represents the quantification of the goals and missions of the company as manifested by the resources required to attain those goals.
The budget becomes the scorecard by which the company as a whole is measured.
The other area of responsibility for CFOs is the treasury function.
Procurement of financial resources available to the company.
Ongoing communication with financial sources, investors, and debt holders who must be kept apprised of the firm’s financial performance.
Allocation of resources within the context of the company budget.

7. Where CFOs Get Their Financial Information
Also available on a Transparency Acetate
See Learning Goal 1: Describe the importance of finance and financial management to an organization, and explain the responsibilities of financial managers.
Where CFOs Get Their Financial Information
This slide helps students understand where chief financial officers (CFOs) go for their information on financial issues.
While this slide focuses on chief financial officers, it has implications for managers of all types at all levels of an organization. While newspapers are the predominant source of information, as students can see most get their information from many varied sources.
Ask students why newspapers are the most dominant source of financial information for CFOs? Students will probably recognize that it’s because they are the most current sources of information and are for the most part updated daily. The others can be either suspect in quality of information or suspect in terms of the timeliness of the information.
Source: USA Today

8. Financial Managers: Ask Your Clients
What are the client's goals in areas like lifestyle, retirement, saving for college education and their health care as well as that of their dependents?
When do they want to reach their goals?
What steps have they already taken toward achieving their goals?
How do they feel about taking investment risks for a potential higher rate of return?
How involved do they want to be in monitoring their progress toward their goals?
See Learning Goal 1: Describe the importance of finance and financial management to an organization, and explain the responsibilities of financial managers.
Financial Managers: Ask Your Clients
This slide presents the five critical questions that every financial manger should ask their client in assisting the clients in their financial planning.
There are two ways to approach this slide:
At a personal level, students can reflect on their own situation and determine where their goals are such as savings for summer college education or working during summer to pay for the college, investing money and where, putting money in retirement, etc.
At a broader level, the five questions asked in this slide can apply to all financial managers including CFOs and the clients would be the organization, CEO and the board of directors.
These questions set the foundation for planned progression whether it is for an individual or an organization.
Source: Fpanet.org

9. Financial Planning Financial Plan Short-term Forecasting
Long-term Forecasting
Operating Budget
Capital Budget
Cash Budget
See Learning Goal 2: Outline the financial planning process, and explain the three key budgets in the financial plan.
See text pages: 487
Financial Controls
Feedback
Feedback

10. Budget Process Financial Plan- Financial Statements Types of Budgets
Capital
Cash
Operating (Master)
Financial Controls- Feedback
See Learning Goal 2: Outline the financial planning process, and explain the three key budgets in the financial plan.
See text pages:

11. Need for Operating Funds
Manage Daily Operations
Controlling credit operations
Acquire Inventory
Capital Expenditures
See Learning Goal 3: Explain the major reasons why firms need operating funds, and identify various types of financing that can be used to obtain those funds.
See text pages: 491

12. Why Firms Need Funds Short-Term Funds Meeting monthly expenses
Unanticipated emergencies
Cash-flow problems
Expanding current inventory
Temporary promotional programs
Long-Term Funds
New product development
Replacing capital expenditure
Mergers or acquisitions
Expansion into new markets
Building new facilities
See Learning Goal 3: Explain the major reasons why firms need operating funds, and identify various types of financing that can be used to obtain those funds.
See text pages: 494

13. Daily Profits Of Companies With The Highest Revenue
Wal-Mart - $24.8 Million
ExxonMobil - $58.9 Million
General Motors - $10.5 Million
Ford - $1.4 Million
General Electric - $41.1 Million
ChevronTexaco - $19.8 Million
Also available on a Transparency Acetate
See Learning Goal 3: Explain the major reasons why firms need operating funds, and identify various types of financing that can be used to obtain those funds.
Daily Profits of Companies with the Highest Revenue
This slide presents the daily profits of companies with most revenues in 2003.
Students are fascinated to learn that companies, on a daily basis, are making monies in the millions.
Ask the students – how can companies continue to make profits at such high level? (Obviously, they need to have high levels of revenue but equally important are the financial controls.)
Share with students: During the Great Depression, so many companies went bankrupt and so many people lost their jobs. However, during these tough times, one company managed to avoid the red ink was General Motors. Although the profits, before the Depression to the end, dropped from million of dollars to merely few hundred thousand dollars, the company remained profitable. The then Chairman and CEO of the company, Alfred P. Sloan attributed the company’s success in avoiding the red ink on its financials to tight financial controls.
Students need to understand that for companies to generate and more importantly sustain these types of profits, there must be strong financial controls established.
Source: World Feature Syndicate, 2005

14. Sources of Funds Short-Term Trade Credit Promissory Notes
Family/Friends
Banks, etc.
Secured Loan
Unsecured Loan
Factoring
Commercial Paper
Credit Cards
Long-Term
Debt
Term-Loan
Bonds
Secured
Unsecured
Equity
Stock
Retained Earnings
Venture Capital
See Learning Goal 4: Identify and describe different sources of short-term financing.
See Learning Goal 5: Identify and describe different sources of long-term financing.
See text pages:

15. Who Can Issue Bonds? Federal, state, and local governments
Federal government agencies
Corporations
Foreign governments and corporations
Also available on a Transparency Acetate
See Learning Goal 5: Identify and describe different sources of long-term financing.
See text pages: 502
Who Can Issue Bonds?
This is information students may find interesting. It is fully explained in the chapter and you can embellish the discussion as extensively as you wish.
Students should walk away from this discussion knowing that the government and private industry compete insofar as the sale of bonds to the investing public. The issue of investor security can easily be addressed here as well as the differences in interest rates paid on specific bonds depending on the issuer. Students should understand that U.S. Government bonds are considered the safest investment in the bond market. There is a high probability that students will be familiar with U.S. Government Savings Bonds, and may in fact have received such a bond as a gift. They clearly need to understand the difference between such bonds and issues involving investments in corporate bonds.
In our classes, students often raise questions concerning school bond issues or public infrastructure issues (roads, bridges, sewers, etc.) Again, this is a perfect opportunity to explain to the class why they got an afternoon off school to help work on a school bond issue or why they keep seeing television commercials about the need for sewer bonds in their community.
We have started assigning students (usually for extra credit) to go to the Internet and locate a bond offering from a foreign government or corporation. It’s surprising how many of them found the assignment interesting.

16. Sources of Equity Financing
Retained Earnings
Internal Sources
Owner Contributions
Sale of Partnerships
Equity Capital
Also available on a Transparency Acetate
See Learning Goal 5: Identify and describe different sources of long-term financing.
See text pages:
Sources of Equity Financing
This slide should help students in distinguishing between equity capital generated from internal sources as opposed to external sources.
Equity financing is the most common source of financing for small businesses. Small businesspersons often seek funding from friends, relatives, and angel investors. Quite often such investors expect a piece of the business in return for their financing assistance. Often a part of the business provided to investors can include:
A specific portion of ownership
Possibly an active role in running the business
Retained earnings as a source of capital is typically not available until your business is established.
Venture capitalists represent a growing avenue of equity financing for business.
External Sources
Venture Capital
Public Sale of Stock

17. IPO
Summer of 2006
89 companies filed plans to raise money through IPO – looking to raise $16.3 billion
17 companies withdrew their plans to proceed with their IPO – were hoping to raise $3.89 billion
Withdrawing – Go Daddy Group and PNY Technologies
Filing – Double-Take Software and Hansen Medical
Also available on a Transparency Acetate
See Learning Goal 5: Identify and describe different sources of long-term financing.
IPO
One way to obtain equity capital from external sources is the public sale of stock. This slide presents some information related to the initial public offerings (IPO) during the Summer of 2006.
Students need to understand that these facts are only for one summer. So the total year IPOs would be significantly higher. Hence, it is a very common way of raising money. Also, the fact – 89 companies looking to raise 16.3 billion is for IPO market. There is also the secondary offerings, i.e., companies whose stocks are already trading trying to raise more monies from the stock market by offering additional stocks for sale.
Students should be able to recognize some of the companies such as Go Daddy Group and PNY Technologies (Flash Drive and Card makers).
Source: redherring.com, August 18, 2006

18. Google IPO Launched – August 2004 IPO Price -- $ 85 per share
Seeking to raise $2.7 billion
Unusual auction-style offering
With IPO, the company must shed light on the inner workings
Key competitors – Yahoo and Microsoft
As of March 31, 2004 Google employed about 1,900 employees
Also available on a Transparency Acetate
See Learning Goal 5: Identify and describe different sources of long-term financing.
Google IPO
Here is a slide that all students should be able to relate to. IPO info about Google. We all use Google just about everyday as a search engine. But this slide tells a little story about Google’s IPO.
Just as the company is unique, they offered the IPO in August 2004 in an unusual auction-style offering so that the small investors would be able to get in on the action as well.
Obviously, when a company goes public, they have to share information with external constituents such as government agencies, investors, etc. about the inner workings of the company. However, it does open up the possibilities with external funding for the company to take on expansion plans and other strategic initiatives.
Students can be asked to do a one page report to update – What Google is up to today? New products/services, number of employees, operations in how many countries, etc. All of these information can be obtained from or ask the students to just Google it.
Source: cnet news.com, April 30, 2004; Forbes, September 17, 2004

19. Venture Capitalists Finance new and rapidly growing companies
Purchase equity securities
Assist in the development of new products or services
Add value to the company through active participation
Take higher risks with the expectation of higher rewards
Have a long-term orientation
Also available on a Transparency Acetate
See Learning Goal 5: Identify and describe different sources of long-term financing.
Venture Capitalists
This slide presents the six key activities of the venture capitalists.
Students need to understand that there is a higher level of risk in what venture capitalists do and to mitigate this risk, they develop a portfolio of young companies to invest in.
Share these statistics with students:
During the second quarter of 2006, venture capital investing reached the highest level since 2002 at $6.3 billion.
This represented 856 deals.
Investment in start-up and early stage companies remained flat at $1 billion but the number of deals increased by 13% to 268 suggesting smaller amounts to more companies.
Funding for expansion stage companies hit the highest level in four years -- $2.9 billion and 329 deals.
Internet specific companies captured 143 deals worth $916 million.
Biotech companies received $1.8 billion in 185 deals.
A record 282 companies received first-time funding in Q worth $1.3 billion.
(Source: NVCA.com, July 25, 2006)
Source: NVCA.com

20. Leverage- Selling Bonds
Making Use of Leverage
Leverage- Selling Bonds
Equity- Sale of Stock
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
Funds Raised $500,000
Earnings $ 125,000
Total Earnings $ 125,000
Return to $125,000
Stockholders $500,000
Also available on a Transparency Acetate
See Learning Goal 5: Identify and describe different sources of long-term financing.
See text pages: 504
Making Use of Leverage
This slide illustrates the use of financial leverage when comparing the issuance of selling bonds and the equity sale of stock.
Help the students understand financial leverage by defining the term. Financial leverage is the use of debt to magnify the rate of return on shareholders’ equity. Ask the students to compare the two options on the acetate and choose which one they think is the right alternative.
Note that both options have an effect on the company’s financial health. Issuing bonds will increase the debt the company has on their books; while the issuance of stock will tend to dilute the stock price. In both cases the company receives an inflow of cash. =
= 160% =
= 25%