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2. Understanding Financial And Risk Management
Chapter 20
Understanding Financial And Risk Management

3. Copyright 2005 Prentice- Hall, Inc.
Chapter Outline
Role Of The Financial Manager
Why Do Businesses Need Funds?
Sources Of Short-Term Funds
Sources Of Long-Term Funds
Financial Management For Small Business
Risk Management
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4. Responsibilities Of Financial Management
Determine Long-Term Investments
Obtain Funds To Pay For Investments
Conduct Everyday Financial Activities
Assist In Managing Risk
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5. Responsibilities Of Financial Manager
Cash-Flow Management- Cash Inflows & Outflows
Financial Control- Performance Vs. Planned Results
Financial Planning- Strategies To Reach Goals/Objectives
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6. Copyright 2005 Prentice- Hall, Inc.
Financial Plan
How Much Does Company Need To Meet Immediate Needs?
When Will It Need More Funds?
What Are The Sources For Short-Term & Long-Term Funds?
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7. Short-Term Expenditures
Operating Needs
Accounts Payable
Accounts Receivable
Inventories
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8. Factors In Short-Term Needs
Credit Policies
Working Capital
Current Assets – Current Liabilities
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9. Long-Term Expenditures
Capital Needs
Not Normally Converted Into Cash
Requires Large Investment
Binding, Long-Term Commitment By Company
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10. Copyright 2005 Prentice- Hall, Inc.
Trade Credit
Open-Book Credit
Promissory Notes
Trade Draft Vs. Trade Acceptance
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11. Secured Short-Term Loans
Collateral
Inventory Loans
Accounts Receivable
Pledging
Factoring
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12. Unsecured Short-Term Loans
No Collateral
Compensating Balance
Line Of Credit
Revolving Credit Agreement
Commercial Paper
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13. Copyright 2005 Prentice- Hall, Inc.
Debt Financing
Long-Term Obligation
Long-Term Loans
Often Arranged Quickly
No Public Disclosure
Duration Matched To Needs
Clauses Make It Possible To Change Terms
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14. Issues In Debt Financing
Interest Rates
Corporate Bonds
Bond Indentures
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15. Copyright 2005 Prentice- Hall, Inc.
Five “C’s” Of Credit
Character
Capacity
Capital
Conditions
Collateral
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16. Copyright 2005 Prentice- Hall, Inc.
Equity Financing
Claim To Earnings
Common Stock
Dividends
Appreciation (Growth)
Retained Earnings
Financial Burden
Hybrid- Preferred Stock
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17. Copyright 2005 Prentice- Hall, Inc.
Stockholders’ Equity
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18. Copyright 2005 Prentice- Hall, Inc.
Debt Vs. Equity
Capital Structure
Financial Risk
Investors’ Return Expectations
Venture Capital = Equity
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19. Risk-Return Relationship
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20. Establishing Bank/Trade Credit
Long-Term Funding
Established Company
New Business
Business Plan
Venture Capital
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21. Copyright 2005 Prentice- Hall, Inc.
Projected Cash Flow
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22. Copyright 2005 Prentice- Hall, Inc.
Risk Management
Risk = Uncertain Outcome
Speculative Risk Gain Vs. Loss
Pure Risk- Loss Vs No Loss
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23. Risk-Management Process
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24. Copyright 2005 Prentice- Hall, Inc.
Risk Alternatives
Avoidance
Control
Retention
Transfer
RISK
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25. Criteria For Insurable Vs. Uninsurable Risk
Predictability
Casualty
Unconnectedness
Verifiability
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26. Business Insurance Products
Liability
Workers’ Compensation
Property
Business Interruption
Special
Key Person
Business Continuation
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27. Injury Rate Per 1,000 Workers
Riskiest Jobs
Injury Rate Per 1,000 Workers
Source: Rutgers University, Crime Prevention Service,
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28. Employee Insurance Products
Life
Group Life
Health
Disability
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29. Special Health Insurance Providers
Health Maintenance Organization (HMO)
Preferred Provider Organization (PPO)
Point-Of-Service (POS)
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30. Areas Of Potential Risk In E-Commerce
Media Liability
Errors And Omissions
Loss Of Service
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