1. Mastering Financial Management
Pride I Hughes I Kapoor 20
Chapter
Mastering Financial Management
PowerPoint Presentation by Charlie Cook
Seventh Edition
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2. What Is Financial Management?
All the activities concerned with obtaining money and using it effectively.
The need for financing
Short-term financing—money that will be used for one year or less to sustain and support the firm’s needs for:
Cash flow—the movement of money into and out of an organization; it can become a problem when the firm’s customer inventory financing activities conflict with cash inflows.
Inventory—considerable cash investments are required.
Long-term financing—money that will be used for longer than one year.
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3. Comparison of Short- and Long-Term Financing
Whether a business seeks short- or long-term financing depends on what the money will be used for.
Corporate Cash Needs
Short-term financing needs
Cash-flow problems
Current inventory needs
Monthly expenses
Speculative production
Short-term promotional needs
Unexpected emergencies
Long-term financing needs
Business startup costs
New-product development
Long-term marketing activities
Expansion of facilities
Replacement of equipment
Mergers and acquisitions
Table 20.1
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4. Cash Flow for a Manufacturing Business
January
Expenses
Sales revenues
March
June
December
Manufacturers often use short-term financing to pay expenses during the production process. Once goods are shipped to retailers and payment is received, sales revenues are used to repay short-term financing.
Figure 20.1
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5. What Is Financial Management? (cont’d)
The need for financial management
Proper financial management can ensure that:
Financing priorities are in line with organizational goals and objectives.
Spending is planned and controlled.
Sufficient financing is available when it is needed.
Excess cash is invested in interest-bearing securities.
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6. Planning—The Basis of Sound Financial Management
Financial plan
A plan for obtaining and using the money needed to implement an organization’s goals.
Developing the financial plan
Establishing goals and objectives detailing what the organization intends to accomplish within a certain period of time.
Budgeting for financial needs.
Budget—a financial statement that projects income and/or expenditures over a specific future period.
Cash budget—a financial statement that projects cash receipts and expenditures over a specific future period
Traditional versus zero-based budgeting
Capital budget
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7. The Three Steps of Financial Planning
After a financial plan has been developed, it must be monitored continually to ensure that it actually fulfills the firm’s goals and objectives.
Budget the money needed
to accomplish the goals and
objectives
Identify the sources of funds
Sales revenue
Equity capital
Debt capital 2
Revenue
projections
for this
planning
period •
Money from
sole proprietor
or partners
Common stock
Preferred stock
Short-term
borrowing
Long-term
Sale of assets
For profit
To raise cash 3
Monitor and evaluate
Establish organizational
goals and objectives 1
Figure 20.2
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8. Sales Budget for Stars and Stripes Clothing
Usually the budgeting process begins with the construction of departmental budgets for sales and various expenses.
Figure 20.3
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9. Planning—The Basis of Sound Financial Management (cont’d)
Developing the financial plan (cont’d)
Identifying sources of funds
Sales revenues—provide the greatest part of the firm’s financing.
Equity capital—money received from the owners or from the sale of shares of ownership in the business.
Debt capital—borrowed money obtained through loans.
Proceeds from the sale of assets—assets are disposed of if absolutely necessary, when no longer needed, and when they don’t fit in the company’s core business.
Monitoring and evaluating financial performance
Monitoring prevents minor problems from becoming major ones.
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10. Cash Budget for Stars and Stripes Clothing
A company-wide cash budget projects sales, collections, purchases, and expenses over a specified period to anticipate cash surpluses and deficits.
Figure 20.4
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11. Budget Comparison for Stars and Stripes Clothing
Budget comparisons can point out areas that require additional planning or careful investigation.
Figure 20.5
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12. Sources of Capital for Entrepreneurs (From ch. 6)80 70 60 50 40 30 20 10
Personal
savings
Friends,
relatives
Investors
Start-up
Banks
Sources of Money
Suppliers
Former
owners
All others
Purchase
Percent of Businesses
Source: Data developed from and provided by the NFIB Foundation and sponsored by the American Express Travel Related Services Company, Inc.
Figure 6.2
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13. Sources of Short-Term Debt Financing
Sources of unsecured short-term financing
Reasons that short-term financing is easier to obtain:
Shorter repayment period means less risk of nonpayment.
Amounts of short-term loans are smaller than long-term loans.
There is a closer relationship between borrower and lender.
Unsecured financing—financing that is not backed by collateral.
Trade credit— a type of short-term financing extended by a seller who does not require immediate payment after the delivery of the merchandise.
Promissory notes issued to suppliers—a written pledge by a borrower (maker) to pay a certain sum of money to a creditor (payee) at a specified future date.
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14. Sources of Short-Term Debt Financing (cont’d)
Sources of unsecured short-term financing (cont’d)
Unsecured bank loans
Promissory notes—loan for repayment on a specific date.
Line of credit—prearranged short-term loan.
Revolving credit agreement—a guaranteed line of credit available whenever the borrower should need it.
Prime interest rate—the lowest rate charged by a bank for a short-term loan to its best customers.
Commercial paper—short-term promissory note issued by a large corporation that is secured only by the reputation of the firm; no collateral is involved.
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15. Sources of Short-Term Debt Financing (cont’d)
Sources of secured short-term financing
Loans secured by inventory
Inventory is pledged as collateral; control of the inventory passes to the lender until the loan is repaid.
Floor planning—a method of financing in which the title to the inventory is given to lenders in return for short-term financing.
Loans secured by receivables
Amounts owed the firm in the form of accounts receivable from trade credit given to customers are pledged as collateral.
Factoring accounts receivable
Factor—a firm that specializes in buying other firms’ accounts receivable for discounted amounts with the expectation of collecting the receivables at full value.
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16. Sources of Short-Term Debt Financing (cont’d)
Cost comparisons
Table 20.2
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17. Sources of Equity Financing
Selling stock
Initial public offering—when a corporation sells stock to the public for the first time.
Advantages of selling common stock:
Firm does not have to repay money received from sale of stock.
Firm does not have to pay dividends on the money from the stock.
Common stock—stock whose owners may vote on corporate matters, but whose claims on corporate profits and assets are subordinate to the claims of others.
Preferred stock—stock whose owners usually do not have voting rights, but whose claims on dividends and assets are paid before those of common-stock owners.
Par value—an assigned (and often arbitrary) dollar value printed on the stock certificate.
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18. Sources of Equity Financing (cont’d)
Selling stock (cont’d)
Call premium—a dollar amount over par value that the corporation must pay investors when it redeems (buys back) either preferred stock or corporate bonds.
Convertible preferred stock—preferred stock that the owner may exchange for a specified number of common-stock shares.
Retained earnings
The portion of a business’s profits not distributed to stockholders that is reinvested in the business.
Venture capital
The money invested in a small firm with the expectation that the firm has the potential to become very successful and increase in value.
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19. Sources of Long-Term Debt Financing
Financial leverage
The use of borrowed funds to increase the return on owners’ equity by earning more than the costs of the borrowed funds.
Lease—an agreement by which the right to use real estate, equipment, or other assets is temporarily transferred from the owner to the user.
Long-term loans
Term-loan agreement—a promissory note that requires a borrower to repay a loan in monthly, quarterly, semiannual, or annual installments.
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20. Analysis of the Effect of Additional Capital from Debt or Equity for Cypress Springs Plastics, Inc.
Table 20.3
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21. Sources of Long-Term Debt Financing (cont’d)
Corporate bonds
Corporate bond—a corporation’s written pledge that it will repay a specified amount of money with interest.
Maturity date—the date on which the corporation is to repay the borrowed money.
Types of bonds:
Registered bond—a bond registered in the owner’s name by the issuing company.
Debenture bond—a bond backed only by the reputation of the issuing corporation.
Mortgage bond—a corporate bond secured by various assets of the issuing firm.
Convertible bond—a bond that can be exchanged, at the owner’s option for a specified number of shares of the corporation’s common stock.
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