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  • Companies: General Motors (GM)
  • See Learning Goal 1: Explain the responsibilities of financial managers. The finance function is responsible for managing a scarce resource - capital.
  • See Learning Goal 1: Explain the responsibilities of financial managers.
  • See Learning Goal 1: Explain the responsibilities of financial managers. This slide provides insight into the role of financial management. 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 often perk 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.
  • See Learning Goal 2: Outline the financial planning process and explain the three key budgets in the financial plan. Who ’s Who in Finance This slide presents the positions a person in finance might hold. Help students understand that there are a variety of positions a person in finance might strive to obtain. Ask students: What are some of the functions/responsibilities of each of these positions? How are these positions alike? How might they be different?
  • See Learning Goal 1: Explain the responsibilities of financial managers. This slide (based on Figure 18.1) 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. 3. 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.
  • See Learning Goal 1: Explain the responsibilities of financial managers. What Worries Financial Managers This slide highlights the things that worry financial managers. Financial managers 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 principles of control and treasury responsibilities transgress all boundaries. The number of issues that financial managers face is one reason why they are so well compensated.
  • See Learning Goal 1: Explain the responsibilities of financial managers.
  • See Learning Goal 1: Explain the responsibilities of financial managers. Top Financial Concerns of Company CFOs - Macro This slide highlights the top concerns of company CFOs in the macro economy. The Chief Financial Officers of companies must concern themselves with a multitude of issues.
  • See Learning Goal 1: Explain the responsibilities of financial managers. Top Financial Concerns of Company CFOs - Micro This slide highlights the top concerns of company CFOs within their own businesses. The Chief Financial Officers of companies must concern themselves with a multitude of issues.
  • See Learning Goal 2: Outline the financial planning process and explain the three key budgets in the financial plan.
  • See Learning Goal 2: Outline the financial planning process and explain the three key budgets in the financial plan.
  • See Learning Goal 2: Outline the financial planning process and explain the three key budgets in the financial plan. Budgeting is critical for the organization to control expenses and to understand revenue expectations. Think of a budget as a guidepost or a reference point for the organization ’s managers.
  • See Learning Goal 2: Outline the financial planning process and explain the three key budgets in the financial plan.
  • See Learning Goal 2: Outline the financial planning process and explain the three key budgets in the financial plan. This slide is based on Figure 18.2. The capital and cash budgets are part of the operating (master) budget.
  • See Learning Goal 2: Outline the financial planning process and explain the three key budgets in the financial plan. Financial controls also help reveal which specific accounts, departments and people are varying from the financial plan.
  • See Learning Goal 2: Outline the financial planning process and explain the three key budgets in the financial plan. Factors Used in Assessing Financial Control This slide highlights the factors used in assessing financial control. Financial control is used in conjunction with the firm ’s budget to ensure the organization is meeting its commitments and goals. Ask students: Why is it important for the CFO to maintain financial control?
  • The three finance functions are: financial planning, budgeting, and the establishment of financial control. The three primary financial problems causing firms to fail are: undercapitalization, poor control of cash flow, and inadequate expense control. Short-term forecasts attempt to project revenue, costs, and expenses for a period of one year or less, while long-term forecasts are for a period greater than one year. A budget sets forth management ’s expectations for revenues and becomes the organization’s primary guide for the financial operations as well as expected financial needs. The three types of budgets are: capital, cash, and operating.
  • See Learning Goal 3: Explain why firms need operating funds.
  • See Learning Goal 2: Outline the financial planning process and explain the three key budgets in the financial plan.
  • See Learning Goal 3: Explain why firms need operating funds. How Small Businesses Can Improve Cash Flow The slide lists methods small businesses use to improve cash flow. Lack of cash flow can impact a business of any size and may lead to the business shutting its doors. It is critical that students understand cash is king for a business of any size.
  • See Learning Goal 2: Outline the financial planning process and explain the three key budgets in the financial plan.
  • See Learning Goal 3: Explain why firms need operating funds.
  • See Learning Goal 3: Explain why firms need operating funds.
  • See Learning Goal 3: Explain why firms need operating funds. This slide is based on Figure 18.5. It is important for management to understand that they need capital for a variety of short-term and long-term situations.
  • Time value of money means money can grow over time through interest earned. Providing credit to customers is often necessary to keep current customers happy and to attract new customers. The problem with selling on credit is that as much as 25 percent of the firm ’s assets could be tied up in accounts receivable. This forces the business to use it own funds to pay for goods or services sold to customers who bought on credit. To attract customers a firm must purchase inventory as well as invest in tangible long-term assets such as land, buildings, and equipment, or intangible assets such as patents, trademarks, and copyrights. The primary difference between debt and equity financing is that debt must be repaid at maturity, while there is no obligation to repay equity financing. Interest must be paid on debt while the company is under no obligation to issue dividends on equity financing. The interest paid is tax deductible while dividends are not. Finally, debt holders do not have the right to vote on company matters as equity holders do.
  • See Learning Goal 4: Identify and describe different sources of short-term financing. Trade credit is the most common form of financing. 2/10 net 30 means a firm can receive a 2% discount if the bill is paid within 10 days. If they choose not to take the discount, the net amount is due in 30 days.
  • See Learning Goal 4: Identify and describe different sources of short-term financing.
  • See Learning Goal 4: Identify and describe different sources of short-term financing.
  • See Learning Goal 4: Identify and describe different sources of short-term financing. Securing capital is the lifeblood to a small business. Students can learn more about Lendio on their web site: www.lendio.com
  • See Learning Goal 4: Identify and describe different sources of short-term financing.
  • See Learning Goal 4: Identify and describe different sources of short-term financing.
  • See Learning Goal 4: Identify and describe different sources of short-term financing. The commercial paper market is an important source of funding for financially stable companies. During the financial crisis which started in 2008, this important market completely shut down, forcing the Federal Reserve to step in and assist many companies with their short-term financing by purchasing their commercial paper.
  • See Learning Goal 4: Identify and describe different sources of short-term financing.
  • See Learning Goal 4: Identify and describe different sources of short-term financing. Ways to Raise Start-Up Capital This slide profiles some of the unique methods businesses can use to raise capital. Trade credit and factoring are two of the oldest methods of raising capital. To start a discussion with students ask the advantages and disadvantages of using each of these methods. Peer-to-peer lending involves individuals loaning money to other individuals or businesses thus bypassing traditional lending outlets. For more information on this new method use loan statistics from www.lendingclub.com
  • 2/10 net 30 means a firm can receive a 2% discount if the bill is paid within 10 days. If they choose not to take the discount, the net amount is due in 30 days. Trade credit is buying goods and services now and paying for them later, while a line of credit is a given amount of unsecured short term funds a bank will lend a business, provided the funds are readily available. A secured loan requires collateral, while an unsecured loan doesn’t not. Factoring is the process of sell accounts receivable for cash. Things to consider in establishing the discount rate are: age of the accounts receivable, the nature of the business, and the condition of the economy.
  • See Learning Goal 5: Identify and describe different sources of long-term financing.
  • See Learning Goal 5: Identify and describe different sources of long-term financing. The Five C ’s of Credit This slide highlights the 5 “C”s of credit that lenders use to make decisions. It is essential that lenders make good decisions when deciding whether or not to loan capital to potential borrowers. Go through each of the C ’s and have students evaluate how important each one is. Are they equally important for the lenders to consider? Why or why not? Ask students: Can you think of any other things the lenders should consider before loaning money? (Note: these do not have to be words that start with C.)
  • See Learning Goal 5: Identify and describe different sources of long-term financing. Lenders may also require certain restrictions to force the firm to act responsibly.
  • See Learning Goal 5: Identify and describe different sources of long-term financing. It is critical that students understand bonds are a form of debt issued by companies. The terms debt, bond, and loan are all four letter words and basically mean the same thing. 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.
  • See Learning Goal 5: Identify and describe different sources of long-term financing.
  • See Learning Goal 5: Identify and describe different sources of long-term financing. Want to Attract a Venture Capitalist? This slide shows how venture capitalists assess the many pitches they receive all year. Venture capitalists want to ensure that not only will they get their money back, but that they will also earn more than their investment. Why is a question like “Will it be worth our money and effort?” important to venture capitalists? (VCs want to make sure there is a large return on their investment so they can make money and continue investing in other companies.)
  • See Learning Goal 5: Identify and describe different sources of long-term financing. This slide is based on Figure 18.6. Financial managers must evaluate the benefits of issuing debt or equity and then weigh those benefits with the drawbacks.
  • See Learning Goal 5: Identify and describe different sources of long-term financing.
  • See Learning Goal 5: Identify and describe different sources of long-term financing.
  • A company could issue and sell bonds or they could borrow from financial institutions and individuals. The primary difference between debt financing and equity financing is that debt must be repaid at maturity while there is no obligation to repay equity financing. Interest must be paid on debt, while the company is under no obligation to issue dividends on equity financing. The interest paid is tax deductible, while dividends are not. Finally, debt holders do not have the right to vote on company matters, while equity holders usually do have voting rights. A business can obtain equity financing from the sale of company stock, from retained earnings, or from venture capital firms. Leverage is borrowing funds to invest in expansion, major asset purchases, or research and development. Firms use leverage in an effort to increase the firm ’s profit.

Transcript

  • 1. Chapter 18 Financial ManagementMcGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
  • 2. ChapterEighteen LEARNING GOALS 1. Explain the role and responsibilities of financial managers. 2. Outline the financial planning process, and explain the three key budgets in the financial plan. 3. Explain why firms need operating funds. 4. Identify and describe different sources of short- term financing. 5. Identify and describe different sources of long-term financing. 18-2
  • 3. Profile CAROL TOMÉ Home Depot • Tomé worked her way up to Chief Financial Officer (CFO) at Home Depot in 2001. • Home Depot was in a store building frenzy; adding more than 100 locations a year through 2005. • Tomé was at the center of tech transition by overseeing the distribution of $350 million in spending. 18-3
  • 4. ChapterEighteen NAME that COMPANY At one time this company was the largest automobile maker in the world. Due to severe financial problems in 2009, the company came very close to extinction. A $7 billion government-backed loan and an additional $43 billion government investment in the company helped it survive. It is now attempting a comeback as a much smaller company. Name that company! 18-4
  • 5. The Role ofFinance andFinancialManagers WHAT’S FINANCE? LG1 • Finance -- The function in a business that acquires funds for a firm and manages them within the firm. • Finance activities include: - Preparing budgets - Creating cash flow analyses - Planning for expenditures 18-5
  • 6. The Role ofFinance andFinancialManagers FINANCIAL MANAGEMENT LG1 • Financial Management -- The job of managing a firm’s resources to meet its goals and objectives. 18-6
  • 7. The Role ofFinance andFinancialManagers FINANCIAL MANAGERS LG1 • Financial Managers -- Examine financial data and recommend strategies for improving financial performance. • Financial managers are responsible for: - Paying company bills - Collecting payments - Staying abreast of market changes - Assuring accounting accuracy 18-7
  • 8. FinancialPlanning WHO’S WHO in FINANCE LG2 • CFO -- Chief Financial Officer • CFP -- Certified Financial Planner • CFA -- Chartered Financial Analyst • Comptroller -- Chief Accounting Officer 18-8
  • 9. The Role ofFinance andFinancialManagers WHAT FINANCIAL LG1 MANAGERS DO 18-9
  • 10. The Role ofFinance andFinancial WHAT WORRIES FINANCIALManagers LG1 MANAGERS • Consumer demand for their firm’s products • Credit markets and interest rates • Financial regulations from the government • Volatility of the dollar • Foreign competition • Environmental regulations Source: CFO Magazine, www.cfo.com, accessed July 2011. 18-10
  • 11. The Value ofUnderstandingFinance WHY DO FIRMS LG1 FAIL FINANCIALLY? 1) Undercapitalization 2) Poor control over cash flow 3) Inadequate expense control 18-11
  • 12. The Value ofUnderstandingFinance TOP FINANCIAL CONCERNS LG1 of COMPANY CFOs - MACRO • Consumer demand • Federal-government policies • Price pressure from competitors • Credit markets/interest rates • Global financial instability Source: CFO Magazine, July/August 2010. 18-12
  • 13. The Value ofUnderstandingFinance TOP FINANCIAL CONCERNS LG1 of COMPANY CFOs - MICRO • Ability to maintain margins • Ability to forecast results • Maintaining morale/productivity • Cost of healthcare • Working-capital management Source: CFO Magazine, July/August 2010. 18-13
  • 14. FinancialPlanning FINANCIAL PLANNING LG2 • Financial planning involves analyzing short-term and long-term money flows to and from the company. • Three key steps of financial planning: 1. 18-14
  • 15. ForecastingFinancialNeeds FINANCIAL FORECASTING LG2 • Short-Term Forecast -- Predicts revenues, costs and expenses for a period of one year or less. • Cash-Flow Forecast -- Predicts the cash inflows and outflows in future periods, usually months or quarters. • Long-Term Forecast -- Predicts revenues, costs, and expenses for a period longer than one year and sometimes as long as five or ten years. 18-15
  • 16. Working withthe BudgetProcess BUDGETING LG2 • Budget -- Sets forth management’s expectations for revenues and allocates the use of specific resources throughout the firm. • Budgets depend heavily on the balance sheet, income statement, statement of cash flows and short-term and long-term financial forecasts. • The budget is the guide for financial operations and expected financial needs. 18-16
  • 17. Working withthe BudgetProcess TYPES of BUDGETS LG2 • Capital Budget -- Highlights a firm’s spending plans for major asset purchases that often require large sums of money. • Cash Budget -- Estimates cash inflows and outflows during a particular period like a month or quarter. • Operating (Master) Budget -- Ties together all the firm’s other budgets and summarizes its proposed financial activities. 18-17
  • 18. Working withthe BudgetProcess FINANICAL PLANNING LG2 18-18
  • 19. EstablishingFinancialControl ESTABLISHING LG2 FINANCIAL CONTROL • Financial Control -- A process in which a firm periodically compares its actual revenues, costs and expenses with its budget. 18-19
  • 20. EstablishingFinancial FACTORS USED in ASSESSINGControl LG2 FINANCIAL CONTROL • Is the firm meeting its short-term financial commitments? • Is the firm producing adequate operating profits on its assets? • How is the firm financing its assets? • Are the firms owners receiving an acceptable return on their investment? 18-20
  • 21. ProgressAssessment PROGRESS ASSESSMENT • Name three finance functions important to the firm’s overall operations and performance. • What three primary financial problems cause firms to fail? • How do short-term and long-term financial forecasts differ? • What’s the purpose of preparing budgets? Can you identify three different types of budgets? 18-21
  • 22. The Need forOperatingFunds KEY NEEDS for OPERATIONAL LG3 FUNDS in a FIRM • Managing day-by-day needs of the business • Controlling credit operations • Acquiring needed inventory • Making capital expenditures 18-22
  • 23. FINANCIAL ORDER or FINANCIAL MARTIAL LAW? (Legal Briefcase)• In Michigan, half of the state’s communities are in financial distress.• Local Government and School District Fiscal Accountability Act allows cities, towns, and school districts to be taken over by state- appointed emergency financial managers (EFMs) selected by the Governor.• Indiana is considering similar legislation. New York and other states’ boards have been given similar power. 18-23
  • 24. The Need forOperating HOW SMALL BUSINESSESFunds LG3 CAN IMPROVE CASH FLOW • Be more aggressive in collecting accounts receivable. • Offer customers discounts for paying early. • Take advantage of special payment terms from vendors. • Raise prices. • Use credit cards discriminately. Source: American Express Small Business Monitor. 18-24
  • 25. GOOD FINANCE or BAD MEDICINE? (Making Ethical Decisions)• You’re a new hospital administrator at a small hospital that, like many others, is experiencing financial problems.• You suggest discontinuing the hospital’s large stockpile of drugs and shift to ordering them just when they are needed.• Some like the idea, but the doctors claim you’re sacrificing patients’ well-being for cash. What do you do? What could be the result of your decision? 18-25
  • 26. AlternativeSources ofFunds USING ALTERNATIVE LG3 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). 18-26
  • 27. AlternativeSources ofFunds SHORT and LONG-TERM LG3 FINANCING • Short-Term Financing -- Funds needed for a year or less. • Long-Term Financing -- Funds needed for more than a year. 18-27
  • 28. AlternativeSources ofFunds WHY FIRMS NEED FINANCING LG3 Short-Term Funds Long-Term Funds Monthly expenses New-product development Unanticipated emergencies Replacement of capital equipment Cash flow problems Mergers or acquisitions Expansion of current inventory Expansion into new markets Temporary promotional programs New facilities 18-28
  • 29. ProgressAssessment PROGRESS ASSESSMENT • Money has time value. What does this mean? • Why is accounts receivable a financial concern of the firm? • What’s the primary reason an organization spends a good deal of its available funds on inventory and capital expenditures? • What’s the difference between debt and equity financing? 18-29
  • 30. Trade Credit TYPES of LG4 SHORT-TERM FINANCING • Trade Credit -- The practice of buying goods or services now and paying for them later. • Businesses often get terms 2/10 net 30 when receiving trade credit. • Promissory Note -- A written contract agreeing to pay a supplier a specific sum of money at a definite time. 18-30
  • 31. Family andFriends TYPES of LG4 SHORT-TERM FINANCING • Many small firms obtain short-term financing from friends and family. • If asking for help from family or friends, it’s important both parties: 1) Agree to specific loan terms 2) Put the agreement in writing 3) Arrange for repayment the same way they would for a bank loan 18-31
  • 32. CommercialBanks DIFFICULTY of OBTAINING LG4 SHORT-TERM FINANCING • Banks generally prefer to lend short- term money to larger, more established businesses. • The recent financial crisis has made it difficult for even promising and well-organized businesses to get loans. 18-32
  • 33. EXPLORING the FINANCING UNIVERSE (Spotlight on Small Business)• Peer-to-peer lending sites like Lending Club match small businesses with lenders and receive a fee for their services.• Lendio claims to have developed a technology that matches business owners with the right type of business loan and lender.• Lendio also offers services such as a business plan makeover and website design for a fee. 18-33
  • 34. DifferentForms ofShort-Term DIFFERENT FORMS ofLoans LG4 SHORT-TERM LOANS • Commercial banks offer short-term loans like: - Secured Loans -- Backed by collateral. - Unsecured Loans -- Don’t require collateral from the borrower. - Line of Credit -- A given amount of money the bank will provide so long as the funds are available. - Revolving Credit Agreement -- A line of credit that’s guaranteed but comes with a fee. 18-34
  • 35. FactoringAccountsReceivable FACTORING LG4 • Factoring -- The process of selling accounts receivable for cash. • Factors charge more than banks, but many small businesses don’t qualify for loans. 18-35
  • 36. CommercialPaper COMMERCIAL PAPER LG4 • Commercial Paper -- Unsecured promissory notes in amounts of $100,000+ that come due in 270 days or less. • Since commercial paper is unsecured, only financially stable firms are able to sell it. 18-36
  • 37. Credit Cards CREDIT CARDS LG4 • Rates for small businesses grew almost 30% after the Credit Card Responsibility Accountability and Disclosure Act was passed. Photo Courtesy of: Robert Scoble • 18-37
  • 38. Credit Cards WAYS to RAISE LG4 START-UP CAPITAL • Seek out a microloan from a microlender • Use asset-based lending or factoring • Turn to the web and seek out peer-to-peer lending • Research local banks • Sweet-talk vendors you want to do business with Source: Entrepreneur, www.entrepreneur.com, accessed July 2011. 18-38
  • 39. ProgressAssessment PROGRESS ASSESSMENT • What does an invoice containing the terms 2/10, net 30 mean? • What’s the difference between trade credit and a line of credit? • What’s the key difference between a secured and an unsecured loan? • What’s factoring? What are some of the considerations factors consider in establishing their discount rate? 18-39
  • 40. ObtainingLong-TermFinancing SETTING LONG-TERM LG5 FINANCING OBJECTIVES • Three questions of financial managers in setting long- term financing objectives: 1. What are the organization’s long-term goals and objectives? 2. What funds do we need to achieve the firm’s long-term goals and objectives? 3. What sources of long-term funding (capital) are available, and which will best fit our needs? 18-40
  • 41. ObtainingLong-TermFinancing The FIVE “C”s of CREDIT LG5 1. The character of the borrow. 2. The borrower’s capacity to repay the loan. 3. The capital being invested in the business by the borrower. 4. The conditions of the economy and the firm’s industry. 5. The collateral the borrower has available to secure the loan. 18-41
  • 42. DebtFinancing USING LONG-TERM LG5 DEBT FINANCING • Long-term financing loans generally come due within 3 -7 years but may extend to 15 or 20 years. • Term-Loan Agreement -- A promissory note that requires the borrower to repay the loan with interest in specified monthly or annual installments. • A major advantage of debt financing is the interest the firm pays is tax deductible. 18-42
  • 43. DebtFinancing USING DEBT FINANCING LG5 by ISSUING BONDS • Indenture Terms -- The terms of agreement in a bond issue. • Secured Bond -- A bond issued with some form of collateral (i.e. real estate). • Unsecured (Debenture) Bond -- A bond backed only by the reputation of the issuing company. 18-43
  • 44. EquityFinancing SECURING EQUITY FINANCING LG5 • A company can secure equity financing by: - Selling shares of stock in the company. - Earning profits and using the retained earnings as reinvestments in the firm. - Attracting Venture Capital -- Money that is invested in new or emerging companies that some investors believe have great profit potential. 18-44
  • 45. EquityFinancing WANT to ATTRACT a LG5 VENTURE CAPITALIST? 1. Can the company grow? 2. Will we get our money back and more? 3. Will it be worth our money and effort? Source: Entrepreneur, February 2011. 18-45
  • 46. ComparingDebt andEquity DIFFERENCES BETWEENFinancing LG5 DEBT and EQUITY FINANCING Types of Financing Conditions Debt Equity None. Unless special Common stock Management influence conditions have been holders have voting agreed on. rights. Debt has a maturity Stock has no maturity Repayment date. date. The firm isn’t legally Yearly obligations Payment of interest. liable to pay dividends. Interest is tax Dividends are not tax Tax benefits deductible. deductible. 18-46
  • 47. ComparingDebt andEquity USING LEVERAGE forFinancing LG5 FUNDING NEEDS • Leverage -- Raising funds through borrowing to increase the firm’s rate of return. • Cost of Capital -- The rate of return a company must earn in order to meet the demands of its lenders and expectations of equity holders. 18-47
  • 48. Lessons Fromthe FinancialCrisis LESSONS of the LG5 FINANCIAL CRISIS • The recent financial crisis was the worst fall since the Great Depression. • Led to the passage of sweeping financial reform. • Government is increasing involvement and intervention. 18-48
  • 49. ProgressAssessment PROGRESS ASSESSMENT • What are the two major forms of debt financing available to a firm? • How does debt financing differ from equity financing? • What are the three major forms of equity financing available to a firm? • What is leverage, and why do firms choose to use it? 18-49