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Chapt 18, intro to bus part 1
Chapt 18, intro to bus part 1
Chapt 18, intro to bus part 1
Chapt 18, intro to bus part 1
Chapt 18, intro to bus part 1
Chapt 18, intro to bus part 1
Chapt 18, intro to bus part 1
Chapt 18, intro to bus part 1
Chapt 18, intro to bus part 1
Chapt 18, intro to bus part 1
Chapt 18, intro to bus part 1
Chapt 18, intro to bus part 1
Chapt 18, intro to bus part 1
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Chapt 18, intro to bus part 1

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Chapt 18, intro to bus part 1

Chapt 18, intro to bus part 1

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  • 1. Financial Management Chapter 18, Part 1 INTRODUCTION TO BUSINESS PREPARED BY: SHAFAYET ULLAH SECTION: A3 AND A4
  • 2. Defining Finance  The study of money within the firm.  The functional area with the responsibility of:  Finding funds for the firm  Managing funds of the firm  Determining best uses of the firm’s funds
  • 3. The Financial Manager  Individual who is responsible for the finance function  Effective, financial manager must develop and follow a financial plan.
  • 4. Role of the Financial Manager  Projecting month-by-month flow of funds into and      out of the business Comparing monthly inflows to monthly outflows Finding ways to generate revenue from excess funds Adjusting inflows and or outflows and looking for other funding sources ( in case of fund shortage) Analyzing alternate sources of funds and finding the most efficient source ( in case new funds are required) Monitoring and evaluating results of the financial plan.
  • 5. Month-by-Month Outward Flow of Funds  Represents the firm’s use of funds  Cost of daily operations: Rent, utilities, wages, interest expense, taxes.  Cost of credit service: Most firms cannot do business strictly on cash basis, so they provide customers with some form of credit to encourage larger purchases and gain new customers.  Cost of inventory: To survive in a competitive environment firms must provide for customer needs and cannot afford to be out of product that customer demands. ( Further complicated by demand fluctuation).
  • 6. Month-by-Month Outward Flow of Funds  Purchase of major assets: Land, buildings, equipment (Must be periodically replaced and upgraded) Expansion also requires additional assets.  Debt payment: Payment of interest and principal  Dividend payment: Made to the shareholder as form of earnings on their stocks. Most firms pay dividends to keep their stock attractive to potential investors.
  • 7. Month-by-Month Inward Flow of Funds  From revenue generated by the business  Can be projected by estimating sales volume  Where credit sales are involved, rate of payment on accounts receivable must be estimated  Interest income expected from investment of cash reserves and other excess funds.
  • 8. Monthly Inflow to Monthly Outflow: Comparison  Three possible outcomes:  Perfect matching: No action required ( Unlikely)  Expected expenditure for the month greater than expected income ( Additional funds must be found to cover shortfall)  Expected income for the month greater than expected expenditure: Company has excess funds.
  • 9. Generating Revenue from Excess Funds: Expansion  Applicable for companies with substantial excess funds  Achieved by:  Increase in production capacity  Addition of new sales outlets  Acquiring another firm.
  • 10. Generating Revenue from Excess Funds: High Liquidity Investments  Most popular placement for excess funds: Marketable securities ( Easily converted into cash, pay relatively high interest rates) Three most commonly used marketable securities:  U.S. Treasury Bills: • Issued each week to the highest bidder • Maturity Dates: Three or six months ( Date on which principal must be • • • • repaid to the purchaser) Often called T bills Virtually risk free One of the most popular marketable securities Issued in amounts of $ 10,000/more ( not for a small investor).
  • 11. Generating Revenue from Excess Funds: High Liquidity Investments  Commercial paper: • Short term note ( Represents a loan to a major • • • • corporation with a high credit standing) Maturity date: Three days to nine months Riskier than T bills, not as liquid Purchaser paid a higher rate of interest Normally issued in amounts of $25,000 to 100,000.
  • 12. Generating Revenue from Excess Funds: High Liquidity Investments  Certificates of deposit/CDs: • Notes issued by a commercial bank/ brokerage firm • Size runs from $100 to 100,000 • Maturity dates: Range from 24 hours to 10 years • Issued for 7 days to 42 months • CDs issued by banks: Early redeeming possible (Substantial interest penalty).
  • 13. Financial Management Chapter 18, Part 1 Thank You

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