Chapt 18, part 2

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Chapt 18, part 2

  1. 1. Financial Management Chapter 18, Part 2 INTRODUCTION TO BUSINESS PREPARED BY: SHAFAYET ULLAH SECTION: A3 AND A4
  2. 2. Efficient Sources of Funds  Major categories of fund sources for a business:  Debt capital: Funds obtained through borrowing  Equity capital: Funds provided in exchange for some ownership in the firm.
  3. 3. Short-Term Financing: Debt Capital  Used to obtain money to finance current operations  Repayment required within one year  May come from several sources: Trade credit Family and friends Commercial banks Internal funds management
  4. 4. Short-Term Financing  Trade Credit  Most widely used source of short-term financing  Credit given by suppliers for the purchases the firm makes from these suppliers • Family and friends  For funds needed for a short time  Extra risk: If business goes sour, not only is there loss of business but loss of relationships too!
  5. 5. Short-Term Financing  Commercial banks Bank loans come in many different forms;  Unsecured loans: Most difficult loans to get from a bank Issued on the good credit of the borrower and requires no collateral **New businesses have difficulty getting these loans
  6. 6. Short-Term Financing Commercial Banks  Secured loans Backed by some form of collateral ( Reduces risk for the banker) **Where borrower fails to pay the loan, lender may take possession of property, equipment, inventory or accounts receivable. ** Pledging: Using accounts receivable as collateral for a loan
  7. 7. Short-Term Financing  Commercial Banks  Line of credit: A preapproved amount the holder may borrow in whole or in part, provided that the bank has sufficient funds  Revolving Credit Agreement: Guarantees that the bank will honor the company’s line of credit up to the stated amount (generally requires payment of a fee)  Factoring: The sale of accounts receivable to a bank or other lender, generally at a considerable discount. ** Seller receives less than the full value of the accounts receivable.  Floor-planning: Borrowers will assign the title to their inventory to the bank as a collateral (Borrowers pay off loan as inventory sold)
  8. 8. Short-Term Financing: Internal Funds Management  Close review of balance sheet and accounting ratios  Overdue accounts receivable can be collected more quickly/ Discount may be offered for early payment  Inventory reduction ( manager must remember to retain adequate inventory)  Cost cuts, expense reduction
  9. 9. Long-Term Financing: Loans  Loans:  Direct loans- Generally given to higher risk business, at lower interest rates.  Guaranteed loan: Loan actually comes from a private lender ( beneficial for small business owners)  Term loan agreement/ promissory note: Requires the borrower to repay the loan according to a schedule of specified installments ( either at fixed/flexible rate of interest
  10. 10. Requirements for Long-term loans  Some form of collateral ( real estate, machinery, equipment or stock)  When determining interest rates for loans, banks will look at;  Length of time the loan is for  Type of collateral  The firm’s credit rating  General level of market interest
  11. 11. Long-Term Financing: Bonds  Bond: An agreement between a firm and an investor with specific terms spelled out in an indenture ** IOU with an investor stipulates periodic interest payments (every 6 months) and payment of the principal at maturity (10 yrs/more)  Secured bond: Backed by some form of collateral (real estate, inventory) that will pass to the bondholders if company does not live up to agreement terms.  Unsecured/debenture bonds: Backed by the good name of the issuing company.
  12. 12. Long-Term Financing: Bonds  Junk bonds: Designates a low-grade bond issued by financially weak companies with no solid collateral. ** Funds internal expansion, corporate acquisitions ** Have very high interest rates • Callable bonds: Give the company the right to purchase back its bonds early ( Slightly higher rate of interest, company pays a premium to the holder when the bonds are called) • Convertible bonds: Can be paid off with stock in the company. Amount of stock indicated in the indenture terms.
  13. 13. Long-term Financing: Public sale of stock  Stocks: Shares of ownerships  Shareholder receives a stock certificate (shows the name of the shareholder, number of shares of stock owned, special characteristic of stock)  Authorized stock: All the shares of stock that can be sold at any time  A company will typically, sell only a portion of their authorized stock, shares sold are called issued stock. (Unsold shares- unissued stock).
  14. 14. Other forms of Long-term financing  Leverage: Use of long-term debt to raise needed cash (Works to maintain higher rates of return on owner’s investments)  Equity capital  Retained earnings: Profits chosen by owner to leave in the company rather than pay them off as dividends  Contributions  Sale of partnerships  Venture capital: Funds provided by individual/ organizations to new firms with high growth potential. Investor receives a share of the ownership and share of control.
  15. 15. Managing Finances Of The Firm  Managing working capital  Developing capital budgets  Developing financial controls
  16. 16. WORKING CAPITAL  Current assets minus the current liabilities  Current assets of cash, accounts receivable and inventory must be managed  Cash must always be earning interest income  Accounts receivable must be collected quickly  Inventory must be kept to the minimum needed to satisfy customer demand  Accounts payable should be paid in time to take advantage of cash discounts.
  17. 17. Capital Budgets  Represent funds allocated for future investments of the firm’s cash  Investments: Plant expansion, equipment improvement  Capital budget has limited funds ( requires evaluation of all proposed capital expenditures for maximum return)  Determining long term rate of return difficult: Depends on customer response, competitive reactions, state of the economy.
  18. 18. Summary of the specific duties of the financial manager  Responsible for maintaining proper flow of funds  Managing uses of funds  Help find sources of funds  Finding appropriate investments for excess cash  Managing the company’s working capital and capital budgeting process  Developing appropriate financial controls ** When comparing actual and projected results manager must look for deviations and corrective action taken.
  19. 19. Financial Management Chapter 18, Part 2 Thank You

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