BUS110 Chapter 18 - Financial Management
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The document discusses the roles and responsibilities of finance and financial managers. It describes what financial management entails, including preparing budgets, analyzing cash flows, and planning for expenditures. It also lists some of the main concerns of financial managers, such as consumer demand, interest rates, and regulatory issues.
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BUS110 Chapter 18 - Financial Management
- 1. * * Chapter Eighteen Financial Management Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
- 5. WHAT FINANCIAL MANAGERS DO * * LG1 The Role of Finance and Financial Managers 18-
- 14. FINANICAL PLANNING * * Working with the Budget Process LG2 18-
- 22. WHY FIRMS NEED FINANCING * * Alternative Sources of Funds LG3 18- 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
- 30. WHEN GOVERNMENT BAILOUTS PAY OFF * * LG5 Debt Financing 18- Company Year Amount Lockheed 1971 $250 Million (Paid Back) City of New York 1973 $6.9 Billion (Paid Back) Chrysler 1980 $1.5 Billion (Paid Back) Saving & Loan Industry 1984 $160 Billion ( Not Paid Back) Airline Industry 2001 $15 Billion ( Not Paid Back)
- 31. DIFFERENCES BETWEEN DEBT and EQUITY FINANCING * * Comparing Debt and Equity Financing LG5 18- Types of Financing Conditions Debt Equity Management influence None. Unless special conditions have been agreed on. Common stock holders have voting rights. Repayment Debt has a maturity date. Stock has no maturity date. Yearly obligations Payment of interest. The firm isn’t legally liable to pay dividends. Tax benefits Interest is tax deductible. Dividends are not tax deductible.
- 32. Review Only
Editor's Notes
- 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 perked 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 1: Explain the responsibilities of financial managers. This slide 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. 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 This slide highlights the top concerns of company CFOs. The Chief Financial Officers of companies must concern themselves with a multitude of issues. To start a class discussion on the issues faced by company CFOs use this link from CFO magazine (http://www.cfo.com/article.cfm/10596933/c_10712531). One interesting point is the different issues facing American, Asian and European CFOs.
- 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. 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 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. The capital and cash budget roll up into an operating or 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?
- See Learning Goal 3: Explain why firms need operating funds.
- See Learning Goal 3: Explain why firms need operating funds. 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
- See Learning Goal 3: Explain why firms need operating funds. How Small Businesses Can Improve Cash Flow The slide list 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 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. It is important for management to understand that they need capital for a variety of short-term and long-term situations.
- 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. 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 financially stable companies to seek alternative sources of funding.
- 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 underwriters use to make decisions. It is essential that underwriters 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 underwriter to consider? Why or why not? Ask students: Can you think of any other things the underwriters 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.
- 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. When Government Bailouts Pay Off This slides gives an historical perspective to government support for various troubled companies dating back to 1971. The bailout of AIG and GM are were nothing new. Students will be surprised to find out how the federal government has come to the rescue numerous times over the past forty years. To start a discussion ask students the following: What are the advantages and disadvantages of government involvement in business? (Benefits of government involvement include the saving of jobs and the protection of an industry, but disadvantages include bailouts can be expensive and the may stifle creativity and competitive drive.)
- See Learning Goal 5: Identify and describe different sources of long-term financing. Financial managers must evaluate the benefits of issuing debt or equity and then weigh those benefits with the drawbacks.
- 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. The Small Business and Entrepreneurship Council reports 60 to 80% of new jobs come from small business.
- See Learning Goal 4: Identify and describe different sources of short-term financing. Today, international factoring accounts for $1 trillion in global trade.
- 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.
- See Learning Goal 5: Identify and describe different sources of long-term financing.
- What are the two major forms of debt financing available to a firm? A company could issue and sell bonds or they could borrow from financial institutions and individuals. How does debt financing differ from equity financing? The primary difference 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 do have voting rights. What are the major forms of equity financing available to a firm? A business can obtain equity financing from the sale of company stock, from retained earnings, or from venture capital firms. What is leverage, and why do firms choose to use it? 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.
- Name three finance functions important to the firm’s overall operations and performance. Financial planning, budgeting, and the establishment of financial control. What three primary financial problems cause firms to fail? Undercapitalization, poor control of cash flow, and inadequate expense control. How do short-term and long-term financial forecasts differ? Short-term forecast attempts to project revenue, costs, and expenses for a period of one year or less, while the long-term forecast is for a period of greater than one year. What’s the purpose of preparing budgets? Identify the different types. 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.
- Why are accounts receivable a financial concern of the firm? 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. What’s the primary reason an organization spends a good deal of its available funds on inventory and capital expenditures? 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. What’s the difference between debt and equity financing? The primary difference 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.