Financial management involves acquiring and managing funds for a business. The financial manager examines financial data and recommends strategies to improve the firm's financial performance. There are three common reasons firms fail financially: undercapitalization, poor cash flow control, and inadequate expense control. Financial planning involves analyzing short and long-term cash flows, optimizing profitability, and making the best use of funds. It has three steps: forecasting financial needs, developing budgets to meet needs, and establishing financial controls. Firms can raise needed capital through borrowing (debt financing) such as bank loans, selling ownership stakes (equity financing), or retaining profits (retained earnings).

1. *
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Chapter
Eighteen
Financial
Management
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

2. • What is Finance?

3. WHAT’S FINANCE?
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• Finance -- The function in a business that acquires
funds for a firm and manages those funds within the
firm.
• Finance activities include:
- Preparing budgets
- Creating cash flow analyses
- Planning for expenditures
The Role of
Finance and
Financial
Managers
LG1
18-3

4. FINANCIAL MANAGEMENT
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• Financial Management --
The job of managing a firm’s
resources to meet its goals
and objectives.
• Financial managers
examine financial data
prepared by accountants
and recommend strategies
for improving the financial
performance of the firm.
The Role of
Finance and
Financial
Managers
LG1
18-4

5. • What is the role of finance and
financial manager?

6. WHAT FINANCIAL
MANAGERS DO
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*
LG1
The Role of
Finance and
Financial
Managers
18-6

7. Three common reasons a firm fails financially
are:
• Undercapitalization
• Poor control over cash flow
• Inadequate expense control

8. Video Example
• Why a firm fails financially?
• https://www.youtube.com/watch?v=UlgbwGH
F8GQ

9. Financial Planning
Financial planning means analyzing short-term
and long-term money flows to and from the
firm.

10. • Write some points (Pair work) on
why do you need financial planning?

11. Objective is to
• Optimize the firm’s profitability
• Make the best use of its money

12. Financial Planning
Three steps
1. Forecasting the firm’s short-term and long-
term financial needs- short- and long-term
forecast
2. Developing budgets to meet those needs
3. Establishing financial controls

13. Working with Budget
• A financial plan that sets forth management’s
expectations, and , on the basis of those
expectations , allocates the use of specific
resources throughout the firm

14. Working with Budget
• Capital budget: highlights a firm’s spending plans for
major asset purchases that require large sums of
money, like property, buildings, and equipment.
• Cash budget estimates cash inflows and outflows
during a particular period, like a month or a quarter.
• Operating budget: The budget that ties together the
firm’s other budgets and summarizes its proposed
financial activities. The most detailed a firm prepares

16. Establishing Financial Controls
• A process in which a firm periodically
compares its actual revenues, costs, and
expenses with its budget.
• Monthly financial review to ensure financial
control

17. The need for operating funds
• A video lecture
• https://www.youtube.com/watch?v=oEe4OW
qy1n8

18. The need for Operating Fund
Key areas include
• Managing day-to-day needs of the business
• Controlling credit operations
• Acquiring needed inventory
• Making capital expenditures

19. Alternative Sources of Fund
A firm can raise needed capital by
borrowing money (debt), selling
ownership (equity), or earning profits
(retained earnings).
Table 18.5- Why firms need funds (short-term
funds and long-term funds)

20. SHORT and LONG-TERM
FINANCING
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• Short-Term Financing --
Funds needed for a year or
less.
• Long-Term Financing --
Funds needed for more than
a year. (usually 2 to 10
years)
Alternative
Sources of
Funds
LG3
18-20

21. Short Term Financing
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*
• Trade Credit.
• Family and Friends
• Commercial Banks
• secured loan ( with collateral)
• unsecured loan (no collateral
• Credit Card
Debt
Financing by
Issuing Bonds
LG5
18-21

22. USING ALTERNATIVE
SOURCES of FUNDS
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• 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).
Alternative
Sources of
Funds
LG3
18-22

23. DIFFERENCES BETWEEN DEBT
and EQUITY FINANCING
*
*Comparing
Debt and
Equity
Financing
LG5
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.
18-23