Joseph Fabiilli | The role of finance to grow a Business
1. THE ROLE OF FINANCE TO GROW A
BUSINESS
JOSEPH FABIILLI
2. LEARNING OBJECTIVES
1. The importance of finance and financial management to
an organization
2. The responsibilities of financial managers.
3. The financial planning process
4. The three key budgets in the financial plan.
5. The major reasons why firms need funds.
6. The types of financing that can be used to obtain these
funds.
7. Identify and describe different sources of short-term
financing.
8. Identify and describe different sources of long-term
3. THE ROLE OF FINANCE AND
FINANCIAL MANAGERS
Finance: The function in a business that acquires
funds for the firm and manages those funds within
the firm.
Financial management: The job of managing a
firm’s resources so it can meet its goals and
objectives.
Financial managers: Managers who make
recommendations to top executives regarding
strategies for improving the financial strength of a
5. FINANCIAL PLANNING
Financial planning is a key responsibility of the
financial manager in a business. It consists of three
steps:
1. Forecasting short-term and long-term financial
needs
2. Developing budgets to meet those needs
3. Establishing financial control to see how well the
company is doing
6. FORECASTING FINANCIAL NEEDS
Forecasting is an important part of any firm’s financial plan.
Short-term forecast: Forecast that predicts revenues, costs, and expenses
for a period of one year or less.
Cash flow forecast: Forecast that predicts the cash inflows and outflows in
future periods, usually months or quarters.
Long-term forecast: Forecast that predicts revenues, costs, and expenses
for a period longer than one year, and sometimes as far as five or ten
years into the future.
7. WORKING WITH THE BUDGET
PROCESS
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.
There are usually several types of budgets
established in a firm’s financial plan:
1. Operating budget
2. Capital budget
3. Cash budget
9. ESTABLISHING FINANCIAL
CONTROLS
• Financial control: A process in which a firm periodically
compares its actual revenues, costs, and expenses with
its projected ones.
• Most companies hold at least monthly financial
reviews as a way to ensure financial control.
• Financial controls help provide feedback to reveal
which accounts, departments and people are varying
from the financial plans.
10. THE NEED FOR FUNDS
Key areas for funds in mostly all organizations
are:
Managing day-to-day needs of the business
Controlling credit operations
Acquiring needed inventory
Making capital expenditures
Capital expenditures: Major investments in either
tangible long-term assets such as land, buildings, and
equipment, or intangible assets such as patents,
trademarks, and copyrights.
11. ALTERNATIVE SOURCES OF FUNDS
Debt financing: Funds raised through various forms or
borrowing that must be repaid.
Equity financing: Funds raised from operations within
the firm or through the sale of ownership in the firm.
Short-term financing: Borrowed funds that are needed
for one year or less.
Long-term financing: Borrowed funds that are needed
for a period longer than one year.
13. OBTAINING SHORT-TERM
FINANCING
• Trade Credit
• Trade credit: The process of buying goods and
services now and paying for them later.
• Promissory note: A written contract with a promise to
pay.
• Family and Friends
• Friends and relatives are sometimes willing to help a
small business by lending funds.
14. OBTAINING SHORT-TERM
FINANCING
Commercial Banks and Other Financial Institutions
A promising and well-organized venture may be able to get a back
loan.
Short-Term Loans
Secured loan
Unsecured loan
Line of credit
Revolving credit agreement
Commercial finance companies
15. OBTAINING SHORT-TERM
FINANCING
Factoring Accounts Receivable
Factoring: The process of selling accounts receivable for cash.
Commercial Paper
Commercial paper: Unsecured promissory notes of $100,000 and up that mature (come
due) in 365 days or less.
Credit Cards
Credit cards provide a readily available line of credit to a business.
Can be risky.
16. OBTAINING LONG-TERM
FINANCING
Financial managers ask themselves three questions when setting long-
term financing objectives:
1. What are the organization’s long-term goals and objectives?
2. What are the financial requirements needed to achieve these long-term goals and
objectives?
3. What sources of long-term capital are available, and which will best fit our needs?
Long-term financing comes from:
1. Debt financing
2. Equity financing
17. DEBT FINANCING
• By Borrowing Money From Lending Institutions
• Term-loan agreement: A promissory note that requires the
borrower to repay the loan in specified installments.
• Risk/return trade-off: The principle that the greater the risk a
lender takes in making a loan, the higher the interest rate
required.
18. DEBT FINANCING
By Issuing Bonds
Bond: A corporate certificate indicating that a person has lent
money to a firm.
Institutional investors: Large organizations– such as pension
funds, mutual funds, insurance companies, and banks– that
invest their own funds or the funds of others.
Interest: The payment the issuer of the bond makes to the
bondholders for use of the borrowed money.
Maturity date: The exact date the issuer of a bond must pay the
principal to the bondholder.
19. DEBT FINANCING-BY ISSUING
BONDS
Different classes of bonds:
1. Unsecured or debenture bonds
2. Secured bonds
Sinking fund: A reserve account in which the issuer of a
bond periodically retires some part of the bond
principal prior to maturity so that enough capital
will be accumulated by the maturity date to pay off
the bond.
20. EQUITY FINANCING
• By Selling Stock
• Stocks: Shares of ownership in a company.
• Initial public offering: The first public offering of a corporation’s
stock.
• From Retained Earnings
• Retained earnings are often a major source of long-term funds
for small businesses who have fewer financing alternatives.
21. EQUITY FINANCING
From Venture Capital
Venture capital: Money that is invested in new or emerging companies that are
perceived as having great profit potential.
From Selling Stock
Stock certificate: Evidence of stock ownership that specifies the name of the company,
the number of shares it represents, and the type of stock being issued.
Dividends: Part of a firm’s profits that may be distributed to shareholders as either cash
payments or additional shares of stock.
23. EQUITY FINANCE-- FROM SELLING
STOCK
Common Shares: The most basic form of ownership in a firm; it confers
voting rights and the right to share in the firm’s profits through
dividends, if offered by the firm’s board of directors.
Holders of common stock can:
1. Vote for the board of directors and on issues affecting the company
2. Share in the firms profits through dividends
Preferred shares: Stock that gives its owners preference in the payment of
dividends and an earlier claim on assets than common shareholders if the
company is forced out of business and its assets are sold.