Understanding business 10th chapter 18b financial mgt

TOP FINANCIAL CONCERNS of COMPANY CFOs - MACRO • Measuring and monitoring business performance • Providing inputs into enterprise strategy • Developing talent in the finance organizatio

Financial Management

Chapter 18

Copyright © 2014 by The McGraw-Hill Companies, Inc All rights reserved McGraw-Hill/Irwin

1 Explain the role and responsibilities of financial

managers.

2 Outline the financial planning process, and explain

the three key budgets in the financial plan.

3 Explain why firms need operating funds.

4 Identify and describe different sources of

Tomé worked her way up to Chief Financial Officer

(CFO) at Home Depot in 2001

CAROL TOMÉ

Home Depot

Profile

• Home Depot was in a store

building frenzy; adding more than 100 locations a year

through 2005

• Tomé was at the center of

tech transition by overseeing the distribution of $350

million in spending

18-3

NAME that COMPANY

Chapter

Eighteen

At one time this company was the largest

automobile maker in the world Due to severe financial problems in 2009, the company came very close to extinction A $7 billion

government-backed loan and an additional $43 billion government investment in the company helped it survive It is now attempting a

comeback as a much smaller company

Name that company!

18-4

Finance The function in a business that acquires

funds for a firm and manages them within the firm.

- Preparing budgets

- Creating cash flow analyses

- Planning for expenditures

Financial Management

The job of managing a firm’s resources to meet its goals and objectives.

FINANCIAL MANAGEMENTLG1

Financial Managers Examine financial data and

recommend strategies for improving financial

performance

FINANCIAL MANAGERSLG1

• CFO Chief Financial Officer

WHAT FINANCIAL MANAGERS DOLG1

WHAT WORRIES FINANCIAL

TOP FINANCIAL CONCERNS

of COMPANY CFOs - MACRO

• Measuring and monitoring business performance

• Providing inputs into enterprise strategy

• Developing talent in the finance organization

• Optimizing planning, budgeting and forecasting

• Driving enterprise cost reduction

Source: Forbes, March 7, 2013

TOP FINANCIAL CONCERNS

of COMPANY CFOs - MICRO

(will there be another recession)

• Increase in energy costs

• Uncertainty about government

Financial planning involves analyzing short-term and long-term money flows to and from the company

1 Forecasting the firm’s short-term and long-term financial

needs.

2 Developing budgets to meet those needs.

3 Establishing financial controls to see if the company is

achieving its goals.

• Short-Term Forecast Predicts revenues, costs

and expenses for a period of one year or less.

and outflows in future periods, usually months or quarters.

and expenses for a period longer than one year and sometimes as long as five or ten years.

Budget Sets forth management’s expectations for

revenues and allocates the use of specific resources

throughout the firm.

income statement, statement of cash flows and

short-term and long-term financial forecasts

and expected financial needs

• Capital Budget Highlights a firm’s spending

plans for major asset purchases that often require large sums of money.

outflows during a particular period like a month or quarter.

firm’s other budgets and summarizes its proposed financial activities.

TYPES of BUDGETSLG2

Working with

the Budget

Process

18-17

FINANICAL PLANNINGLG2

Working with

the Budget

Process

18-18

Financial Control

A process in which a firm periodically compares its actual revenues, costs and expenses with its budget

ESTABLISHING FINANCIAL CONTROL

FACTORS USED in ASSESSING

return on their investment?

• Name three finance functions important to the

firm’s overall operations and performance

firms to fail?

forecasts differ?

you identify three different types of budgets?

PROGRESS ASSESSMENT

Progress

Assessment

18-21

• Managing day-by-day needs of the business

KEY NEEDS for OPERATIONAL

• In Michigan, half of the state’s communities are in

financial distress

Accountability Act allows cities, towns, and

school districts to be taken over by

state-appointed emergency financial managers (EFMs) selected by the Governor

York and other states’ boards have been given

similar power

FINANCIAL ORDER or FINANCIAL MARTIAL LAW?

(Legal Briefcase)

18-23

HOW SMALL BUSINESSES CAN IMPROVE CASH FLOW

aggressive in collecting receivables

• You’re a new hospital administrator at a small

hospital that, like many others, is experiencing

financial problems

stockpile of drugs and shift to ordering them just

when they are needed

sacrificing patients’ well-being for cash What do

you do? What could be the result of your

• Debt Financing The

funds raised through various forms of borrowing that must

be repaid.

funds raised from within the firm from operations or

through the sale of ownership

in the firm (such as stock)

USING ALTERNATIVE SOURCES of FUNDS

Alternative

Sources of

Funds

18-27

WHY FIRMS NEED FINANCING

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

• Money has time value What does this mean?

the firm?

spends a good deal of its available funds on inventory and capital expenditures?

• Trade Credit The practice of buying goods or

services now and paying for them later.

receiving trade credit

pay a supplier a specific sum of money at a definite time.

TYPES of SHORT-TERM FINANCING

Trade Credit

LG4

18-30

Many small firms obtain short-term financing from

friends and family

important both parties:

1) Agree to specific loan terms 2) Put the agreement in writing 3) Arrange for repayment the same way they would

for a bank loan

TYPES of SHORT-TERM FINANCING

Family and

Friends

LG4

18-31

• Banks generally

prefer to lend term money to larger, more established

short-businesses

DIFFICULTY of OBTAINING SHORT-TERM FINANCING

Commercial

Banks

LG4

even promising and well-organized businesses to get loans

18-32

• Peer-to-peer lending sites like Lending Club

match small businesses with lenders and receive

a fee for their services

• Lendio claims to have developed a technology

that matches business owners with the right type

of business loan and lender

plan makeover and website design for a fee

EXPLORING the FINANCING UNIVERSE

(Spotlight on Small Business)

18-33

Commercial banks offer short-term loans like:

from the borrower.

bank will provide so long as the funds are available.

credit that’s guaranteed but comes with a fee.

DIFFERENT FORMS of SHORT-TERM LOANSLG4

Factoring The process

of selling accounts

receivable for cash.

than banks, but many

small businesses don’t

qualify for loans

FACTORINGLG4

Factoring

Accounts

Receivable

18-35

Commercial Paper Unsecured promissory notes in amounts of $100,000+ that come due in 270 days or

less.

financially stable firms are able to sell it

• Rates for small businesses

grew almost 30% after the Credit Card Responsibility Accountability and

Disclosure Act of 2009 was

passed

but costly for a small business

WAYS to RAISE START-UP CAPITAL

Source: Entrepreneur, www.entrepreneur.com , accessed July 2011.

out peer-to-peer lending

want to do business with

LG4

Credit Cards

18-38

• What does an invoice containing the terms 2/10,

considerations factors consider in establishing their discount rate?

PROGRESS ASSESSMENT

Progress

Assessment

18-39

• Three questions of financial managers in setting

long-term financing objectives:

1 What are the organization’s long-term goals and

objectives?

2 What funds do we need to achieve the firm’s long-term

goals and objectives?

3 What sources of long-term funding (capital) are

available, and which will best fit our needs?

SETTING LONG-TERM FINANCING OBJECTIVES

1 The character of the borrow.

2 The borrower’s capacity to repay the loan.

3 The capital being invested in the business by

the borrower

4 The conditions of the economy and the firm’s

industry

5 The collateral the borrower has available to

secure the loan

The FIVE “C”s of CREDIT

• Long-term financing loans generally come due

within 3 -7 years but may extend to 15 or 20

years

requires the borrower to repay the loan with interest in specified monthly or annual installments.

the firm pays is tax deductible

USING LONG-TERM DEBT FINANCING

Debt

Financing

LG5

18-42

• Indenture Terms The terms of

agreement in a bond issue.

with some form of collateral (i.e

real estate).

A bond backed only by the reputation of the issuing company.

USING DEBT FINANCING

by ISSUING BONDSLG5

Debt

Financing

18-43

A company can secure equity financing by:

SECURING EQUITY FINANCING

Equity

Financing

- Selling shares of stock in the

company.

- Earning profits and using the

retained earnings as reinvestments

in the firm.

- Attracting Venture Capital Money

that is invested in new or emerging companies that some investors

LG5

18-44

WANT to ATTRACT a VENTURE CAPITALIST?

LG5

Equity

Financing

1 Can the company grow?

2 Will we get our money

back and more?

3 Will it be worth our

money and effort?

Source: Entrepreneur, February 2011.

18-45

DIFFERENCES BETWEEN DEBT and EQUITY FINANCING

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

• Leverage Raising funds through borrowing to

increase the firm’s rate of return.

must earn in order to meet the demands of its lenders and expectations of equity holders.

USING LEVERAGE for

FUNDING NEEDSLG5

• The recent financial crisis was the worst fall since

the Great Depression

LESSONS of the FINANCIAL CRISISLG5

increasing involvement and intervention

18-48

• What are the two major forms of debt financing

available to a firm?

financing?

financing available to a firm?