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Lecture 12

AFM 131 Lecture 12: Module 12 - Finance

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University of Waterloo
Accounting & Financial Management
AFM 131
Bob Sproule

Chapter 17 – Financial Management 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 firm - Auditing, planning, budgeting, obtaining funds, controlling funds (fund management), collecting funds (credit management), advising top management on financial matters, managing taxes 3 ways for firms to fail financially 1. Undercapitalization (lacking funds to start and run a business) 2. Pool control over cash flow 3. Inadequate expense control Financial Planning involves 3 steps 1. Forecasting both short-term and long-term financial needs 2. Developing budgets to meet those needs 3. Establishing financial control to see how we ll the company is doing what it set out to do Financial Plan Short-term Forecasting Long-term forecasting Operating (master) budget Capital Budget Cash Budget Feedback Financial Controls Feedback Short-term Forecast: Forecast that predicts revenues, costs, and expenses for a period of 1 year or less. Part of this statement is in the form of… Cash flow statement: 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 that one year, and sometimes as far as 5 or 10 years into the future 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. 1. Operating (Master) Budget: The budget that ties together all of a firm’s other budgets; it is the projection of dollar allocations to various costs and expenses need to run or operate the business, given projected revenues 2. Capital Budget: A budget that highlights a firm’s spending plans for major purchases (such as purchases of capital assets) that often require large sums of money 3. Cash Budget: a budget that estimates a firm’s projected cash inflows and outflows that the firm can use to plan for any cash shortages or surpluses during a given period Financial Control: a process in which a firm periodically compares its actual revenues, costs and expense with its projected ones (many firm’s do at least monthly) The need for funds - Managing day-to-day needs of the business: money has time value – interest gained on the firm’s investments is important in maximizing the profit the company will gain – therefore cash expenditures should be kept to a minimum - Controlling credit operations: efficient collection procedures - Acquiring needed inventory: to satisfy customers, must maintain inventory that often involve a sizable expenditure of funds (just-in-time inventory = new innovation , evaluate turnover ratio) < poorly managed inventory can drain finances - Making 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 o Large sums of money with no guarantee that expansion will be commercially successful Alternative Sources of Funds 1. Long-term Financing: borrowed funds that are needed for a period longer than 1 year a. Debt Financing: funds raised through various forms of borrowing that must be repaid (lending institutions and selling bonds) b. Equity Financing: funds raised from operations within the firm or through the sale of ownership in the firm (retained earnings, venture capital and selling stock) 2. Short-term Financing: borrowed funds that are 1 year or less a. Trade credit: the practice of buying goods and services now and paying for them later b. Promissory notes: A written contract with a promise to pay c. Family and friends: can be risky. Need to (1) agree on specific loan terms, (2) put the agreement in writing, and (3) arrange for repayment in the same way that they would for a bank loan d. Financial institutions (e.g. line of credit): hard to get + trust bankers e. Short-term loans: i. Secured Loans: A loan backed by something valuable, such as property (collateral) < (accounts receivable as collateral = pledging) ii. Unsecured Loan: A loan that’s not backed by any specific assets iii. Line of Credit: A given amount of unsecu
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