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MGM101H5 (341)

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Dave Swanston

Financial Management Finance: the function in a business that acquires funds fort he firm and manages those funds within the firm Financial Management: job of the 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  Vital to stay alongside of changes and opportunities in finance and adjust to them  Carefully analyze tax implications of various managerial decisions in attempt to minimize taxes paid by business Financial Planning 1. Forecasting both short-term and long-term financial needs  Short-term forecast: predicts revenues, costs, and expenses for a period of one year or less o Cash flow forecast: predicts cash inflows and outflows in future periods, usually months or quarters  Long-term forecast: predicts revenues, costs, and expenses for a period longer than one year, sometimes as far as five or ten years into the future 2. Developing budgets to meet those needs  Operating (master) budget: ties together all of firm’s other budgets; the projection of dollar allocations to various costs and expenses needed to run or operate the business, given projected revenues.  Capital Budget: budget that highlights a firm’s spending plans for major asset purchases that often require large sums of money  Cash Budget: 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 3. Establishing financial control to see how well company is doing what it set out to do  Financial Control: process in which a firm periodically compares its actual revenues, costs, and expenses with its projected ones The Need for Funds - Managing day to day needs of the business o To see that funds are available to meet daily cash needs o Money has time value - Controlling credit operations o Issuing credit cards - Acquiring needed inventory - Making capital expenditures o 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 Alternative Sources of Funds Debt financing: funds raised through various forms of 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 - Trade Credit: practice of buying goods and services now and paying for them later - Promissory Notes: written contract with promise to pay - Family/Friends 1. Agree on specific load terms 2. Put agreement in writing 3. Arrange for repayment in same way they would for a bank loan - Banks o Secured loan: loan backed by something valuable, such as property o Unsecured loan: loan not backed by any specific assets o Line of credit: a given amount of unsecured funds a bank will lend to a business (good for unexpected cash needs) o Revolving credit agreement: line of credit that is guaranteed by the bank (good for unexpected cash needs) o Commercial finance companies: organizations that make short- term loans to borrowers who offer tangible assets as collateral - Factoring: process of selling accounts receivable for cash - Commercial Paper: unsecured promissory notes of $100,000 and up that mature in 365 days or less Long-term financing: borrowed funds that are needed for a period longer than one year 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? - Debt o Term-Loan: promissory note that requires borrower to repay loan in specified installments o Risk/Return trade-off: principle that the greater the risk a lender takes in making a loan, the higher the interest rate required. o Bonds: corporate certificate indicating that a person has lent money to a firm  Secured: backed by some tangible asset  Unsecured (debenture bonds): not backed by any collateral  Institutional investors: Large organizations (pension funds, mutual funds, insurance companies, and banks) that invest their own funds or funds of others  Interest: payment the issuer of the bond makes to the bondholders for use of the borrowed money  Maturity date: exact date the issuer of a bond must pay the principal to the bondholder Special Bond Features  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 bond  Provide orderly payment of bond issue  Reduce risk of bond not being repaid Advantages:  Creditor, not owners  Interest paid on bonds is tax deductible  When bonds are repaid, debt obligation is eliminated  Can be repaid before maturity date Disadvantages:  Increase debt  Paying interest on bonds is a legal obligation  Face value of bonds must be repaid on maturity date - Equity o Stock: shares of ownership in a company  Initial Public Offering (IPO): first public offering of a corporation’s stock  Stock certificate: evidence of stock ownership that specifies name of company, number of shares it represents, and type of stock being issued  Dividends: part of a firm’s profits that may be distributed to share holders as either cash payments or additional shares of stock  Common shares: most basic form of ownership in firm  Right to vote for company board directors and important issues affecting company  Share in firm’s profit through dividends  Preferred shares: stock that gives owners preference in payment of dividends and an earlier claim on assets than common shareholders if company is forced out of business and its assets are sold Advantages:  As owners, shareholders never have to be repaid  No legal obligation to pay dividends  Selling stock has no risk since issuing stock creates no debt Disadvantages:  Shareholders have right to vote for company’s board of directors  Dividends not tax deductible  Management’s decisions can be affected by need to keep stockholders happy o Retained Earnings: profits the company keeps and reinvests in the firm o Venture Capital: money that is invested in new or emerging companies that are perceived as having great profit potential Difference between Debt and Equity Financing Marketing Marketing: process of determining customer needs and wants and then developing goods and services that meet or exceed these expectations Green marketing: marketing efforts to produce, promote, and reclaim environmentally sensitive products The Evolution of Marketing  Production Era (Up to early 1900s) o Produce as much as possible  Selling Era (1920s-1950s) o Emphasized selling and advertising  Marketing Concept Era (1950s-1990s) 1. Customer Orientation: find out what customer wants and provide it 2. Service Orientation: customer satisfaction is objective of all employees 3. Profit Orientation: focus on products and services that will yield most profit  Customer Relationship Management (CRA) [1990s+] o Know customer well enough to be able to exceed their expectations and keep them coming back Non-Profit Organizations Prosper from Marketing  Charities use marketing to raise funds  Blood donors are found using marketing  Politicians use marketing to gain votes  Not-for-profit sector very competitive for donations, volunteers, and help Apply the Marketing Process  Find need  Conduct research  Identify a target market  Design product to meet the need based on research and then conduct product testing  Determine a band name and design package  Set a price  Select a distribution system  Design promotional program  Build relationship w/customers The Marketing Mix (the four Ps) 1. Product: any physical good, service, or idea that satisfies a want/need  Test marketing: process of testing products among potential users  Brand name: a word, device (design, shape, sound, or color), or combination of these used to distinguish a seller’s goods or services from those of competitors 2. Price: money or other consideration (including other goods and services) exchanged for ownership or use of a good or service 3. Place  How best to get products to customers 4. Promotion: all of the techniques sellers use to motivate customers to buy their products  E.g. advertising, personal selling, public relations… Marketing research: analysis of markets to determine opportunities and challenges, and to find information needed to make good decisions The Marketing Research Process 1. Defining the question (problem or opportunity) and determining the present situa
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