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Lecture 10

MGM101 Lecture 10 - Book + Lecture notes

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Dave Swanston

Lecture 10 November-15-13 12:26 PM Can business exist without money? Can countries? - Debts become larger and eventually unpaid - We need to manage money,control spending, create profit/ surplus - We don’t want to lose too much money (this is the role of financial manager) Finance and managers What Is Financial Management? ○ Finance: the business function that is responsible for cash—acquisition and disbursements ○ Financial management:the job of managing a firm’s resources so it can meetits goals and objectives ○ Financial Manager: Managers who make recommendationsto top executivesregarding strategies for improving the financial strength of a firm Importance of finance Commonways to fail financially: (1) undercapitalization (lacking funds to start and run the business) (2) poor control over cash flow (3) inadequate expense control What financial managers do 2 tasks: Manage transactions from accounting standpoint, Manage flow of cash (cash cycle - spend money first so we can generate products and services - then we sell and get payment) Goal is to shorten cycle - delay paying, and get income The Importance of Understanding Finance - It’s vital that financial managers in any business stay abreast of changes and opportunities in finance and adjust to them. - Financial managers also carefully analyze the tax implications of various managerial decisions in an attemptto minimize the taxes paid by the business. Plans: Operation, marketing, financial Managers look for ways to reduce the tax we pay (but this leads to ethical issues) - a problem for government Financial planning process We have to have realistic targets, so we can comparethis to the actual result Forecasting Financial Needs • Forecasting is an important part of any firm’s financial plan. • A short-term forecast predicts revenues, costs, and expenses for a period of one year or less. • Part of the short-termforecast may be in the form of a cash flow forecast, which predicts the cash inflows and outflows in future periods, usually months or quarters. cash inflows and outflows in future periods, usually months or quarters. • A long-term forecast predicts revenues, costs, and expenses for a period longer than one year, and sometimesas far as five or ten years into the future. • This forecast plays a crucial part in the company’s long-termstrategic plan The Budget Process • The budgeting process depends on the accuracy of the firm’s financial statements. • A budget sets forth management’sexpectationsfor revenues and, on the basis of those expectations,allocates the use of specific resourcesthroughout the firm. A quantitative expression of the firm’s strategic plans Commonlanguage in business is numbers so be comfortablewith them! Types of budget • 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 needed to run or operate the business, given projected revenues • A capital budget - budget that highlights a firm’s spending plans for major asset purchases that often require large sums of money • A cash budget- budget that estimatesa firm’s projected cash inflows and outflows that the firm can use to plan for any cash shortages or surpluses during a given period EstablishingFinancial Controls • Financial control is a process in which a firm periodically comparesits actual revenues, costs, and expenses with its budget. • Most companies hold at least monthly financial reviews as a way to ensure financial control. The Need for Funds In virtually all organizations, there are certain needs for which funds must be available. Key areas include: • Managing day-to-day needs of the business • Controlling credit operations • Acquiring needed inventory • Making capital expenditures Managing Day-to-Day Needs of the Business ○ The challenge of sound financial management is to see that funds are available to meet these daily cash needs. ○ Money has what is called a time value (the value of money today will grow as time passes by) Controlling credit operations ○ Making credit available helps keep current customershappy and attracts new customer ○ Problem:large percentage of a non-retailer’s business assets could be tied up in its credit accounts (accounts receivable) ○ Firm’s credit policy reflects its financial position and its desire to expand into new markets ○ To decrease the time, and therefore expense, involved in collecting accounts receivable is to accept bank credit cards such as MasterCard or Visa Acquiringneeded inventory ○ a carefully constructed inventory policy assists in managing the firm’s available funds and maximizing profitability ○ a firm can better control its outflow of cash for inventory Making Capital Expenditures Are major investmentsin either tangible long-term assets such as land, buildings, and ○ Are major investmentsin either tangible long-term assets such as land, buildings, and equipment, or intangible assets such as patents, trademarks, and copyrights Sources of Funds  Trade credit is the practice of buying goods or servicesnow and paying for them later Often times, business invoices contain items like 2/10, net 30, means there's a 2% discount when buyer pays within 10 days, total bill is due in 30 days.  Promissorynote is a written contract with a promise to pay a supplier a specific sum of money at a definite time  Family/ Friends Both parties must: (1) agree on specific loan terms (2) put the agreementin writing (3) arrange for repayment in the same way they would for a bank loan Such actions help keep family relationships and friendships intact  Banks Generally, they give you secured loan because you don’t have a track record (proof) that you are able to pay the money back Secured loan is a loan that’s backed by something valuable, such as property Unsecured loan doesn’t require a borrower to offer the lending institution any collateral to obtain the loan. In other words, the loan is not backed by any assets Line of credit is a given amount of unsecured funds a bank will lend to a business Revolvingcredit agreement is a line of credit that’s guaranteed by the bank  CommercialFinance Company Organizations that make short- term loans to borrowerswho offer tangible assets as collateral  Factoring - the process of selling accounts receivable for cash A market intermediarybuys the account receivable from the firm at a discount for cash Pays a factor the money then down the road, they get the money back slowly Usually small businesses because they can't qualify for loan  Commercialpaper consists of unsecured promissorynotes, in amounts of $100,000and up, that mature (come due) in 365 days (366days in a leap year) or less Only large corporations  Credit card - ex. Small Business Visa Card Provide readily available line of credit to a business that can save time and the likely embarrassmentof being rejected for a bank loan, but are risky and costly Alternative Sources of Funds • Funds from: Selling shares (selling equity), selling bonds, retained earnings • Think about where is the best place to get funds (some ways to get funds cost more) Questions to ask: 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? 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 financing refers to funds raised through various forms of borrowing that must be repaid. Debt financing by: ○ Borrowing money from lending institutions Term-loan agreementis a promissorynote that requires the borrowerto
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