Can business exist without money?
- 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
○ Financial management:the job of managing a firm’s resources so it can meetits goals
○ 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
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
• 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
• 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
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
○ To decrease the time, and therefore expense, involved in collecting accounts receivable
is to accept bank credit cards such as MasterCard or Visa
○ 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
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
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
Organizations that make short- term loans to borrowerswho offer tangible assets as
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