AFM131 Chapter Notes - Chapter 9: Cash Flow Statement, Small Business Financing, Cash Flow

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Nov 10, 12 Chapter 17 1
Chapter 17: Financial Management
What is financial management?
Finance: acquiring/managing funds within the company
Financial actives include:
prepare budgets
doing cash flow analysis
planning for the expenditure of funds on assets such as PPE
Financial management: managing resources to meet goals or objectives
Role of a financial manager
Day to day planning; planning for the future
Safeguarding cash assets
oMinimize cash on hand or access to cash
oSegregation of duties
oBank reconciliation process
Buying merchandise on credit (A/P)
Collecting payments from customers (A/R)
Stay on top of tax law (taxes are an outflow of cash from a business)
Analyze tax implications of managerial decisions to minimize the taxes a business must pay
How can a profitable company, with growing sales, be forced to close their doors?
Not enough cash to pay liabilities
Managing credit operations: bad management of A/R
Bad management of inventory
oDon't want cash tied into these for too long
3 Most common ways for firms to fail financially
1. Under capitalization
not having sufficient funds to start
2. Poor control over cash flow
not managing receivables properly, credit operations, inventory
3. Inadequate expense control
budget in place?
Differences between financial management at a private vs public company
Private company Public company
More control over business and financial
decisions
Maintain ownership of company (debt
adverse)
Less control over business and financial
decisions since stakeholder interests need to
be considered
Financial planning
Financial planning: analyzing short-term and long-term money flows to and from a firm
Overall objective is to optimize the firm's profitability and make the best use of its money
3 steps to financial planning
1. Forecast a firm's short-term and long-term financial needs
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Nov 10, 12 Chapter 17 2
2. Developing budgets to meet those needs
3. Establishing financial control to see whether the company is achieving its goals
Forecasting Financial Needs
Short-term forecast: predicting revenues, costs and expenses for a period of one year or less
The reliability reduces the longer you go out
oEx. Don't know your competitors 10 years from now
Revise short term forecast more frequently
Part of the short-term forecast may be in a form of a cash-flow forecast
Cash flow forecast: predicts the cash inflows and outflows in future periods, usually months of
quarters
Based on expected sales revenues and on various costs and expenses incurred, and when
payment is due
Sales forecast: estimates the firm's projected sales for a particular period
Uses past financial statements as a basis for projecting expected sales and various costs and
expenses
Long-term forecast: predicting revenues, costs, and expenses for periods longer than one year (5-10
years)
Plan for large asset purchases
Crucial part in long-term strategic plan
The Budget Process
Budget: management expectations for revenues, and on the basis of those expectations, allocates
the use of specific resources throughout the company
Depends heavily on the accuracy of the firm's b/s, i/s, cash flow statement, short term and long
term financial forecasts
Departmental/division budgets
Will submit a budget for approval
Accountable to monitor actual results versus budgeted results
3 types of budgets established in a firm's financial plan
1. Operating (master budget)
Operating (master) budget: ties together all of the company's other budgets and summarizes
the businesses proposed financial activities
Estimates costs and expenses needed to run a business, given projected revenue
Ex. spending on supplies, travel, rent, advertising is determined in the master budget
Most detailed, prepare this for each department
2. Capital budget
Capital budget: highlights a firm's spending plans for major asset purchases that often require
large sums of money, like PPE
3. Cash budget
Cash budget: estimates cash inflows and outflows during a particular period (monthly/quarterly)
Make sure able to pay monthly bills
Safety level: Plan for a minimum cash balance
Ex. We should always have $5000 in the bank to spend
Anticipate borrowing needs, debt repayment, operating expenses, short term investments,
Usually last budget prepared
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Nov 10, 12 Chapter 17 3
Establishing Financial Controls
Financial control: process in which a firm periodically compares its actual revenues, costs, and
expenses with its budget
Most companies hold at least monthly financial reviews to ensure financial control
Managers can identify variances to the financial plan / take corrective action
Provide feedback/reveal which departments are varying from financial plans
Why Firms Need Operating Funds
1. Managing day-today needs of the business
oCover monthly expenses (utilities, electricity)
oCushion for unanticipated emergencies
oMay run into issues collecting from customers
oMoney has time value
o$1 received today is worth more than $1 received in a year (you can invest the $1,
collect interest, and it would grow to more than $1 in a years' time)
oSuggest the company pay its bills as late as possible (unless there's a
cash discount)
oCollect what is owed to them as fast as possible
2. Controlling credit operations: A/R, A/P
Think of buying inventory on credit
Risk of assets being tied up in credit accounts (A/R)
oFirm is forced to use its own funds to pay for g/s sold to customers who bought
on credit
3. Acquiring inventory
not wanting cash to be tied up for inventory
Need to maintain inventory to satisfy customers
oJIT reduce the funds a firm must tie up in inventory
Converting inventory to cash
oInventory turnover ratio
365/1.9 = 192.1053 shows you how long cash could be tied up. 192
days cash is tied up in inventory.
4. Making capital expenditures (planning for large purchases)
Capital expenditures: major investments in either tangible long-term assets such as PPE, or
intangible assets such as patents, trademarks, and copyrights
What process should you follow to decide whether or not to allow a customer to pay later?
Financial statements (See their liquidity)
Customer banking information
Current suppliers
Credit check
Adjust levels of credit and payment terms
A standard credit application
Alternative Sources of Funds
Short-term financing: borrowing funds needed for one year or less
Long term financing: borrowing funds needed for a period of more than one year
Lender will ask for regular payments within the 5 years
Debt financing: borrowed funds that must be repaid
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