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Chapter 11

Chapter 11- Financial Management.docx

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Dave Swanston

November 15, 2013 Chapter 11- Financial Management The Role of Finance and Financial Managers  Business nor countries can exist without money because they need capital to run the entity  Go bankrupt when entity is not making enough to pay back even just the interest  Must pay attention to finances, create profits, generate spending, etc  Financial Management- The job of managing firm’s resources so it can meet its goals/objectives; firm has little change for survival without carefully calculated financial plan  Finance- The function in a business that acquires funds for the firm and manages those funds within the firm; preparing cash flow analysis, planning for expenditure of funds, etc  Financial Managers- Managers who make recommendations to top executives regarding strategies for improving the financial strength of a firm  Make decisions only if they understand accounting information and accountants needs to know finance as well  Key responsibility is to obtain money and then control the use of that money effectively  Role of financial managers: control financial transactions in organization to ensure business can be viable in short term and long term and meet its goals/expectations; all about the money  What financial managers do: o Auditing o Planning o Budgeting o Obtaining funds o Controlling funds (funds management) o Collecting funds (credit management) o Advising top management on financial matters o Managing taxes o Ensure company is paying its bills o MANAGE TRANSACTION AND CASH  Cash Cycle: put money out, go through all activities, before getting money back (longer it is, more financial resources we need to pay for things to get that money so shorten that cycle to reduce demand for financial/capital resources)  Three ways firm can fail financially 1. Undercapitalization (lacking funds to start and run the business) 2. Poor control over cash flow 3. Inadequate expense control The Important of Understanding Finance  Do not have to pursue finance as a career to understand finance, which is important to anyone who wants to start a small business, invest in stocks and bones, or plan a retirement fund  Financial managers must stay abreast of changes or opportunities in finance and prepare to adjust to them  Financial managers must analyze tax implications of various managerial decisions in an attempt to minimize the taxes paid by the business (look at ways that reduces amount of tax to pay) November 15, 2013  Leads to ethical/morale issues: professionals are hired to determine loopholes in business which is bad for government who needs the funding Financial Planning- Key Responsibility  Involves analyzing short term and long term money flows to and from the firm  Objective of financial planning is to optimize firm’s profitability and make best use of money  Financial planning involves three steps: 1. Forecasting both short term and long term financial needs (FORECAST CASH FLOW)  Short Term Forecast- Forecast that predicts revenues, costs, and expenses for a period of one year or less o Foundation for most other financial statement so accuracy is critical o Cash Flow Forecast- 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 than one year, and sometimes as far as five or ten years into future o Gives top management sense of potential income/profit possible with different strategic plans 2. Developing budgets to meet those needs (BUDGET CASH NEEDS)  Budgeting process depends on accuracy of financial statements  Budget- A financial plan that sets forth management’s expectations, and, on the basis of those expectations, allocates the use of specific resources throughout firm  Budget= financial plan; quantitative expression of the firm’s strategic plans  Several types of budgets established in a firm’s financial plan: o 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/operate business, given projected revenues  The most detailed and most used budget that firm prepares o Capital Budget- A budget that highlights a firm’s spending plans for major asset purchases that often require large sums of money  Ex. Property, buildings, and equipment o 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/surpluses during a given period  Insist managers in anticipating borrowing, debt repayment, etc  Identify projected increase/decrease in cash and ensure minimum cash balance is maintained 3. Establishing financial control to see how well the company is doing what it set out to do (CONTROL DIFFERENCES)  Financial Control- A process in which a firm periodically compares its actual revenues, costs, and expenses with its projected ones  Help identify variances to financial plan and allow them to take corrective action  Provides feedback to help reveal which accounts, departments, and people are varying from financial plans  Actual vs., projected flows 4. COMPARE RESULTS  November 15, 2013 The Need for Funds  Certain needs for which funds are available are included in key areas: Managing Day to Day Needs of the Business  Funds have to be available to meet all operational costs of the business  Money has a time value; the interest gained on firm’s investment is important in maximizing profit the company will gain which is why financial managers encourage keeping firm’s cash expenditures to a minimum  Pay bill as late as possible + collect what is owed as fast as possible = maximize investment potential of firm’s funds Controlling Credit Operations  Making credit available to customers  However, large %age of non-retailer’s business assets could be tied up in its credit account (account receivable) and firm needs to pay costs incurred for making of g/s already sold to customers who bought on credit  Financial managers must develop efficient collection procedures  Firm’s credit policy reflects its financial position and desire to expand into new markets  Accepting bank credit cars enhances sales and business no longer incurs cost of running a credit department Acquiring Needed Inventory  To satisfy customers, businesses must maintain inventories that often involve sizable expenditure of funds  Carefully constructed inventory policy assists in managing the firm’s available funds and maximizing profitability  Poorly managed inventory system can affect cash flow and drain finances dry Making Capital Expenditures  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 November 15, 2013  Critical that companies weigh all possible options before committing large portion of available resources  Long term financing could be used as this type of expenditure should benefit business for many years to come  Financial managers and analysts evaluate the appropriateness of such purchases/expenditures Alternative Sources of Funds  Firm can seek to raise needed capital through borrowing (debt), selling ownership (equity), or earning profits (retained earnings)  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  Firms can borrow funds though:  Short term financing- Borrowed funds that are needed for one year or less  Long term financing- Borrowed funds that are needed for a period longer than one year Obtaining Short Term Financing Trade Credit  Trade Credit- (Accounts payable) The practice of buying g/s now and paying for them later  2/10 net 30 creates opportunities for firms to reduce costs  When suppliers hesitate to give trade credit to organizations with poor credit rating, no credit history, or history of slow payment, supplier may insists customer sign:  Promissory Note- A written contract with a promise to pay a supplier a specific sum of money at definite time Family and Friends  Burrowing money from family and friends  Better to go to commercial bank that fully understands business’s rick and can help analyze firm’s future financial needs since firm could find itself having to pay bills with no source of fund  If borrowing funds from friends and family, both parties:  Agree on specific loan terms  Put agreement in writing  Arrange for repayment in the same way they would for a bank loan Commercial Banks and Other Financial Institutions  If business is able to get a bank loan, a small or medium sized business should have the person in charge of the finance function keep close touch with the bank, see a bank periodically and send the banker all of firm’s fi
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