Chapter 18 Financial Management Role of the Financial Manager finance planning obtaining and managing the company s funds to accomplish its objectives as effectively and efficiently as possible financial managers executives who develops implements the firm s financial plan determines the most appropriate sources and uses of funds o responsible for meeting expenses investing in assets and increasing profits to shareholders Finance Organization CFO VP for Financial Management prepares forecasts Treasurer responsible for financing activities Controller keeps books Risk return trade off process of maximizing the wealth of the firm s shareholders by striking the optimal balance between risk and return Financial Planning financial plan specifies funds needed by a firm for a period of time the timing of inflows outflows most appropriate sources uses of funds o What funds will the firm require during the planning period o When will it need addt l funds o Where will it obtain the necessary funds 3 Steps of preparing a Financial Plan forecast of sales revenue over some future time determine the expected level of profits for future periods o o o CFO estimates how many addt l assets firm will need to support projected sales financial control process of comparing actual revenues costs and expenses with forecasts Managing Assets short term assets cash assets that can be converted into cash within a year marketable securities low risk securities that either have short maturities or can be easily sold in secondary markets accounts receivable uncollected credit sales and can be a significant asset collected by financial manager o o o determining overall credit policy deciding which customers will be offered credit calculate accounts receivable turnover successive time period inventory can be the largest asset long lived assets expected to produce economic benefits for more than one year capital investment analysis process by which decisions are made regarding investments in long lived assets exchange rates rate at which one currency can be exchanged for another Sources of Funds and Capital Structure Assets liabilities owner s equity Debt capital funds obtained through borrowing Equity capital funds provided by firm s owners when they reinvest earnings make addt l contributions liquidate assets issue stock or raise capital from investors Capital structure mix of firm s debt and equity capital Leverage increasing the rate of return on funds invested by borrowing funds increase rate of return on funds invested Short term funds current liabilities less expensive expose firm to more risk Long term funds long term debt and equity Dividends periodic cash payments to shareholders paid quarterly labeled as a regular dividend o Short Term Funding Options 3 Sources of Short Term Funds Firm is not required to pay dividends trade credit extended by suppliers when a firm receives goods services agreeing to pay for it at a later date o o supplier records trade credit as an account receivable retailer records it as an account payable line of credit specifies max amount firm can borrow over time bank is under no obligation to lend money revolving credit bank guarantees funds will be available when needed banks charge a fee interest commercial paper short term IOU sold by a company factoring business sells its accounts receivable to a bank finance company factor at a discount Long Term Financing 3 sources of long term financing loans from financial institutions banks life insurance companies pension funds bonds sold to investors equity financing acquired by selling stock or reinvesting profits private placements stock bonds not sold publicly but instead to pension funds insurance companies venture capitalist firm that raises money from wealthy individuals and institutional investors and invests the funds in promising businesses private equity funds investment companies that raise funds from wealthy individuals and use funds to make large investments sovereign wealth funds companies owned by gov ts and invest in a variety of assets real estate hedge funds private investment companies open only to qualified large investors not regulated by SEC Mergers Acquisitions Buyouts Divestitures merger 2 firms combine into one company acquisition one firm buys assets obligations of another tender offer offer made by a firm to the target firm s shareholders leveraged buyout public shareholders are bought out and the firm reverts to private status divestiture sale of assets by a firm o o sell off assets are sold by one firm to another spin off assets sold form a new firm
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