Chapter 18 Financial Management Goal What is Finance and What do Financial Managers Do 1 The Role of Finance and Financial Managers a Finance The function in a business that acquires funds for the firm and manages them within the firm i Activities Include Preparing budgets doing cash flow analysis and planning for the expenditure of funds on assets such as plant equipment and machinery b Financial Management The job of managing a firm s resources to meet its goals and objectives i Without a carefully calculated financial plan a firm has little chance for survival regardless of its product or marketing effectiveness ii Financial Managers Examine financial data prepared by accountants and recommend strategies for improving the financial performance on the firm 1 Financial managers accountants go hand in hand usually controlled by the CFO 2 Comptroller Chief accounting officer 3 Important Tasks Auditing planning budgeting obtaining funds controlling funds funds management managing taxes advising top management on financial managers and collecting funds credit management 4 Funds Management Controlling funds include managing the firm s cash credit c Three Most Common Reasons a Firm Fails Financially accounts accounts receivable and inventory i Undercapitalization Insufficient funds to start the business ii Poor control of cash flow iii Inadequate expense control 2 Financial Planning a Analyzing short term and long term money flows to and from the firm Overall objective is to optimize the firm s profitability and make the best use of its money i Three Steps 1 Forecasting the firm s short term and long term financial needs a Short Term Forecast Predicts revenues costs and expenses for a period of one year or less i Cash Flow Forecast Predicts cash inflows and outflows in future periods usually months or quarters Based on expected sales revenues and various costs and expenses incurred as well as when they are due for payment b Sales Forecast Estimates predicted sales for a particular period c Long Term Forecast Predicts revenues costs and expenses for a period longer than 1 year sometimes as long as 5 or 10 years i What business are we in Should we be in it 5 years from now How much money should we invest in technology and new plant and equipment over the next decade Will we have cash available to meet long term obligations a Budget Sets forth management s expectations for revenues and allocates the use of specific resources throughout the firm i Capital Budget Highlights the firm s spending plans for major asset purchases that often require large sums of money like property buildings and equipment ii Cash Budget Estimates cash inflows and outflows during a particular period like a month or a quarter Helps managers anticipate borrowing needs debt repayment operating expenses and short term investments and is often the last budget prepared 2 Developing budgets to meet those needs iii Operating Master Budget Ties together the firm s other budgets and summarizes its proposed financial activities Estimates costs and expenses needed to run a business given projected revenues Most detailed 3 Establishing financial controls to see whether the company is achieving its goals a Financial Control Process in which a firm periodically compares its actual revenues costs and expenses with its budget i Most companies hold monthly financial reviews to ensure financial control Identifies variances to the financial plan and allows corrective action ii Helps reveal which specific accounts departments and people are varying from the financial plan 3 Need for Operating Funds operational costs of the business a Managing Day by Day Needs of the Business Funds have to be available to meet the daily i Ae Salaries need to be paid on time as do taxes and interest payments ii Financial managers must ensure that funds are available to meet daily cash needs without compromising the firm s opportunities to invest money for its future Money has TIME VALUE 1 Taking money when offered is important even if you do not need it because you can invest and make money on interest Interest helps to maximize profits 2 Financial managers try to minimize cash expenditures to free up funds for investment in interest bearing accounts b Controlling Credit Operations Making credit available helps keep current customers happy and attracts new ones i Problem As much as 25 of the business s assets could be tied up in its credit accounts A R by selling on credit which forces the firm to use its own funds to pay for goods and services sold to customers who bought on credit ii Financial managers develop efficient collection procedures to reduce accounts receivable such as offering cash or quantity discounts to buyers who pay their accounts by a certain time Also scrutinize new credit customers to see whether they have a history of meeting credit obligations on time iii Reduce risk by accepting bank credit cards such as Visa Mastercard etc c Acquiring Needed Inventory A carefully constructed inventory policy helps manage the firm s available funds and maximize profitability i Just in Time Inventory Control and other methods can reduce the funds a firm must tie up in its inventory ii Calculating its inventory ratio can also help a firm control outflow of cash for inventory d Making 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 i Important to weigh all possible options before committing a large portion of available resources e Alternative Sources of Funds What are the most appropriate sources to obtain money i Debt Financing Funds raised through various forms of borrowing that must be repaid ii Equity Financing Money raised from within the firm from operations or through the sale of ownership in the firm stock iii Short Term Financing Funds needed for a year or less iv Long Term Financing Covers funds needed for more than a year 4 Obtaining Short Term Financing bulk of financing does not relate to obtaining long term funds a Trade Credit The practice of buying goods or services now and paying for them later i Most widely used source of short term funding the least expensive and the most convenient ii A firm buys merchandise and receives an invoice for it Firms reduce their costs by paying invoices within the credit terms iii Promissory Note A negotiable written contract with a promise to pay a supplier a specific
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