FInancial managers managers who examine financial data prepared by accountants and recumbent strategies for improving the financial performance of the 1 The Role of Finance and Financial Managers Finance the function in a business that acquires funds for the firm and manages those funds within the firm Financial management the job of managing a firm s resources so it can meet its goals and objectives firm two key responsibilities are to obtain funds and to effectively control the use of those funds accounting and finance functions are generally under control of a chief financial officer CFO a comptroller is the chief accounting officer A The Value of Understanding Finance 3 most common reasons a firm fails financially 1 Undercapitalization insufficient funds to start the business 2 Poor control over cash flow 3 Inadequate expense control B What is Financial Management responsible for paying bills at appropriate time collecting overdue payments stay abreast of changes or opportunities in tax law since taxes rep outflow of cash from the business analyze tax implications of managerial decisions to minimize taxes the business must pay 2 Financial Planning analyzing short term and long term money flows to and from the firm 1 Forecasting firm s short term long term financial needs 2 Developing budgets to meet those needs 3 Establishing financial controls to see whether the company is achieving its goals A Forecasting Financial Needs short term forecast predicts revenues costs and expenses for a period of one year or less cash flow forecast forecast that predicts the 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 long term forecast predicts revenues costs and expenses for period longer than 1 yr sometimes as far as 5 or 10 yrs into future B Working with the Budget Process budget sets forth management s expectations for revenues and on the basis of those expectations allocates the use of specific resources throughout the firm capital budget highlight s a firm s spending plans for major asset purchases that often require large sums of money cash budget estimates cash inflows and outflows during a particular period like a month or a quarter operating or master budget ties together the firm s other budgets and summarizes its proposed financial activities final step in financial planning is to establish financial controls C Establishing Financial Controls Financial control a process in which a firm periodically compares its actual revenues costs and expenses with its budget help reveal which accounts departments and people are varying from financial plan Legitimate variances may merit adjustments to the plan shifts in economy or global events can also alter financial plans 3 The Need for Operating Funds Key areas virtually all organizations have operational needs for which they need funds 1 managing day by day needs of the business 2 Controlling credit operations 3 Acquiring needed inventory 4 Making capital expenditures A Managing Day by Day Needs of the Business managers must ensure funds are available to meet daily cash needs w o compromising firm s opportunities to invest for future money had time value money you obtain now can be invested and collect interest suggest companies pay bills as late as possible unless there s cash discount for early payment and collect ASAP B Controlling Credit Operations managers often develop efficient collection procedures like cash quantity discounts to buyers who pay accts my certain time scrutinize old new credit customers to see whether they have a history of meeting credit obligations on time accepting bank credit cards decreases time expense of collecting accts receivable C Acquiring Needed Inventory carefully constructed inventory policy yeps manage firm s available funds and maximize profitability D Making Capital Expenditures and copyrights capital expenditures major investments in either tangible long term assets like land buildings and equipment or intangible assets like patents trademarks E Alternative Sources of Funds debt financing funds raised through various forms of borrowing that must be repaid short term financing funds needed for a year or less long term financing funds needed for more than a year usually 2 10 yrs equity financing money raised from within the firm from operations or through the sale of ownership in the firm stock or venture capital 4 Obtaining Short Term Financing A Trade Credit trade credit the practice of buying goods services now and paying for them later 2 10 net 30 2 discount if paid in 10 days otherwise due in 30 days promissory note a written contract with a promise to pay a supplier a specific sum of money at a definite time B Family and Friends C Commercial Banks D Different Forms of Short Term Loans secured loan a loan backed by collateral something valuable such as property pledging accounts receivable are often used as collateral unsecured loan loan that doesn t require any collateral line of credit a given amount of unsecured short term funds a bank will lend to a business provided the funds are readily available revolving credit agreement a line of credit that s guaranteed but usually comes with a fee commercial finance companies organizations that make short term loans to borrowers who offer tangible assets as collateral E Factoring Accounts Receivable factoring the process of selling accounts receivable for cash commercial paper unsecured promissory notes of 100 000 and up that mature come due in 270 days or less investment opportunity for buyers who can afford to put up cash for short periods to earn interest on their money F Commercial Paper mature in 30 90 days G Credit Cards card company abusers extremely risky and costly Credit Card Responsibility Accountability and Disclosure Act of 2009 reduced consumer interest rates approved many protections for consumers again 5 Obtaining Long Term Financing In setting long term financing objectives financial managers generally ask 3 questions 1 What are our organization s long term goals objectives 2 What funds do we need to achieve the firm s long term goals and objectives 3 What sources of long term funding capital are available and which will best fit out needs A Debt Financing borrowing money they company has a legal obligation to repay Can get a loan from a lending institution or issuing bonds I Debt Financing by