Marco Romero CHAPTER 18 FINANCIAL MANAGEMENT Finance the function in a business that acquires funds for the firm and manages those funds within the firm o Finance activities include preparing budgets doing cash flow analysis and planning for the expenditure of funds on such assets as plant equipment and machinery Financial management the job of managing a firm s resources so it can meet its goals and objectives Financial managers managers who examine financial data prepared by accountants and recommend strategies for improving the performance of a firm A comptroller is the chief accounting officer Financial managers tasks o Auditing managing taxes advising top management on financial matters collecting funds credit management controlling funds funds management obtaining funds budgeting and planning o Two key responsibilities are to obtain funds and to effectively control the use of those funds Three of the most common reasons a firm fails financially are 1 Undercapitalization insufficient funds to start the business 2 Poor control over cash flow Inadequate expense control 3 Financial managers are responsible for paying the company s bills at the appropriate time and for collecting overdue payments to make sure the company does not lose too much money to bad debts o Buying merchandise on credit accounts payable and collecting payments from customers account receivable are key components to the job Financial planning means analyzing short term and long term money flows to and from the firm its money one year or less o Its overall objective is to optimize the firm s profitability and make the best use of o It has three steps 1 forecasting the firm s short term and long term financial needs 2 developing budgets to meet those needs and 3 establishing financial controls to see whether the company is achieving its goals Short term forecast forecast that predicts revenues costs and expenses for a period of Cash flow forecast forecast that predicts the cash inflows and outflows in future periods usually months or quarters o Based on expected sales revenues and various costs and expenses incurred Long term forecast forecast that predicts revenues costs and expenses for a period longer than 1 year and sometimes as far as 5 or 10 years into the future o Asks questions such as What business are we in Should we be in it five 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 Marco Romero o Innovations in Web based software help financial managers address these long term forecasting questions Budget a financial plan that sets forth management s expectations and on the basis of those expectations allocates the use of specific resources throughout the firm o There are usually several types of budgets in a firm s financial plan 1 A capital budget 2 A cash budget 3 An operating or master budget Capital budget a budget that highlights a firm s spending plans for major asset purchases that often require large sums of money property buildings and equip Cash budget a budget that estimates cash inflows and outflows during a particular period like a month or quarter o Helps managers anticipate borrowing needs debt repayment operating expenses and short term investments and is often the last budget prepared Operating or master budget the budget that ties together the firm s other budgets and summarizes its proposed financial activities o More formally it estimates costs and expenses needed to run a business given projected revenues o Determines firm s spending on supplies travel rent advertising and salaries generally the most detailed a firm prepares Financial control a process in which a firm periodically compares its actual revenues costs and expenses with its budget Virtually all organizations have operational needs for which they need funds Key areas include o Managing day by day needs of the business o Controlling credit operations o Acquiring needed inventory o Making capital expenditures Money has time value Capital expenditures major investments in either tangible assets such as land buildings and equipment or intangible assets such as patents trademarks and copyrights Debt financing funds raised through various forms of borrowing that must be repaid Equity financing money raised from within the firm from operations or through the sale of ownership in the firm stock Short term financing funds needed to a year or less Long term financing funds needed for more than a year usually 2 to 10 years o Short term funds monthly expenses unanticipated emergencies cash flow problems expansion of current inventory temporary promotion programs o Long term funds new product development replacement of capital equipment mergers or acquisitions expansion into new markets domestic or global new facilities Trade credit the practice of buying goods and services now and paying for them later o Small businesses rely heavily on read credit Promissory note a written contract with a promise to pay a supplier a specific sum of money at a definite time Marco Romero If an entrepreneur decides to ask family or friends for financial assistance its important that both parties 1 agree to specific loan terms 2 put the agreement in writing and 3 arrange for repayment in the same way they would for a bank loan Secured loan a loan backed by a collateral something valuable such as property Accounts receivable are company assets often used as collateral for a loan this process is called pledging and works as follows A percentage of the value of a firm s accounts receivable pledged usually about 75 percent is advanced to the borrowing firm As customers pay off their accounts the funds received are forwarded to the lender in repayment of the funds that were advanced Unsecured loan a loan that doesn t require any collateral o Normally lenders give unsecured loans only to highly regarded customers longstanding businesses or those considered financially stable Line of credit a given amount of unsecured short term funds a bank will lend to a business provided the funds are readily available o Not guaranteed to a business Speeds up to borrowing process since a firm does not have to apply for a new loan every time it will often increase their line of credit 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
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