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 includes preparing budgets doing cash flow analysis planing for the expenditure of funds Financial management The job of managing a firm s resources so it can meet is goals and objectives cid 127 Without a calculated financial plan a firm has little chance for survival Financial managers Managers who examine financial data prepared by accountants and recommend strategies for improving the financial performance of the firm tasks auditing managing taxes advising top management on financial matters collecting funds credit management controlling funds funds management obtaining funds budgeting cash flow analysis expenditure planning 3 of the most common reasons a firm fails financially Undercapitalization inefficient funds to start the business Poor control over cash flow i e circuit city Inadequate expense control Pay accounts payable as slow as possible and accounts receivable as quickly as possible Financial planning Long term forecasting short term forecasting Financial plan Operating master budget made up of Cash and Capital budget Financial controls feedback Financial plan pg 497 Forecasting financial needs Short term forecast Forecast that 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 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 cid 127 Gives some sense of the profit potential of different strategic plans and helps in preparing company budgets Developing budgets to meet financial needs Budget A financial plan that sets forth management s expectations and on the basis of those expectations allocates the use of specific resources Capital budget A budget that highlights a firm s speeding plans for major asset purchases that often require large sums of money like property buildings future throughout the firm and equipment Cash budget A budget that estimates cash inflows and outflows during a particular period like month or a quarter helps anticipate borrowing needs debt repayment and operating expenses cid 127 Operating or master budget The budget that ties together the firm s other budgets and summarizes its proposed financial activities Establishing financial controls Financial control A process in which a firm periodically compares its actual revenues costs and expenses with its budget Compare monthly operating results income sheet to budget budget states financial objects of company The need for operating funds cid 127 Managing day by day needs of the business ensure that funds are available to meet cash needs without compromising the firm s opportunities to invest money for the future cid 127 money has a time value better to obtain 200 today than in a year so you can invest and it can grow In today s business environment making credit available helps keep current customers happy and attract new customers A carefully constructed inventory policy helps manage the firm s available funds and maximize profitability Capital expenditures Major investments in either tangible long term assets such as land buildings and equipments or intangible assets such as patents critical to weigh all possible options before committing a large portion of available resources 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 or venture capital Controlling credit operations Acquiring needed inventory cid 127 Making capital expenditures trademarks and copyrights Alternative sources of funds Short term financing Funds needed for a year or less Long term financing Funds needed for more than a year usually 2 to 10 years Obtaining short term financing Trade credit The practice of buying goods and services now and paying for them later cid 127 most widely used source of short term funding the least expensive and the most convenient Promissory note A written contract with a promise to pay a supplier a specific sum of money at a definite time cid 127 Many small firms obtain short term funds by borrowing money from family and friends Banks generally prefer to lend short term money to larger established businesses cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 Different forms of short term loans Secured loan A loan backed by collateral something valuable such as property If the borrower fails to pay the loan the lender may take possession of the collateral Unsecured loan A loan that doesn t require any collateral hard to obtain Line of credit A given amount of unsecured short term funds a bank will lend to a business provided the funds are readily available not guaranteed to a business as a business matures banks likely to increase their line of credit Revolving credit agreement a line of credit thats guaranteed but usually comes with a fee Commercial finance companies Organizations that make short term loans to borrowers who offer tangible assets a collateral ex General Electric Capital Factoring accounts receivable Factoring The process of selling accounts receivable for cash cash A factor is a market intermediary usually a commercial bank or financial institution that agrees to buy the firm s account receivable at a discount for cid 127 When it collects the accounts receivable that were originally owned to the firm the factor keeps them Commercial paper Unsecured promissory notes of 100 000 and up that mature come due in 270 days or less states a fixed amount of money the business agrees to repay the lender investor on specific date at specific rate of interest Credit cards provide a redly available line of credit that can save time and the likely embarrassment of being rejected for a bank loan very convenient but very risky and costly Obtaining long term financing 1 What are our organizations long term goals and objectives 2 What funds do we need to achieve them 3 What sources of long term funding capital are
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