1. 19-1 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. NickelsMcHughMcHugh Nickels Cover

2. 19-2 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 1919 Financial Management

3. 19-3 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Finance & Managers What is Financial Management?What is Financial Management? –Finance –Financial Manager Importance of FinanceImportance of Finance

4. 19-4 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. What Financial Managers Do

5. 19-5 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Financial Planning Process Forecast Cash Flow Short-term & Long-term Uses Budget Cash Needs Operating, Cash, & Capital Control Differences Actual vs. Projected Flows Compare Results Modify Forecasts & Budgets

6. 19-6 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Financing Daily Operations- Cash Flows Money Received From: (Cash In)  Credit Sales  Cash Sales  Investment Income Business Expenses: (Cash Out)  Inventory Purchases  Payment on Loans  Payment on Assets  Salaries Payable  Supplies  Taxes

7. 19-7 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Budget Process Financial Plan- Financial StatementsFinancial Plan- Financial Statements Types of BudgetsTypes of Budgets –Capital –Cash –Operating (Master) Financial Controls- FeedbackFinancial Controls- Feedback

8. 19-8 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Ways to Cut Costs Slash travel, consulting, & entertainment budgets Unbundle product service/mix, charge for things once free Renegotiate purchasing contracts Form partnerships to share costs Put selected R&D, technology, etc. on hold Speed collections/slow payments Cut people outside core areas of production & sales

9. 19-9 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Need for Operating Funds Manage Daily OperationsManage Daily Operations Manage Accounts ReceivableManage Accounts Receivable Acquire InventoryAcquire Inventory Capital ExpendituresCapital Expenditures

10. 19-10 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Sources of Funds

11. 19-11 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Who Can Issue Bonds? 1.Federal, state, and local governments 2.Federal government agencies 3.Corporations 4.Foreign governments and corporations

12. 19-12 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Sources of Equity Financing Equity Capital Internal Sources External Sources Retained Earnings Owner Contributions Sale of Partnerships Venture Capital Public Sale of Stock

13. 19-13 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Making Use of Leverage Common Stock $ 50,000 Bonds (@10%) $450,000 Funds Raised $500,000 Earnings $ 125,000 Less: Bond Interest $ 45,000 Total Earnings $ 80,000 Return to $80,000 Stockholders $50,000 Common Stock $500,000 Bonds (@10%) 0 Funds Raised $500,000 Earnings $ 125,000 Total Earnings $ 125,000 Return to $125,000 Stockholders $500,000 = = 160% Leverage- Selling Bonds = = 25% Equity- Sale of Stock