© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 1 Financial Management Chapter16

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 2  All the activities concerned with obtaining money and using it effectively  The need for financing When expenses are high or sales are low When there are opportunities to expand What Is Financial Management?

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 3 Types of Financing  Short-term financing Money that will be used for one year or less  Long-term financing Money that will be used for longer than one year Often involves large amounts of money

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 4 Comparison of Short- and Long-Term Financing

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 5 Cash Flow for a Manufacturing Business

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 6 The Cash Flow Cycle Sales Accounts Receivable Cash Inventory Customers

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 7  Proper financial management at all times must ensure that: Financing priorities are established in line with organizational goals Spending is planned and controlled Sufficient financing is available when it is needed Credit customers pay their bills on time and past-due or delinquent accounts are reduced Bills are paid promptly to protect the firm’s credit rating and ability to borrow money Funds are always available to pay taxes on time Excess cash is invested in CDs, government securities, or conservative marketable securities Financial Management During the Economic Crisis

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 8  Financial plan A plan for obtaining and using the money needed to implement an organization’s goals  Developing the financial plan Establish organizational goals Determine how much money is needed to accomplish each goal Identify sources of funds and which to use Planning—the Basis of Sound Financial Management

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 9 The Three Steps of Financial Planning

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 10 Developing the Financial Plan  Identifying sources of funds Sales – Provide the greatest part of the firm’s financing Equity capital – Money received from the owners or from the sale of shares of ownership in the business Debt capital – Borrowed money obtained through loans Sale of assets – If absolutely necessary or when no longer needed  Monitoring and evaluating financial performance Prevents minor problems from becoming major ones

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 11 Cash Budget for Stars and Stripes Clothing

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 12 Sources of Unsecured Short-Term Financing  What is Unsecured financing? Financing not backed by collateral  What kinds of unsecured financing are there? (4) 1. Trade credit – Financing extended by a seller who does not require immediate payment after the delivery of the merchandise 2. Promissory notes – A written pledge by a borrower to pay a certain sum of money to a creditor at a specified future date – Unlike trade credit, promissory notes usually include interest – Legally binding – Negotiable instruments

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 13 Sources of Unsecured Short-Term Financing (cont.) 3. Unsecured bank loans Interest rates vary with each borrower’s credit rating Prime interest rate – The lowest rate charged by a bank for a short-term loan Offered through promissory notes, a line of credit, or revolving credit agreement 4. Commercial paper Short-term promissory note issued by a large corporation Interest rates are usually below that charged by banks for short-term loans

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 14 Sources of Secured Short-Term Financing  What is Secured financing? Loans secured by inventory – Inventory is pledged as collateral – Control of the inventory passes to the lender until the loan is repaid – If the lender requires storage of inventory used as collateral in a public warehouse, the borrower pays storage fees Loans secured by receivables – Amounts owed to a firm by its customers are pledged as collateral – Quality of receivables is considered

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 15 Sources of Equity Financing  For sole proprietorships or partnerships Owner or owners invest money in the business Venture capital  For corporations Sale of stock Retained earnings-Use of profits not distributed to stockholders Venture capital-will invest in firms that have the potential of becoming extremely profitable. In return, they usually require a percent ownership of the business.

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 16 Sources of Equity Financing (cont.)  Selling stock Initial public offering – When a corporation sells common stock to the general public for the first time – Why does a company “go public”? – What is involved in an IPO? Advantages of selling stock – Firm does not have to repay money received from sale of stock – Firm does not have to pay dividends to stockholders unless they decide to.

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 17 Sources of Equity Financing (cont.)  Selling stock (cont.) Common stock – Stock whose owners may vote on corporate matters but whose claims on profits and assets are subordinate to the claims of others Preferred stock – Stock whose owners usually do not have voting rights, but whose claims on dividends and assets are paid before those of common-stock owners

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 18 Using the Internet  The New York Stock Exchange and the NASDAQ are the two most cited equity markets. Each provides financial information about the companies it lists and news that might influence their stock values.

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 19 Sources of Long-Term Debt Financing  Financial leverage The use of borrowed funds to increase the return on owners’ equity As long as the firm’s earnings are larger than the interest charged for the borrowed money, it is ok to borrow.

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 20 Sources of Long-Term Debt Financing (cont.)  Long-term loans Term-loan agreement – For loans longer than one year. – A promissory note requires a borrower to repay a loan in monthly, quarterly, semiannual, or annual installments. – Interest rate and repayment terms are based on the reasons for borrowing, the firm’s credit rating, and the value of collateral. The basics of getting a loan – Know potential lenders. – Maintain a good credit rating. – Fill out an application, submit a business plan and financial statements, and compile references. – Meet with loan officer. – If denied, determine why.

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 21 Chapter Quiz 1. Retained earnings, as a form of equity financing, are A. gross earnings. B. profits before taxes. C. profits after taxes. D. undistributed profits. E. total owners’ equity.

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 22 Chapter Quiz 2. True or False. The primary sources of funds available to a business include all of the following: 2. debt capital. 3. equity capital. 4. sales revenue. 5. sale of assets.