1. FINANCIAL MANAGEMENT Bus101

2. 1. The importance of finance and financial management to an organization 2. The responsibilities of financial managers. 3. The financial planning process 4. The three key budgets in the financial plan. 5. The major reasons why firms need funds. 6. The types of financing that can be used to obtain these funds. 7. Identify and describe different sources of short-term financing. 8. Identify and describe different sources of long-term financing. Bus101

3.  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.  Financial managers: Managers who make recommendations to top executives regarding strategies for improving the financial strength of a firm. Bus101

5.  Financial planning is a key responsibility of the financial manager in a business. It consists of three steps: 1. Forecasting short-term and long-term financial needs 2. Developing budgets to meet those needs 3. Establishing financial control to see how well the company is doing Bus101

6. Forecasting is an important part of any firm’s financial plan.  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 one year, and sometimes as far as five or ten years into the future. Bus101

7.  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.  There are usually several types of budgets established in a firm’s financial plan: 1. Operating budget 2. Capital budget 3. Cash budget Bus101

9.  Financial control: A process in which a firm periodically compares its actual revenues, costs, and expenses with its projected ones.  Most companies hold at least monthly financial reviews as a way to ensure financial control.  Financial controls help provide feedback to reveal which accounts, departments and people are varying from the financial plans. Bus101

10. Key areas for funds in mostly all organizations are:  Managing day-to-day needs of the business  Controlling credit operations  Acquiring needed inventory  Making capital expenditures  Capital expenditures: Major investments in either tangible long-term assets such as land, buildings, and equipment, or intangible assets such as patents, trademarks, and copyrights. Bus101

11.  Debt financing: Funds raised through various forms or borrowing that must be repaid.  Equity financing: Funds raised from operations within the firm or through the sale of ownership in the firm.  Short-term financing: Borrowed funds that are needed for one year or less.  Long-term financing: Borrowed funds that are needed for a period longer than one year. Bus101

13.  Trade Credit  Trade credit: The process of buying goods and services now and paying for them later.  Promissory note: A written contract with a promise to pay.  Family and Friends  Friends and relatives are sometimes willing to help a small business by lending funds. Bus101

14.  Commercial Banks and Other Financial Institutions  A promising and well-organized venture may be able to get a back loan.  Short-Term Loans  Secured loan  Unsecured loan  Line of credit  Revolving credit agreement  Commercial finance companies Bus101

15.  Factoring Accounts Receivable  Factoring: The process of selling accounts receivable for cash.  Commercial Paper  Commercial paper: Unsecured promissory notes of $100,000 and up that mature (come due) in 365 days or less.  Credit Cards  Credit cards provide a readily available line of credit to a business.  Can be risky. Bus101

16.  Financial managers ask themselves three questions when setting long-term financing objectives: 1. What are the organization’s long-term goals and objectives? 2. What are the financial requirements needed to achieve these long-term goals and objectives? 3. What sources of long-term capital are available, and which will best fit our needs?  Long-term financing comes from: 1. Debt financing 2. Equity financing Bus101

17.  By Borrowing Money From Lending Institutions  Term-loan agreement: A promissory note that requires the borrower to repay the loan in specified installments.  Risk/return trade-off: The principle that the greater the risk a lender takes in making a loan, the higher the interest rate required. Bus101

18.  By Issuing Bonds  Bond: A corporate certificate indicating that a person has lent money to a firm.  Institutional investors: Large organizations– such as pension funds, mutual funds, insurance companies, and banks– that invest their own funds or the funds of others.  Interest: The payment the issuer of the bond makes to the bondholders for use of the borrowed money.  Maturity date: The exact date the issuer of a bond must pay the principal to the bondholder. Bus101

19. Different classes of bonds: 1. Unsecured or debenture bonds 2. Secured bonds Sinking fund: A reserve account in which the issuer of a bond periodically retires some part of the bond principal prior to maturity so that enough capital will be accumulated by the maturity date to pay off the bond. Bus101

20.  By Selling Stock  Stocks: Shares of ownership in a company.  Initial public offering: The first public offering of a corporation’s stock.  From Retained Earnings  Retained earnings are often a major source of long- term funds for small businesses who have fewer financing alternatives. Bus101

21.  From Venture Capital  Venture capital: Money that is invested in new or emerging companies that are perceived as having great profit potential.  From Selling Stock  Stock certificate: Evidence of stock ownership that specifies the name of the company, the number of shares it represents, and the type of stock being issued.  Dividends: Part of a firm’s profits that may be distributed to shareholders as either cash payments or additional shares of stock. Bus101

23.  Common Shares: The most basic form of ownership in a firm; it confers voting rights and the right to share in the firm’s profits through dividends, if offered by the firm’s board of directors.  Holders of common stock can: 1. Vote for the board of directors and on issues affecting the company 2. Share in the firms profits through dividends  Preferred shares: Stock that gives its owners preference in the payment of dividends and an earlier claim on assets than common shareholders if the company is forced out of business and its assets are sold. Bus101