1. Mastering Financial Management
Chapter 16
Mastering Financial Management

2. Learning Objectives
Explain the need for financial management in business.
Summarize the process of planning for financial management.
Identify the services provided by banks and financial institutions for their business customers.
Describe the advantages and disadvantages of different methods of short-term debt financing.
Evaluate the advantages and disadvantages of equity financing.
Evaluate the advantages and disadvantages of long-term debt financing.

3. Financial Management
…all the activities concerned with obtaining money and using it effectively.

4. Need for Financing Reasons: Sources: Afterward: Start a business
Keep it going
Sources:
Owners’ investment
Borrowed
Afterward:
Pay expenses
Provide profit

5. …money that will be used for one year or less.
Short-Term Financing
…money that will be used for one year or less.

6. Table 16.1: Comparison of Short- and Long-Term Financing
Whether a business seeks short- or long-term financing depends on what the money will be used for.

7. …the movement of money into and out of an organization.
Cash Flow
…the movement of money into and out of an organization.

8. Customers The Cash Flow Cycle
Sales
Accounts Receivable
Cash
Inventory

9. Speculative Production
…the time lag between actual production of goods and when the goods are sold.

10. Figure 16.1: Cash Flow for a Manufacturing Business

11. …money that will be used for longer than one year.
Long-Term Financing
…money that will be used for longer than one year.

12. Two-Sided Problem of Financing
Uses of funds dictate type(s) of financing needed
Activities undertaken determined by types of financing available

13. Risk-Return Ratio
…a ratio based on the principle that a high-risk decision should generate higher financial returns for a business and more conservative decisions often generate lesser returns.

14. Proper Financial Management
Financing priorities established with goals and objectives
Spending planned/controlled
Bills paid promptly
Excess cash invested

15. Careers in Finance
Chief Financial Officer (CFO): manages firm’s finances, reports to chief executive officer or president
Lower-level positions: banking, insurance, investment, non-profits, government entities
Requirements:
Strong background in accounting/math
Knowledge of computer use for data analysis
Expertise in written/oral communication

16. Positions, Salaries, and Experience at Two Major Firms
Title
GMC
Pepsico
Exp./Education
Junior Fin. Anal.
$ K
$45-50K
B.B.A.
Senior Fin. Anal.
$ K
$60-70K
3yr/MBA
Division Controller
$ K
$70-80K
10yr/MBA
CFO
$ K
$ K
15yr/MBA
Swiss Finance Academy, “Corporate Finance Salaries,” accessed September 27, 2009.

17. Financial Plan
…a plan for obtaining and using money needed to implement an organization’s goals.

18. Developing Financial Plan
Establish Goals and Objectives
Monitor & Evaluate Performance
Budget for Needs
Identify Sources

19. Figure 16.2: The Three Steps of Financial Planning

20. Budget
…a financial statement that projects income and/or expenditures over a specified future period.

21. Figure 16.3: Sales Budget

22. Cash Budget
…a financial statement that projects cash receipts and cash expenditures over a specified period.

23. Figure 16.4: Cash Budget

24. Capital Budget
…a financial statement that estimates a firm’s expenditures for major assets and its long-term financing needs.

25. Approaches to Budgeting
Traditional: base on budget of preceding year; modify to reflect revised goals and objectives; justify only new expenditures
Zero-base: justify every expense

26. Primary Sources of Funds
Sales Revenue
Equity Capital
Debt Capital
Sales of Assets

27. Financial Services Provided by Banks and Other Financial Institutions
Traditional
Savings and Checking Accounts
Business Loans
Electronic Banking
Automated Clearinghouses (ACHs)
Point of Sale (POS) Terminals
Electronic Check Conversion (ECC)
International
Letter of Credit
Bankers Acceptance

28. Traditional Business Banking Services
Savings and Checking Accounts
Passbook Savings
Certificate of Deposit
Check
Business Loans
Short-Term Loans
Line of Credit
Revolving Credit
Long-Term Loans
Credit/Debit Card Transactions

29. Electronic Funds Transfer
…a means of performing financial transactions through a computer terminal or telephone hookup.

30. Sources of Unsecured Short-Term Financing
Unsecured financing is financing that is not backed by collateral.
Trade Credit
Promissory Note
Unsecured Bank Loans
Commercial Paper

31. Average Prime Interest Rate
Source: Federal Reserve Bank website, accessed October 17,

32. Sources of Secured Short-Term Financing
Inventory
Accounts Receivable- Factoring

33. Table 16.2: Comparison of Short-Term Financing Methods

34. Sources of Equity Financing
Sale of Stock
Initial Public Offering: common stock sold the first time to public
Investment Banking Firm: assists firm in raising capital
Retained Earnings: undistributed portion of firm’s profits
Private Placement: securities sold directly to insurance companies, pension funds, large institutions, wealthy investors

35. 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.

36. IPOs Can Raise Billions!
Spotlight
IPOs Can Raise Billions!
Source: The Renaissance Capital IPO Home website, accessed May 24, 2009.

37. Convertible Preferred can be exchanged for common
Types of Stock
Common
Holders vote on corporate matters
Holders’ claims on profits/assets subordinate to preferred
Preferred
Holders receive dividends first
Dividend is specified
Convertible Preferred can be exchanged for common

38. Sources of Long-Term Debt Financing
Financial Leverage Use of borrowed funds to increase return on owners’ equity
Term Loan Borrower required to repay loan in monthly, quarterly, semiannual, or annual installments

39. Corporate Bond
…a corporation’s written pledge that it will repay a specified amount of money with interest.
The maturity date is the date on which the amount borrowed must be repaid.

40. Types of Bonds
Registered: registered in owner’s name by issuing company
Debenture: backed only by issuing firm’s reputation
Mortgage: secured by assets of firm
Convertible: may be exchanged for a specified number of common stock shares

41. Bond Provisions
Maturity date: 10 to 30 years
Indenture: details conditions of bond issue
Serial Bonds: single issue that matures on different dates
Sinking fund: deposits made each year for purpose of redeeming bond issue
Trustee: acts as bond owners’ representative

42. Table 16.4: Comparison of Long-Term Financing Methods

43. Chapter Quiz
Which of the following would be considered a short- term financial need?
New product development
Cash flow problems
Business start-up costs
Mergers and acquisitions
Expansion of facilities

44. Chapter Quiz 2. The least expensive form of short-term financing is
promissory notes.
prime rate loans.
common stock.
trade credit.
factoring.

45. Chapter Quiz Which of the following statements is incorrect?
A corporation can issue only common stock or preferred stock, but not both.
IPO stands for initial public offering.
Common stockholders have the right to vote on major corporate actions.
A corporation is under no legal obligation to pay dividends to common stockholders.
A corporation is under no legal obligation to buy back the stock you purchase.

46. Chapter Quiz
4. The portion of a corporation’s profits not distributed to stockholders is called
retained earnings.
undistributed profits.
profit residue.
income before taxes.
net profit.

47. Chapter Quiz
A __________ is the legal document that details all the conditions relating to a bond issue.
bond indenture
debenture statement
bond contract
security agreement
collateral statement