1. Chapter 20 THE FUTURE OF BUSINESS Gitman & McDaniel 5 th Edition THE FUTURE OF BUSINESS Gitman & McDaniel 5 th Edition Chapter Managing the Firm’s Finances Prepared by Deborah Baker Texas Christian University Prepared by Deborah Baker Texas Christian University 20

2. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 2 1What roles do finance and the financial manager play in the firm’s overall strategy? 2How does a firm develop its financial plans, including forecasts and budgets? 3What types of short-term and long-term expenditures does a firm make? 4What are the main sources and costs of unsecured and secured short-term financing? 5How do the two primary sources of long-term financing compare? Learning Goals

3. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 3 6What are the major types, features, and costs of long- term debt? 7When and how do firms issue equity, and what are the costs? 8What trends are affecting the field of financial management? Risk and Insurance Appendix: 9What is risk and how can it be managed? What makes a risk insurable? 10What types of insurance coverage should businesses consider? Learning Goals

4. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 4 Learning Goal 1 What roles do finance and the financial manager play in the firm’s overall strategy? 1

5. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 5 How Cash Flows Through a Business 1 Owners’ investment Borrowed Funds Cash Sales Purchase of Fixed Assets Payment of Dividends Purchase of Inventory Payment of Expenses Collection of Accounts Receivable Sale of Fixed Assets

6. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 6 The Financial Manager’s Responsibilities 1 KeyActivitiesKeyActivities Financial Planning Investment (spending money) Financing (raising money)

7. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 7 The Goal of the Financial Manager 1 Maximize Firm’s Value! Opportunity for Profit Potential for Loss

8. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 8 Risk and Return Factors 1 Social Issues Market Conditions General Economic Conditions Interest Rates Changing Patterns of Market Demand

9. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 9 2 Learning Goal 2 How does a firm develop its financial plans, including forecasts and budgets?

10. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 10 2 Forecasting the Future Short-Term Forecasts Operating Plans for one-year period Long-Term Forecasts Long-Term Forecasts Strategic Plans for longer than one- year period Strategic Plans for longer than one- year period Project revenues, costs of goods, operating expenses Broader view of financial activities

11. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 11 Operating Budgets Capital Budgets Capital Budgets Cash Budgets Cash Budgets 2 Forecast profits Forecast outlays for fixed assets Forecast cash inflows and outflows

12. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 12 3 Learning Goal 3 What types of short-term and long-term expenditures does a firm make?

13. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 13 3 How Organizations Use Funds Manage Current Assets Cash Accounts Receivable Inventory

14. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 14 3 How Organizations Use Funds Manage Long-Term Capital Expenditures Machinery Buildings Land Equipment Information Systems

15. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 15 4 What are the main sources and costs of unsecured and secured short-term financing? Learning Goal 4

16. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 16 4 Obtaining Short-Term Financing Raising Funds Borrow Money (Debt) Sell Ownership Shares (Equity) Retain Earnings (Profits)

17. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 17 4 Unsecured Short-Term Loans Bank Loans Lines of credit Revolving credit agreement Lines of credit Revolving credit agreement Trade Credit Seller extends credit to the buyer Commercial Paper Unsecured short-term debt issued by a financially strong corporation

18. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 18 4 Secured Short-Term Loans Secured Loans Borrower pledges specific assets as collateral, such as accounts receivable or inventory. Factoring Firm sells its accounts receivable to a factor, such as a commercial bank or commercial finance company.

19. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 19 How do the two primary sources of long-term financing compare? 5 Learning Goal 5

20. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 20 5 Debt versus Equity Financing

21. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 21 6 What are the major types, features, and costs of long-term debt? Learning Goal 6

22. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 22 6 Bonds Long-term debt obligations issued by corporations and governments. Term Loans A business loan with a maturity of more than one year. Mortgage Loans A long-term loan made against real estate as collateral. Debt Financing

23. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 23 7 When and how do firms issue equity, and what are the costs? When and how do firms issue equity, and what are the costs? Learning Goal 7

24. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 24 7 Venture Capital Preferred Stock Dividends & Retained Earnings Selling Common Stock Equity Financing

25. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 25 8 What trends are affecting the field of financial management? Learning Goal 8

26. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 26 8  Work with top management to develop and implement the firm’s strategic direction  Reestablish public trust  Assure stakeholders of honest transactions and reporting  Maintain a higher profile with their companies’ boards The Changing Role of the CFO

27. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 27 8 Market risk Operational risk Credit risk Weighing the Risks after 9-11-2001

28. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 28 9 What is risk and how can it be managed? What makes a risk insurable? What is risk and how can it be managed? What makes a risk insurable? Learning Goal 9

29. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 29 9 Strategies to Manage Risk Risk reduction Risk avoidance Self-insuranceSelf-insurance Risk transference Risk Management

30. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 30 10 What types of insurance coverage should businesses consider? Learning Goal 10

31. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 31 10 There must be many similar exposures to peril Losses must be financially measurable Peril must not be likely to affect all parties at same time Company must have the right to set standards for coverage The loss must not be under control of insured Potential loss must be significant Insurance Concepts Insurable Risks

32. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 32 10 Life Health Liability Property Types of Insurance

33. Chapter 20 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 33 10 Title insurance Fidelity and surety bonds Theft insurance Business interruption insurance Professional liability insurance Special Types of Business Liability Insurance