Bài giảng Understanding Business - Chapter 18 Financial Management

Financial ManagementChapter 18 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinExplain the role and responsibilities of financial managers.Outline the financial planning process, and explain the three key budgets in the financial plan.Explain why firms need operating funds.Identify and describe different sources of short-term financing.Identify and describe different sources of long-term financing.LEARNING GOALSChapter Eighteen18-2Finance -- The function in a business that acquires funds for a firm and manages them within the firm.Finance activities include:Preparing budgetsCreating cash flow analysesPlanning for expendituresFinancial Management -- The job of managing a firm’s resources to meet its goals and objectives.WHAT’S FINANCE?The Role of Finance and Financial Managers LG118-3Financial Managers -- Examine financial data and recommend strategies for improving financial performance. FINANCIAL MANAGERSLG1The Role of Finance and Financial Managers Financial managers are responsible for:Paying company billsCollecting paymentsStaying abreast of market changesAssuring accounting accuracy18-4CFO -- Chief Financial OfficerCFP -- Certified Financial PlannerCFA -- Chartered Financial AnalystComptroller -- Chief Accounting OfficerWHO’S WHO in FINANCELG2Financial Planning18-5WHAT FINANCIAL MANAGERS DOLG1The Role of Finance and Financial Managers 18-6WHAT WORRIES FINANCIAL MANAGERSConsumer demand for their firm’s productsCredit markets and interest ratesFinancial regulations from the governmentVolatility of the dollarForeign competitionEnvironmental regulationsSource: CFO Magazine, www.cfo.com, accessed July 2011. LG1The Role of Finance and Financial Managers 18-7UndercapitalizationPoor control over cash flowInadequate expense controlWHY DO FIRMS FAIL FINANCIALLY?The Value of Understanding Finance LG118-8TOP FINANCIAL CONCERNS of COMPANY CFOs - MACROConsumer demandFederal-government policiesPrice pressure from competitorsCredit markets/interest ratesGlobal financial instabilitySource: CFO Magazine, July/August 2010. LG1The Value of Understanding Finance 18-9TOP FINANCIAL CONCERNS of COMPANY CFOs - MICROAbility to maintain marginsAbility to forecast resultsMaintaining morale/productivityCost of healthcareWorking-capital managementSource: CFO Magazine, July/August 2010. LG1The Value of Understanding Finance 18-10Financial planning involves analyzing short-term and long-term money flows to and from the company. Three key steps of financial planning:Forecasting the firm’s short-term and long-term financial needs.Developing budgets to meet those needs.Establishing financial controls to see if the company is achieving its goals.FINANCIAL PLANNINGFinancial PlanningLG218-11Short-Term Forecast -- Predicts revenues, costs and expenses for a period of one year or less.Cash-Flow Forecast -- Predicts the cash inflows and outflows in future periods, usually months or quarters.Long-Term Forecast -- Predicts revenues, costs, and expenses for a period longer than one year and sometimes as long as five or ten years.FINANCIAL FORECASTINGForecasting Financial Needs LG218-12Budget -- Sets forth management’s expectations for revenues and allocates the use of specific resources throughout the firm.Budgets depend heavily on the balance sheet, income statement, statement of cash flows and short-term and long-term financial forecasts.The budget is the guide for financial operations and expected financial needs.BUDGETINGWorking with the Budget Process LG218-13Capital Budget -- Highlights a firm’s spending plans for major asset purchases that often require large sums of money.Cash Budget -- Estimates cash inflows and outflows during a particular period like a month or quarter.Operating (Master) Budget -- Ties together all the firm’s other budgets and summarizes its proposed financial activities.TYPES of BUDGETSLG2Working with the Budget Process 18-14Financial Control -- A process in which a firm periodically compares its actual revenues, costs and expenses with its budget. ESTABLISHING FINANCIAL CONTROLEstablishing Financial ControlLG218-15FACTORS USED in ASSESSING FINANCIAL CONTROLIs the firm meeting its short-term financial commitments?Is the firm producing adequate operating profits on its assets?How is the firm financing its assets?Are the firms owners receiving an acceptable return on their investment?LG2Establishing Financial Control18-16Managing day-by-day needs of the businessControlling credit operationsAcquiring needed inventoryMaking capital expendituresKEY NEEDS for OPERATIONAL FUNDS in a FIRMThe Need for Operating FundsLG318-17HOW SMALL BUSINESSES CAN IMPROVE CASH FLOWBe more aggressive in collecting accounts receivable.Offer customers discounts for paying early.Take advantage of special payment terms from vendors.Raise prices.Use credit cards discriminately. Source: American Express Small Business Monitor.LG3The Need for Operating Funds18-18You’re a new hospital administrator at a small hospital that, like many others, is experiencing financial problems.You suggest discontinuing the hospital’s large stockpile of drugs and shift to ordering them just when they are needed. Some like the idea, but the doctors claim you’re sacrificing patients’ well-being for cash. What do you do? What could be the result of your decision?GOOD FINANCE or BAD MEDICINE?(Making Ethical Decisions)18-19Debt Financing -- The funds raised through various forms of borrowing that must be repaid.Equity Financing -- The funds raised from within the firm from operations or through the sale of ownership in the firm (such as stock).Short-Term Financing -- Funds needed for a year or less.Long-Term Financing -- Funds needed for more than a year. USING ALTERNATIVE SOURCES of FUNDSAlternative Sources of FundsLG318-20WHY FIRMS NEED FINANCINGShort-Term FundsLong-Term FundsMonthly expensesNew-product developmentUnanticipated emergenciesReplacement of capital equipmentCash flow problemsMergers or acquisitions Expansion of current inventoryExpansion into new marketsTemporary promotional programsNew facilities LG3Alternative Sources of Funds18-21Trade Credit -- The practice of buying goods or services now and paying for them later.Businesses often get terms 2/10 net 30 when receiving trade credit.Promissory Note -- A written contract agreeing to pay a supplier a specific sum of money at a definite time.TYPES of SHORT-TERM FINANCINGTrade CreditLG418-22Many small firms obtain short-term financing from friends and family.If asking for help from family or friends, it’s important both parties:Agree to specific loan termsPut the agreement in writingArrange for repayment the same way they would for a bank loanTYPES of SHORT-TERM FINANCINGFamily and FriendsLG418-23Banks generally prefer to lend short-term money to larger, more established businesses. DIFFICULTY of OBTAININGSHORT-TERM FINANCINGCommercial BanksLG4The recent financial crisis has made it difficult for even promising and well-organized businesses to get loans.18-24Peer-to-peer lending sites like Lending Club match small businesses with lenders and receive a fee for their services. Lendio claims to have developed a technology that matches business owners with the right type of business loan and lender. Lendio also offers services such as a business plan makeover and website design for a fee. EXPLORING the FINANCING UNIVERSE(Spotlight on Small Business)18-25Commercial banks offer short-term loans like:Secured Loans -- Backed by collateral.Unsecured Loans -- Don’t require collateral from the borrower.Line of Credit -- A given amount of money the bank will provide so long as the funds are available.Revolving Credit Agreement -- A line of credit that’s guaranteed but comes with a fee.DIFFERENT FORMS of SHORT-TERM LOANSLG4Different Forms of Short-Term Loans18-26Factoring -- The process of selling accounts receivable for cash.Factors charge more than banks, but many small businesses don’t qualify for loans.Commercial Paper -- Unsecured promissory notes in amounts of $100,000+ that come due in 270 days or less. FACTORING / COMMERCIAL PAPERLG4Factoring Accounts Receivable18-27Rates for small businesses grew almost 30% after the Credit Card Responsibility Accountability and Disclosure Act was passed.Credit cards are convenient but costly for a small business.CREDIT CARDSCredit CardsLG4Photo Courtesy of: Robert Scoble18-28WAYS to RAISE START-UP CAPITALSeek out a microloan from a microlenderUse asset-based lending or factoringSource: Entrepreneur, www.entrepreneur.com, accessed July 2011.Turn to the web and seek out peer-to-peer lendingResearch local banksSweet-talk vendors you want to do business withLG4Credit Cards18-29Three questions of financial managers in setting long-term financing objectives:What are the organization’s long-term goals and objectives?What funds do we need to achieve the firm’s long-term goals and objectives?What sources of long-term funding (capital) are available, and which will best fit our needs?SETTING LONG-TERM FINANCING OBJECTIVESObtaining Long-Term Financing LG518-30The character of the borrow.The borrower’s capacity to repay the loan.The capital being invested in the business by the borrower.The conditions of the economy and the firm’s industry.The collateral the borrower has available to secure the loan.The FIVE “C”s of CREDITLG5Obtaining Long-Term Financing 18-31Long-term financing loans generally come due within 3 -7 years but may extend to 15 or 20 years.Term-Loan Agreement -- A promissory note that requires the borrower to repay the loan with interest in specified monthly or annual installments.A major advantage of debt financing is the interest the firm pays is tax deductible.USING LONG-TERM DEBT FINANCINGDebt FinancingLG518-32Indenture Terms -- The terms of agreement in a bond issue.Secured Bond -- A bond issued with some form of collateral (i.e. real estate).Unsecured (Debenture) Bond -- A bond backed only by the reputation of the issuing company.USING DEBT FINANCING by ISSUING BONDSLG5Debt Financing18-33A company can secure equity financing by:SECURING EQUITY FINANCINGEquity FinancingSelling shares of stock in the company.Earning profits and using the retained earnings as reinvestments in the firm.Attracting Venture Capital -- Money that is invested in new or emerging companies that some investors believe have great profit potential.LG518-34WANT to ATTRACT a VENTURE CAPITALIST?LG5Equity FinancingCan the company grow?Will we get our money back and more?Will it be worth our money and effort?Source: Entrepreneur, February 2011.18-35DIFFERENCES BETWEEN DEBT and EQUITY FINANCINGComparing Debt and Equity Financing Types of FinancingConditionsDebtEquityManagement influenceNone. Unless special conditions have been agreed on.Common stock holders have voting rights.RepaymentDebt has a maturity date. Stock has no maturity date. Yearly obligationsPayment of interest.The firm isn’t legally liable to pay dividends. Tax benefitsInterest is tax deductible. Dividends are not tax deductible.LG518-36Leverage -- Raising funds through borrowing to increase the firm’s rate of return.Cost of Capital -- The rate of return a company must earn in order to meet the demands of its lenders and expectations of equity holders.USING LEVERAGE for FUNDING NEEDSLG5Comparing Debt and Equity Financing 18-37The recent financial crisis was the worst fall since the Great Depression.LESSONS of the FINANCIAL CRISISLG5Lessons From the Financial CrisisLed to the passage of sweeping financial reform.Government is increasing involvement and intervention.18-38