Chapter 18 Financial Management

Chapter 18 Financial Management 18-1 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 examine financial data prepared by accountants and recommend strategies for improving the financial performance of the firm. - The financial manger job + Auditing + Planning + Budgetting + Managing taxes + Advising top management on financial matters + Obtaining funds + Contrilling funds (funds management) + Collecting funds (credit management) *The value of understanding finance - Common reasons a firm fails financially + Undercapitalization ( insufficient funds to start the business) + Poor control over cash flow + Inadequate expense control 18-2 Financial planning *Forecasting Financial Needs - Short-term forecast: predicts revenue, costs, and expenses for a period of one year or less + Cash flow forecast: forecast that predicts that cash inflows and outflows in future periods, usually months or quarters - Long-term forecast: predicts revenue, costs, and expenses for a period longer than 1 year, sometimes as long as 5 or 10 years *Working with the Budget Process 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 - Capital budget: a budget that highlights a firm’s spending plans for major asset purchases that often require large sums of money (long period) - Cash budget: a budget that estimates cash inflows and outflows during a particular period like a month or a quarter - Operating (or master) budget: the budget that ties together the firm’s other budgets and summarizes its proposed financial activities *Establishing Financial Controls Financial control: a process in which a firm periodically compares its actual revenues, costs, and expenses with its budget 18-3 The need for operating funds Key areas: + Managing day-by-day needs of the business + Controlling credit operations + Acquiring needed inventory + Make capital expenditures *Managing Day-by-Day Needs of the Business - Financial manager must ensure that funds are available to meet daily cash needs without compromising the firm’s opportunities to invest money for its future - Money has a time value *Controlling Credit Operations - Making credit available helps keep current customers happy and helps attract new ones *Acquiring Needed Inventory - Just-in-time inventory control and other such methods can reduce the funds a firm must tie up in inventory - Evaluating its inventory turnover ratio can also help a firm control the outflow of cash for inventory *Making Capital Expenditures (chi phí chi tiêu vốn) - 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 *Alternative Sources of Funds - Debt financing: funds raised through various forms of borrowing that must be repaid - Equity financing: money raised from within the firm, from operations or through the sale of ownership in the firm (stock or venture capital) + Short-term financing: funds needed for more than a year or less + Long-term financing: covers funds needed for more than a year (2-10 years) 18-4 Obtaining short-term financing *Trade credit - Trade credit: the practice of buying goods and services now and paying for them later, most widely used source of short-term funding, the least expensive, and the most convenient - Promissory note: a written agreement with a promise to pay a supplier a specific sum of money at a definite time *Family and Friends - Small firms obtain short-term of funds by borrowing money from family and friends - If an entrepreneur decides to ask family or friends for financial assistance, both should: + agree to specific loan terms + put the agreement in writing + arrange for repayment in the same way they would for the bank loan …. To keep family relationship and friendship intact *Commercial Banks - Banks, being sensitive to risk, generally prefer to lend short-term money to larger, established businesses - Large business, specialist in a company’s finance and accounting department do a cash flow forecast - Small business owners generally lack such specialist and must monitor cash flow carefully themselves *Different Forms of Short-Term Loans - Secured loan: a loan backed by collateral – tài sản thế chấp (something valuable, such as property) - Unsecured loan: a loan that doesn’t require any collateral, lenders normally give unsecured loans only to high regarded customers- long standing business - Line of credit (for business develops a strong relationship with a bank): a given amount of unsecured short-term funds a bank will lend to a business, provided the funds are readily available *Factoring Accounts Receivable - Factoring: the process of selling accounts receivable for cash - A factor is a market intermediary (usually a financial institution or a factoring company) that agrees to buy the firm’s account receivable, at a discount, for cash - While factors chảge more than banks’ loan rắt, remember many small businesses can’t qualify for a bank loan *Commercial paper - A type of a short-term financing available to large corporations that need funds for just a few months and prefer not to have negotiate with a commercial bank - Commercial paper consist of unsecured promissory notes, in amount of $100,000 and up, that mature or come due in 270 days or less - Commercial paper states a fixed amount of money the business agrees to repay to the lender (investor) on a specific rate of interest *Credit Cards - Many businesses turn to short-term financing through credit cards - Credits cards provide a readily available line of credit that can save time and the likely embarrassment of being rejected for a bank loan 18-5 Obtaining Long-term financing - In setting long-term financing objectives, financial managers generally ask 3 questions: 1. What are our organization’s long-term goals and objectives? 2. What funds do we need to achieve the firm’s long-term goals and objectives? 3. What sources of long-term funding (capital) are available and which will best fit our needs? - Firms need long-tẻm capital to purchase expensive assets such as plant and equipment, to develop new products, or perhaps finance their expansion *Debt Financing - Is borrowing money the company has a legal obligation to repay Debt Financing by Borrowing from lending Institutions - A term-loan agreement: is a promissory note that requires the borrower to repay the loan with interest in specified monthly or annual installments - Risk/Return trade-off: the greater the risk a lender takes in making a loan, the higher the rate of interest Debt Financing by Issuing Bonds - A secured bond: is issued with some form of collateral, such as real estate, equipment, or other pledged assets - An unsecured bond, called a debenture bond, is backed only by the reputation of the issuer *Equity financing - Equity financing makes funds available when the owners of the firms sell shares of ownership to outside investors in the form of stock, when they reinvest company earnings in the business, or when they obtain funds from venture capitalists Equity financing by selling stock - The key thing to remember about stock is that stockholders become owners in the organization - The first time a company offerers to sell its tock to the general public called an initial public offering (IPO) Equity Financing from Retained Earnings - Retained earnings often are a major source of long-term funds, especially for small businesses since they often have fewer financing alternatives, such as selling stock or bonds, than large businesses do - Large corporation also depend on retained earnings for needed long-term funding Equity Financing from Venture Capital Venture capital: money that is invested new or emerging companies that are perceived as having great profit potential, they have assisted many major companies during strart-up *Comparing Debit and Equity Financing - Leverage: raising funds through borrowing to increase the firm’s rate of return - Debt increase risk because it creates a financial obligation that must be repaid, it also enhances the firm’s ability to increase profits - Cost of capital: the rate of return a company must earn in order to meet the demands of its lenders and expectations of its equity holders