Chapter 18 Financial Management Lecture Note

Chapter 18: Financial Management The Role of Finance and Financial Managers(pg. 464) Finance is the function in a business that acquires funds for the firm and managers them within the firm. Activities include preparing budgets; doing cash flow analysis; and planning for the expenditure of funds on such assets as plant. Equipment, and machinery. Financial management is the job of managing a firm’s resources to meet its goals and objectives. A financial manager is like a doctor who interprets the report and makes recommendation that will improve the patient’s health. Financial managers examine financial data prepared by accountants and recommend strategies for improving the financial performance pared by accountants and recommend strategies for improving the financial performance of the firm. A CFO is generally the second-highest-paid person in an organization and CFO’s often advance to the top job of CEO. A comptroller is the chief accounting officer. Accounting and finance function are generally under the control of a chief finance functions are generally under the control of a chief financial officer (CFO). Two key responsibilities are to obtain funds includes managing the firm’s cash, credit accounts. * What Financial Managers Do Chart The Value of Understanding Finance (pg.465) Three of the most common reasons a firm fails financially are: 1. Undercapitalization (insufficient funds to start the business). 2. Poor control over cash flow. 3. Inadequate expense control. What Is Financial Management? (pg.466) Financial managers are responsible for paying the company’s bills at the appropriate time, and for collecting overdue payments to make sure the company does not lose too much money to bad debts. It’s also essential that that financial managers stay abreast of changes or opportunities in finance, such as changes in tax law, since taxes represent an outflow of cash from the business. They must also analyze the tax implications of managerial decisions to minimize the taxes the business must pay. Financial Planning Financial planning has three steps: 1. Forecasting the firm’s short-term and long-term financial needs 2. Developing budgets to meet those needs 3. Establishing financial controls to see whether the company is achieving its goals Forecasting FInancial needs Short-term forecast predicts revenues, cost, and expenses for a period of one year or less. Cash flow forecast which predicts the cash inflows and outflows in future periods, usually months or quarters. A long-term forecast predicts revenues,cost, and expenses for a period longer than 1 year, sometimes as long as 5 or 10 years. The long-term financial forecast gives top management, as well as operations managers, some of the income or profit potential of different strategic plans. Working with the Budget Process (pg. 467) Budget Sets forth management’s expectations for revenues and, on the basis of those expectations, allocates the use of specific resources throughout the firm. There are usually several budgets in a firm’s financial [aln, threeo of the most common are: 1. A capital budget 2. A cash budget 3. An operating or master budget Capital budget forecasts a firm’s spending plans for major asset purchases that often require large sums of money, like property, buildings, and equipment. Cash budget estimates cash inflows and outflows during a particular period, like a month or a quarter. Operating (or master) budget is an affergate of the firm’s other budgets and summarizes its proposed financial activities Establishing Financial controls (pg.468) Financial control is a process in which a firm periodically compares its actual revenues, costs, and expenses with its budget. The need for operating funds (pg.470) Key areas include: ● Managing day-by-day needs of the business ● Controlling credit operations ● Acquiring needed inventory ● Making 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. Financial managers often try to minimize cash expenditures to free up funds for investment in interest-bearing accounts. Efficient cash management is particularly important to small firms since their access to capital is much more limited than larger businesses. Controlling Credit Operations Making credit available helps keep customers happy and helps attract new ones. The problem with selling on credit is that as much as 25% of the business’s assets could be tied up inits credit accounts. One convenient way to decrease the time and expense of collecting accounts receivable is to accept bank credit cards such as MasterCard or Visa. Acquiring Needed Inventory (pg. 471) Just-in-time inventory control and other such methods can reduce the funds a firm must tie up in inventory. Carefully evaluating its inventory turnover ratio also helps a firm control the outflow of cash for inventory. Marketing Capital Expenditures (pg.471) Capital Expenditures Are 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 (pg.472)