Understanding business 8th by mcchugh nickels chapter 18

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Financial
Management

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CHAPTER

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18

Nickels

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McHugh

McGraw-Hill/Irwin
Understanding Business, 8e

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McHugh
1-1

18-1

© 2008 The McGraw-Hill Companies, Inc., All Rights

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Finance & Managers

• What is Financial
Management?
• Finance

• Financial Manager

• Importance of
Finance

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Most Important
Skills Needed by CFOs

Source: CIO Enterprise

18-3

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Women CFOs
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As of May 2006, 35 of the 500 largest companies in the US had a female
CFO
Five largest companies with female
CFO: Citigroup, Home Depot,
Verizon, Marathon Oil, and Medco Health Solutions
Top 3 reasons that helped women achieve their current position:
Supportive boss, Supportive spouse, and culture of the organization

Source:: cfo.com, June 1, 2006

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Non-Finance
Functions of CFOs

Source: CIO Enterprise

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What Financial Managers Do

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Where CFOs Get
Their Financial Information

Source:: USA Today

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Financial Managers:
Ask Your Clients

1. What are the client's goals in areas like

lifestyle, retirement, saving for college
education and their health care as well as that
of their dependents?

2. When do they want to reach their goals?
3. What steps have they already taken toward
achieving their goals?

4. How do they feel about taking investment risks
for a potential higher rate of return?

5. How involved do they want to be in monitoring
Source:: Fpanet.org

their progress toward their goals?

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Financial Planning

Short-term
Forecasting

Capital
Budget
Feedback

Financial
Plan

Operating
Budget

Financial
Controls

Long-term
Forecasting
Cash
Budget
Feedback

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Budget Process

• Financial Plan- Financial Statements
• Types of Budgets
• Capital
• Cash
• Operating (Master)

• Financial Controls- Feedback
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Need for Operating Funds

• Manage Daily Operations
• Controlling credit operations
• Acquire Inventory
• Capital Expenditures
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Why Firms Need Funds
Short-Term Funds

• Meeting monthly
expenses
• Unanticipated
emergencies
• Cash-flow problems
• Expanding current
inventory
• Temporary
promotional
programs

Long-Term Funds
• New product
development
• Replacing capital
expenditure
• Mergers or
acquisitions
• Expansion into new
markets
• Building new
facilities
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Daily Profits Of Companies

With The Highest Revenue

• Wal-Mart - $24.8 Million
• ExxonMobil - $58.9 Million
• General Motors - $10.5 Million
• Ford - $1.4 Million
• General Electric - $41.1 Million
• ChevronTexaco - $19.8 Million
Source: World Feature Syndicate, 2005

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Sources of Funds
Short-Term
• Trade Credit
• Promissory Notes
• Family/Friends
• Banks, etc.

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Secured Loan
Unsecured Loan

Factoring
Commercial Paper
Credit Cards

Long-Term
• Debt

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Term-Loan
Bonds
• Secured
• Unsecured

Equity

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Stock
Retained Earnings
Venture Capital

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Who Can Issue Bonds?
1. Federal, state, and local
governments
2. Federal government
agencies
3. Corporations
4. Foreign governments and
corporations
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Sources of Equity Financing
Internal
Internal
Sources
Sources
Equity
Equity
Capital

Capital

External
External
Sources
Sources

Retained
Retained
Earnings
Earnings
Owner
Owner
Contribution
Contribution
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Sale
Sale of
of
Partnerships
Partnerships
Venture
Venture
Capital
Capital
Public
Public Sale
Sale of
of
Stock

Stock

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IPO
Summer of 2006
• 89 companies filed plans to raise money
through IPO – looking to raise $16.3 billion
• 17 companies withdrew their plans to proceed
with their IPO – were hoping to raise $3.89
billion
• Withdrawing – Go Daddy Group and PNY
Technologies
• Filing – Double-Take Software and
Hansen Medical
Source:: redherring.com, August 18, 2006

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Google IPO

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Launched – August 2004
IPO Price -- $ 85 per share
Seeking to raise $2.7 billion
Unusual auction-style offering
With IPO, the company must
shed light on the inner workings
Key competitors – Yahoo and Microsoft
As of March 31, 2004 Google employed about 1,900 employees

Source:: cnet news.com, April 30, 2004; Forbes, September 17, 2004

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Venture Capitalists
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Finance new and rapidly growing companies
Purchase equity securities
Assist in the development of new products or
services
Add value to the company through active
participation
Take higher risks with the expectation of higher
rewards
Have a long-term orientation

Source:: NVCA.com

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Making Use of Leverage
Leverage- Selling
Bonds

Equity- Sale of Stock

Common Stock

Bonds (@10%)

$ 50,000
$450,000

Common Stock
Bonds (@10%)

$500,000
0

Funds Raised

$500,000

Funds Raised

$500,000

Earnings
Less: Bond Interest

$ 125,000
$ 45,000

Earnings

$ 125,000

Total Earnings

$ 80,000

Total Earnings

$ 125,000

Return to

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Stockholders

$80,000
$50,000

= 160%

Return to

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Stockholders

$125,000
$500,000

= 25%

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