Understanding business 10th chapter 18b financial mgt

Chapter 18

Financial
Management

McGraw-Hill/Irwin

Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.


Chapter
Eighteen

LEARNING GOALS

1. Explain the role and responsibilities of financial
managers.
2. Outline the financial planning process, and explain
the three key budgets in the financial plan.
3. Explain why firms need operating funds.
4. Identify and describe different sources of shortterm financing.
5. Identify and describe different sources of long-term
financing.
18-2


Profile

CAROL TOMÉ
Home Depot

Tomé worked her way up to Chief Financial Officer
(CFO) at Home Depot in 2001.
• Home Depot was in a store
building frenzy; adding more
than 100 locations a year
through 2005.
• Tomé was at the center of
tech transition by overseeing
the distribution of $350
million in spending.
18-3


Chapter
Eighteen

NAME that COMPANY

At one time this company was the largest
automobile maker in the world. Due to severe
financial problems in 2009, the company came
very close to extinction. A $7 billion
government-backed loan and an additional $43
billion government investment in the company
helped it survive. It is now attempting a
comeback as a much smaller company.
Name that company!
18-4

The Role of
Finance and
Financial
Managers

WHAT’S FINANCE?

LG1

Finance -- The function in a business that acquires
funds for a firm and manages them within the firm.

•Finance activities include:
- Preparing budgets
- Creating cash flow analyses
- Planning for expenditures

18-5


The Role of
Finance and
Financial
Managers

FINANCIAL MANAGEMENT

LG1

Financial Management -The job of managing a firm’s

resources to meet its goals and
objectives.

18-6


The Role of
Finance and
Financial
Managers

FINANCIAL MANAGERS

LG1

Financial Managers -- Examine financial data and
recommend strategies for improving financial
performance.
• Financial managers are
responsible for:
- Paying company bills
- Collecting payments
- Staying abreast of market
changes
- Assuring accounting
accuracy
18-7


Financial

Planning

WHO’S WHO in FINANCE

LG2

• CFO -- Chief Financial Officer
• CFP -- Certified Financial
Planner
• CFA -- Chartered Financial
Analyst
• Comptroller -- Chief
Accounting Officer

18-8


The Role of
Finance and
Financial
Managers
LG1

WHAT
FINANCIAL MANAGERS DO

18-9


The Role of

Finance and
Financial
Managers
LG1

WHAT WORRIES FINANCIAL
MANAGERS

• Consumer demand for their
firm’s products
• Credit markets and interest
rates
• Financial regulations from
the government
• Volatility of the dollar
• Foreign competition
• Environmental regulations
Source: CFO Magazine, www.cfo.com, accessed July 2011.

18-10


The Value of
Understanding
Finance
LG1

WHY DO FIRMS
FAIL FINANCIALLY?

1) Undercapitalization
2) Poor control over
cash flow
3) Inadequate expense
control

18-11


The Value of
Understanding
Finance
LG1

TOP FINANCIAL CONCERNS
of COMPANY CFOs - MACRO

• Measuring and monitoring
business performance
• Providing inputs into
enterprise strategy
• Developing talent in the
finance organization
• Optimizing planning,
budgeting and forecasting
• Driving enterprise cost
reduction
Source: Forbes, March 7, 2013.

18-12

The Value of
Understanding
Finance
LG1

TOP FINANCIAL CONCERNS
of COMPANY CFOs - MICRO

• Healthcare costs
• Taxation
• Uncertainty about the economy
(will there be another recession)
• Higher costs of hiring employees
• Increase in energy costs
• Uncertainty about government
policy
Source: Forbes, August 24, 2012.

18-13


Financial
Planning

FINANCIAL PLANNING

LG2

Financial planning involves analyzing short-term and
long-term money flows to and from the company.
•Three key steps of financial planning:
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 if the company is
achieving its goals.

18-14


Forecasting
Financial
Needs

FINANCIAL FORECASTING

LG2

• Short-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.

18-15


Working with
the Budget
Process

BUDGETING

LG2

Budget -- 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.
18-16


Working with
the Budget
Process

TYPES of BUDGETS

LG2

• Capital 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.
18-17


Working with
the Budget
Process

FINANICAL PLANNING

LG2

18-18


Establishing
Financial
Control

LG2

ESTABLISHING
FINANCIAL CONTROL

Financial Control -A process in which a firm
periodically compares its actual
revenues, costs and expenses
with its budget.

18-19


Establishing
Financial
Control
LG2

FACTORS USED in ASSESSING
FINANCIAL CONTROL

• Is 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?
18-20

Progress
Assessment

PROGRESS ASSESSMENT

• Name three finance functions important to the
firm’s overall operations and performance.
• What three primary financial problems cause
firms to fail?
• How do short-term and long-term financial
forecasts differ?
• What’s the purpose of preparing budgets? Can
you identify three different types of budgets?
18-21


The Need for
Operating
Funds
LG3

KEY NEEDS for OPERATIONAL
FUNDS in a FIRM

• Managing day-by-day needs of the business
• Controlling credit operations
• Acquiring needed inventory
• Making capital expenditures

18-22


FINANCIAL ORDER or
FINANCIAL MARTIAL LAW?
(Legal Briefcase)

• In Michigan, half of the state’s communities are in
financial distress.
• Local Government and School District Fiscal
Accountability Act allows cities, towns, and
school districts to be taken over by stateappointed emergency financial managers (EFMs)
selected by the Governor.
• Indiana is considering similar legislation. New
York and other states’ boards have been given
similar power.
18-23


The Need for
Operating
Funds
LG3

HOW SMALL BUSINESSES
CAN IMPROVE CASH FLOW

• Measuring cash flow
• Improving receivables, be more
aggressive in collecting

receivables
• Managing payables
• Surviving shortfalls

Source: Entrepreneur April 2014

18-24


GOOD FINANCE
or BAD MEDICINE?
(Making Ethical Decisions)

• You’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?
18-25