Understanding business 11th by mchugh nickels chap018

CHAPTER 18

Financial
Management

McGraw-Hill/Irwin

Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights reserved.


LEARNING OBJECTIVES
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 short-term
financing.
5. Identify and describe different sources of long-term
financing.

18-2


SABRINA SIMMONS
Gap

• Simmons earned her
bachelor’s in finance at UCBerkeley and her MBA at
UCLA.
• Joined Gap as treasurer in

2001, balanced the books, and
eliminated the reliance on risky
investments.
• Encourages Gap to not be
afraid to create new brands,
even after failure.

18-3


NAME that COMPANY

This company spends over $6 billion a year on
research to develop new products even though it
may take as long as ten years before the
products are approved and introduced to the
market. Since long-term funding is very critical in
our business, high-level managers are very
involved in the finance decisions.
Name that company!
18-4


WHAT’S FINANCE?

LO 18-1

• 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


FINANCIAL MANAGEMENT

LO 18-1

• Financial Management -The job of managing a firm’s
resources to meet its goals and
objectives.

18-6


FINANCIAL MANAGERS

LO 18-1

• 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


WHO’S WHO in FINANCE

LO 18-1

• CFO -- Chief Financial Officer
• CFP -- Certified Financial
Planner
• CFA -- Chartered Financial
Analyst
• Comptroller -- Chief
Accounting Officer
18-8


FOUR SIGNS YOU NEED a CFO

LO 18-1

1. You do not have information on key items like
cash flow, working capital, or forecasts.
2. No one is carefully watching and analyzing your
expenses.
3. You are not aware of regulatory changes that

could affect your business.
4. You are unable to generate financial reports.
Source: Karen Stern, St. Louis Small Business Monthly, January 2014.

18-9


WHAT FINANCIAL
MANAGERS DO

LO 18-1

18-10


WHAT WORRIES FINANCIAL
MANAGERS

LO 18-1

• 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 November 2014.

18-11


WHY DO FIRMS
FAIL FINANCIALLY?

LO 18-1

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

18-12


TOP FINANCIAL CONCERNS
of COMPANY CFOs - MACRO

LO 18-1

• Consumer demand
• Federal-government policies
• Price pressure from
competitors
• Credit markets/interest rates
• Global financial instability
Source: CFO Magazine, www.cfo.com, accessed November 2014.

18-13


TOP FINANCIAL CONCERNS
of COMPANY CFOs - MICRO

LO 18-1

• Ability to maintain margins
• Ability to forecast results
• Maintaining
morale/productivity
• Cost of healthcare
• Working-capital
management
Source: CFO Magazine, www.cfo.com, accessed November 2014.

18-14


FINANCIAL PLANNING

LO 18-2

• 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.
18-15


FINANCIAL FORECASTING

LO 18-2

• 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.
18-16


BUDGETING

LO 18-2

• 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.
18-17


TYPES of BUDGETS

LO 18-2

• 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.
18-18


FINANCIAL PLANNING

LO 18-2

18-19


ESTABLISHING
FINANCIAL CONTROL

LO 18-2

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

18-20


FACTORS USED in ASSESSING
FINANCIAL CONTROL

LO 18-2

• 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?

18-21


TEST PREP
• 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?
18-22


KEY NEEDS for OPERATIONAL
FUNDS in a FIRM

LO 18-3

• Managing day-by-day
needs of the business
• Controlling credit
operations
• Acquiring needed
inventory
• Making capital
expenditures
18-23

HOW SMALL BUSINESSES
CAN IMPROVE CASH FLOW

LO 18-3

• Be 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.

18-24


GOOD FINANCE
or BAD MEDICINE?
• You are 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 are
sacrificing patients’ well-being for cash. What do
you do? What could be the result of your

decision?
18-25