Chapter 18 - Financial Management

1. Chapter 18 - Financial Management M. GolamRabbani

2. What is Finance Motive of any business  make “Money” “Core” essence of any business  Finance Tells how to acquire & manage Funds Financial Management: Managing firm’s resources to meet the goals and objectives. What Financial Managers do:

3. What Financial Managers do managing: Cash, Accounts Payable, Accounts Receivable etc.

4. Financial Planning Prediction of revenues, costs & expenses over a period of time Short-Term forecasting: prediction of financials for one year or less Long- Term forecasting: prediction of financials for more than a year Forecasting Allocating the use of resources based on mgmt expectations for revenues. Capital Budget: spending plans for major/ expensive asset purchase Cash Budget: estimating cash inflow/ outflow over a period of time Operating Budget: estimating cost & expenses required to run a business Budgeting Financial Controlling Periodic monitoring of ActualVs. Budget of revenue, costs, & expense Management takes corrective actions if deviations found Financial Planning means analyzing short- term and long-term money flows to and from the firm, to optimize firms profitability and make best use of money It has 3 steps:

5. Financial Planning Forecasting Budgeting Financial Controlling

6. Needs for Operational funds in a FIRM • Managing day-by-day needs of the business (maintain liquidity/ cash, time value of money) • Controlling credit operations (selling in credit keeps customers happy but will tie up cash) • Acquiring needed inventory • Making capital expenditures (Major investments in assets)

7. Alternate Source of funding • Retailed Earnings -- Use of profits earned • Debt Financing -- The funds raised through various forms of borrowing that must be repaid. • Equity Financing -- The funds raised from within the firm from operations or through the sale of ownership in the firm (such as stock).

8. Types of Financing • Short-Term Financing -- Funds needed for <= 1 year • Monthly expenses • Emergencies, Cash flow problems • Inventory management • Temporary promotional programs • Long-Term Financing -- Funds needed for > 1 year. • New Product development • Investment in capital equipments • Mergers & Acquisitions • Market expansions • New Facilities

9. Forms of Short Term Loans Secured Loans – Loans backed by secured collateral (e.g. Property, House, Car) Unsecured Loans – Loans w/o any collateral Line of Credit – Given amount of unsecured readily available short term loans provided by banks to business Commercial Paper – A fixed amount of money paid to business who agrees to pay at a specific future date at a specific interest rate (matures <270 days) Credit Cards – Instant credit

10. Forms of Long Term Loans • Term Loans – promissory note requiring the borrower to pay off in monthly installments • “risk/ return trade off” • Bonds – secured & unsecured loan, promising payment + interest on a certain future date • Equity/ Stocks – selling of stocks (ownership) or using of retained earnings (previous profits)

11. Debt Vs. Equity Financing