Joseph Fabiilli | Managing the Firm’s Finances

1. Managing the Firm’s Finances Joseph Fabiilli

2. Managing the Firm’s Finances THE FUTURE OF BUSINESS Gitman& McDaniel

3. Learning Goals 1 What roles do finance and the financial manager play in the firm’s overall strategy? 2 How does a firm develop its financial plans, including forecasts and budgets? 3 What types of short-term and long-term expenditures does a firm make? 4 What are the main sources and costs of unsecured and secured short-term financing? 5 How do the two primary sources of long-term financing compare? 3

4. Learning Goals 6 What are the major types, features, and costs of long- term debt? 7 When and how do firms issue equity, and what are the costs? 8 What trends are affecting the field of financial management? Risk and Insurance Appendix: 9 What is risk and how can it be managed? What makes a risk insurable? 10What types of insurance coverage should businesses consider? 4

5. Learning Goal 1 1 What roles do finance and the financial manager play in the firm’s overall strategy? 5

6. How Cash Flows Through a Business 1 Borrowed Funds Sale of Fixed Assets Owners’ investment Collection of Accounts Receivable Cash Sales Purchase of Fixed Assets Payment of Expenses Payment of Dividends Purchase of Inventory 6

7. The Financial Manager’s Responsibilities 1 Financial Planning Investment (spending money) Key Activities Financing (raising money) 7

8. The Goal of the Financial Manager 1 Maximize Firm’s Value! Opportunity for Profit Potential for Loss 8

9. Risk and Return Factors 1 Changing Patterns of Market Demand Interest Rates General Economic Conditions Market Conditions Social Issues 9

10. Learning Goal 2 2 How does a firm develop its financial plans, including forecasts and budgets? 10

11. Forecasting the Future 2 Project revenues, costs of goods, operating expenses Operating Plans for one-year period Short-Term Forecasts Strategic Plans for longer than one- year period Long-Term Forecasts Broader view of financial activities 11

12. Budgets 2 Cash Budgets Forecast cash inflows and outflows Capital Budgets Forecast outlays for fixed assets Operating Budgets Forecast profits 12

13. Learning Goal 3 3 What types of short-term and long-term expenditures does a firm make? 13

14. How Organizations Use Funds 3 Cash Manage Current Assets Accounts Receivable Inventory 14

15. How Organizations Use Funds 3 Land Buildings Manage Long-Term Capital Expenditures Machinery Equipment Information Systems 15

16. Learning Goal 4 4 What are the main sources and costs of unsecured and secured short-term financing? 16

17. Obtaining Short-Term Financing 4 Borrow Money (Debt) Sell Ownership Shares (Equity) Raising Funds Retain Earnings (Profits) 17 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved

18. Unsecured Short-Term Loans 4 Trade Credit Seller extends credit to the buyer •Lines of credit •Revolving credit agreement Bank Loans Commercial Paper Unsecured short-term debt issued by a financially strong corporation 18

19. Secured Short-Term Loans 4 Borrower pledges specific assets as collateral, such as accounts receivable or inventory. Secured Loans Firm sells its accounts receivable to a factor, such as a commercial bank or commercial finance company. Factoring 19

20. Learning Goal 5 5 How do the two primary sources of long-term financing compare? 20

21. Debt versus Equity Financing 5 21

22. Learning Goal 6 6 What are the major types, features, and costs of long-term debt? 22

23. Debt Financing 6 A business loan with a maturity of more than one year. Term Loans Long-term debt obligations issued by corporations and governments. Bonds A long-term loan made against real estate as collateral. Mortgage Loans 23

24. Learning Goal 7 7 When and how do firms issue equity, and what are the costs? 24

25. Equity Financing 7 Selling Common Stock Dividends & Retained Earnings Preferred Stock Venture Capital 25

26. Learning Goal 8 8 What trends are affecting the field of financial management? 26

27. The Changing Role of the CFO 8 ▪ Work with top management to develop and implement the firm’s strategic direction ▪ Reestablish public trust ▪ Assure stakeholders of honest transactions and reporting ▪ Maintain a higher profile with their companies’ boards 27

28. Weighing the Risks after 9-11-2001 8 Credit risk Market risk Operational risk 28

29. Learning Goal 9 9 What is risk and how can it be managed? What makes a risk insurable? 29

30. Risk Management 9 Risk avoidance Self-insurance Strategies to Manage Risk Risk reduction Risk transference 30

31. Learning Goal 10 10 What types of insurance coverage should businesses consider? 31

32. Insurance Concepts Insurable Risks 10 The loss must not be under control of insured There must be many similar exposures to peril Losses must be financially measurable Peril must not be likely to affect all parties at same time Potential loss must be significant Company must have the right to set standards for coverage 32

33. Types of Insurance 10 Property Liability Health Life 33

34. Special Types of Business Liability Insurance 10 Business interruption insurance Theft insurance Fidelity and surety bonds Title insurance Professional liability insurance 34

35. Thank You 35