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Chapter 18

Chapter 18. Financial Management. The Field of Financial Management. What is financial management? Managing a firm’s resources and matching them with its strategies Financial managers… Plan Forecast needs Work within the budget process Establishing financial controls.

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Chapter 18

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  1. Chapter 18 Financial Management

  2. The Field of Financial Management • What is financial management? • Managing a firm’s resources and matching them with its strategies • Financial managers… • Plan • Forecast needs • Work within the budget process • Establishing financial controls.

  3. Why Do Firms Fail, Financially? Undercapitalization (they didn’t have enough to use as kindling for the business). Poor control over cash flow Inadequate expense control

  4. The Point to Financial Planning Forecasts and Strategy Financial Plan Budget Capital Budget Cash Budget Controls

  5. Budgeting • Firms often have three budgets: • Capital Budget • For large expenditures: new buildings, land, expansion • Cash Budget • Tracks the need and availability of cash over weeks or months, so that the firm knows when cash will be ample and when it will be short • Operating Budget • Stretches out the revenue made over several areas that need that money • Lets each area know how much they have to spend

  6. Where Does Money Come from in the Firm? • Sales • Often small in the first years of the firm, and sometimes difficult to predict • Debt • Loans taken out that must be repaid • Equity • Owners’ savings put into the firm; traded for partnership interest

  7. Daily Profits Of High Sales Companies • 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

  8. Sources of Financing for the Short-Term • Trade credit • Lines of credit with a supplier • Terms of these lines (2/10 net 30, etc.) • Friends and family • Not always the best choice • Needs to be put in writing with strict repayment terms • Banks • Not only a source for loans, but also for good, free advice

  9. Sources of Financing for the Long-Term • Long-term loans and bonds • Term loan (tax deductible interest) • Secured and unsecured bonds • Only corporations or government agencies can issue these • Selling stock to new investors • IPO (initial public offering) for large firms with high returns • Venture capitalists and angel investors • Anywhere from $100,000 to $15 million • Must have potential for extremely high return • VCs want to see 50 to 70% return on their investment in 5-7 years

  10. Deciding on Whether and How to Finance • If the firm can earn more off of the debt used for a project than it pays in interest for that debt, the best decision is to finance the expansion using debt • Leverage – the extent to which the firm uses debt to fund its expansion • If risk is an issue, equity might be the better choice! • Understand that it is not always up to the firm to choose what option is available!

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