Chapter 20 THE FUTURE OF BUSINESS Gitman & McDaniel 5 th Edition THE FUTURE OF BUSINESS Gitman &...

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THE FUTURE OF BUSINESSGitman & McDaniel

5th Edition

THE FUTURE OF BUSINESSGitman & McDaniel

5th Edition

Chapter

Managing the Firm’s FinancesManaging the Firm’s Finances

Prepared byDeborah Baker

Texas Christian University

Prepared byDeborah Baker

Texas Christian University

20

Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 2Ch

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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?

Learning Goals


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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?

Learning Goals


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Learning Goal 1

What roles do finance andthe financial manager play

in the firm’s overall strategy?

1


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How Cash Flows Through a Business1

Owners’ investmentOwners’ investmentBorrowed FundsBorrowed Funds

Cash SalesCash Sales

Purchase ofFixed Assets

Purchase ofFixed Assets

Payment ofDividends

Payment ofDividends

Purchase ofInventory

Purchase ofInventory

Payment of Expenses

Payment of Expenses

Collection ofAccounts Receivable

Collection ofAccounts Receivable

Sale ofFixed Assets

Sale ofFixed Assets


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The Financial Manager’s Responsibilities1

Key Key ActivitiesActivities

Key Key ActivitiesActivities

Financial PlanningFinancial Planning

Investment(spending money)

Investment(spending money)

Financing(raising money)

Financing(raising money)


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The Goal of the Financial Manager1

Maximize Firm’s Value!Maximize Firm’s Value!Maximize Firm’s Value!Maximize Firm’s Value!

Opportunity Opportunity for Profitfor Profit

Opportunity Opportunity for Profitfor Profit

Potential Potential for Lossfor Loss

Potential Potential for Lossfor Loss


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Risk and Return Factors1

Social IssuesSocial Issues

Market ConditionsMarket Conditions

General Economic ConditionsGeneral Economic Conditions

Interest RatesInterest Rates

Changing Patterns of Market DemandChanging Patterns of Market Demand


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2 Learning Goal 2

How does a firm develop its financial plans, includingforecasts and budgets?


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2 Forecasting the Future

Short-TermForecasts

Short-TermForecasts

Operating Plansfor

one-year period

Operating Plansfor

one-year period

Long-TermForecasts

Long-TermForecasts

Strategic Plansfor

longer than one- year period

Strategic Plansfor

longer than one- year period

Project revenues, costs of goods,

operating expenses

Project revenues, costs of goods,

operating expenses

Broader view offinancial activitiesBroader view of

financial activities


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OperatingBudgets

OperatingBudgets

Capital BudgetsCapital Budgets

CashBudgetsCash

Budgets

2 Budgets

Forecast profitsForecast profits

Forecast outlays for fixed assetsForecast outlays for fixed assets

Forecast cash inflows and outflowsForecast cash inflows and outflows


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3 Learning Goal 3

What types of short-term and long-term expenditures

does a firm make?


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3 How Organizations Use Funds

ManageManageCurrent Current AssetsAssets

ManageManageCurrent Current AssetsAssets

CashCash

Accounts ReceivableAccounts Receivable

InventoryInventory


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3 How Organizations Use Funds

ManageManageLong-TermLong-Term

CapitalCapitalExpendituresExpenditures

ManageManageLong-TermLong-Term

CapitalCapitalExpendituresExpenditures

MachineryMachinery

BuildingsBuildings

LandLand

EquipmentEquipment

Information SystemsInformation Systems


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4

What are the main sources and costs of unsecured and secured short-term

financing?

Learning Goal 4


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4 Obtaining Short-Term Financing

RaisingRaisingFundsFunds

RaisingRaisingFundsFunds

Borrow Money(Debt)

Borrow Money(Debt)

Sell Ownership Shares(Equity)

Sell Ownership Shares(Equity)

Retain Earnings(Profits)

Retain Earnings(Profits)


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4 Unsecured Short-Term Loans

Bank LoansBank Loans •Lines of credit•Revolving credit agreement

•Lines of credit•Revolving credit agreement

TradeCreditTradeCredit Seller extends credit to the buyer Seller extends credit to the buyer

CommercialPaper

CommercialPaper

Unsecured short-term debt issuedby a financially strong corporationUnsecured short-term debt issuedby a financially strong corporation


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4 Secured Short-Term Loans

SecuredLoans

SecuredLoans

Borrower pledges specific assets as collateral, such as

accounts receivable or inventory.

Borrower pledges specific assets as collateral, such as

accounts receivable or inventory.

FactoringFactoring Firm sells its accounts receivable to a

factor, such as a commercial bank or commercial finance company.

Firm sells its accounts receivable to a factor, such as a commercial bank or commercial finance company.


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How do the two primary sources ofHow do the two primary sources oflong-term financing compare?long-term financing compare?

How do the two primary sources ofHow do the two primary sources oflong-term financing compare?long-term financing compare?

5 Learning Goal 5


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5 Debt versus Equity Financing


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6

What are the major types, features, What are the major types, features, and costs of long-term debt?and costs of long-term debt?

What are the major types, features, What are the major types, features, and costs of long-term debt?and costs of long-term debt?

Learning Goal 6


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6

BondsBonds Long-term debt obligations issuedby corporations and governments.Long-term debt obligations issuedby corporations and governments.

Term LoansTerm Loans A business loan with a maturity of more than one year.

A business loan with a maturity of more than one year.

Mortgage LoansMortgage Loans A long-term loan made againstreal estate as collateral.

A long-term loan made againstreal estate as collateral.

Debt Financing


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7

When and how do firms issue equity,When and how do firms issue equity,and what are the costs?and what are the costs?

When and how do firms issue equity,When and how do firms issue equity,and what are the costs?and what are the costs?

Learning Goal 7


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7

Venture CapitalVenture Capital

Preferred Stock Preferred Stock

Dividends & Retained EarningsDividends & Retained Earnings

Selling Common StockSelling Common Stock

Equity Financing


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8

What trends are affecting theWhat trends are affecting thefield of financial management?field of financial management?What trends are affecting theWhat trends are affecting the

field of financial management?field of financial management?

Learning Goal 8


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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

The Changing Role of the CFO


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8

Market riskMarket risk

Operational riskOperational risk

Credit riskCredit risk

Weighing the Risks after 9-11-2001


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9

What is risk and how can What is risk and how can it be managed?it be managed?

What makes a risk insurable?What makes a risk insurable?

What is risk and how can What is risk and how can it be managed?it be managed?

What makes a risk insurable?What makes a risk insurable?

Learning Goal 9


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9

StrategiesStrategiestoto

Manage RiskManage Risk

StrategiesStrategiestoto

Manage RiskManage RiskRisk reductionRisk reductionRisk reductionRisk reduction

Risk avoidanceRisk avoidanceRisk avoidanceRisk avoidance

Self-insuranceSelf-insuranceSelf-insuranceSelf-insurance

Risk transferenceRisk transferenceRisk transferenceRisk transference

Risk Management


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10

What types of insurance coverageWhat types of insurance coverageshould businesses consider?should businesses consider?

What types of insurance coverageWhat types of insurance coverageshould businesses consider?should businesses consider?

Learning Goal 10


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10

There must be many similar exposures to perilThere must be many similar exposures to peril

Losses must be financially measurableLosses must be financially measurable

Peril must not be likely to affect all parties at same timePeril must not be likely to affect all parties at same time

Company must have the right to set standards for coverage

Company must have the right to set standards for coverage

The loss must not be under control of insuredThe loss must not be under control of insured

Potential loss must be significantPotential loss must be significant

Insurance ConceptsInsurable Risks


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10

LifeLife

HealthHealth

LiabilityLiability

PropertyProperty

Types of Insurance


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Title insuranceTitle insurance

Fidelity and surety bondsFidelity and surety bonds

Theft insuranceTheft insurance

Business interruption insuranceBusiness interruption insurance

Professional liability insuranceProfessional liability insurance

Special Types of Business Liability Insurance

Chapter 20 THE FUTURE OF BUSINESS Gitman & McDaniel 5 th Edition THE FUTURE OF BUSINESS Gitman &...

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