(FINAL) Chapter 17 - Financial Management

Obtaining Long Term Financing: Explain debt financing by issues bonds

- A bond is a long term debt obligation of a corporate government - a company that issues a bond has a legal obligation to make regular interest payments to investors and to repay the entire bond principal amount at a prescribed time, called the maturity date.

Obtaining Short Term Financing: What is a Line of Credit?

- A given amount of unsecured funds a bank will lend to a business - Not guaranteed to a business, it helps if they have a developed relationship.

Obtaining Short Term Financing: What is a Secured loan?

- A loan that is backed by something valuable such as property (known as collateral) - If the borrower fails to pay the loan, the lender may take possession of the collateral

What are the 2 types of budgets established in a firms financial plan?

- An operating master budget - A capital budget - A cash budget

What positions does a career in finance give you?

- Analyst position - Management - Financial Consultant - Investment Banker - Chief information officer AND MORE (stupid slide)

Obtaining Short Term Financing: What is Revolving Credit Agreement?

- As a business matures and becomes more financially secure, the amount of credit is often increased. Firms will then apply for a revolving credit agreement in which a line of credit is guaranteed

FUNDS: 3. Explain Acquiring Inventory

- Effective marketing implies a clear customer orientation - To satisfy customers, businesses must maintain inventories that often involve a sizeable expenditure of funds - It is important for a business to understand that a poorly managed inventory system can seriously affect cash flow and drain it finances dry

Obtaining Long Term Financing: What is Equity Financing?

- Involved selling ownership in the firm in the form of stock, or using earnings that have been retained by the company to reinvest in the business (retained earnings) - A business can also seek equity financing by selling ownership in the firm to venture capitalists

FUNDS: 2. Explain Controlling Credit Operations

- The major problem with selling on credit it that a large percentage of a non-retailer's business assets could be tied up in its credit accounts

Obtaining Short Term Financing: Explain commercial finance companies

- They make short term loans to borrower who offer tangible assets - This is if a business is unable to secure a short term loan from a bank, a financial manager may obtain short term funds from these non deposit types of organizations

Obtaining Short Term Financing: What is commercial paper?

-Consists of unsecured promissory notes, in amounts of $100,000 and up, that come due in 365 days -When a large corporations needs funds for just a few months and wants to get lower rates of interest than those charged by banks, one strategy is to sell commercial paper

How can you obtain Long Term Financing?

-Firms can borrow funds by either getting a loan from a lending institution or issuing bonds -Debt financing involves borrowing money that the company has a legal obligation to repay

FUNDS: 1. Explain Managing day to day business

-The challenges of sound financial management is to see that funds are available to meet these daily cash needs -Money has what is called a time value

What are 2 Alternative Sources of funds?

1. Debt Financing 2. Equity Financing

What are the 4 key areas in an organization in which funds must be available?

1. Managing day to day needs of the business 2. Controlling credit operations 3. Acquiring needed inventory 4. Making capital expendituress

What are all the different ways of obtaining short term financing?

1. Trade Credit 2. Promissory Note 3. Family and Friends 4. Commerical banks & other financial institiutions 5. Secured loan 6. Unsecured loan 7. Line of Credit 8. Revolving Credit 9. Commercial Finance companies 10. Factoring 11. commercial Paper

What are the 3 most common reasons a firm fails financially?

1. Undercapitalization (insufficient funds to run a business) 2. Poor control over cash flow 3. Inadequate expense control

What are the 3 major questions financial managers ask in setting long term financial objectives?

1. What are the organizations long term goals and objectives? 2. What are the financial requirements needed to achieve these long term goals and objectives? 3. What sourced of long term capital are available?

What would you commonly find in business invoices?

2/10, net 30 -Means the buyer can take a 2 percent discount if the invoice is paid within 10 days, the total bill is due (net) in 30 days if the purchaser does not take advantage of the discount

Obtaining Short Term Financing: What is an Unsecured loan?

A loan that doesn't require a borrower to offer the lending institution any collateral - The most difficult kind of loan to get from a bank

Obtaining Long Term Financing: What is a term loan agreement?

A promissory note that requires the borrower to repay the loan in specific instalments (eg. monthly or yearly) -Major advantage of this is that the interest paid on the long term debt is tax deductable

Obtaining Short Term Financing: What is factoring?

A relatively expensive source of short term funds, which is the process of selling accounts receivable for cash

Obtaining Short Term Financing: Commercial banks and other financial institutions

Banks are highly sensitive to risk and are often reluctant to lend money to small new businesses

FUNDS: 4. Explain Making Capital Expenditures

Capital Expenditures are major investments in either tangible long-term assets such as land, buildings and equipment, or intangible assets such as patents, trademarks, and copyrights. -These expenditures often require a huge portion of the organizations funds

What is a Cash Budget?

Estimates a firms projected cash inflows and outflows that the firm can use to plan for any cash shortages or surpluses during a given period -Important guidelines that assist managers in anticipating borrowing, dept repayment, operating expenses and short-term investments

What is a Capital Budget?

Highlighting a firms spending pans for major asset purchases that often require large sums of money

What is Financial control?

Is a process where a firm periodically compares its actual revenues, costs and expenses with its budget -Most comopanies hold monthly financial reviews as a way to ensure financial control

2. What is Equity financing?

Is money raised from operations within the firm or through the sale of ownership in the firm (shares)

What is a stock certificate?

It is evidence of stock ownership that specifies the name of the company, the number of shares it represents, and the type of stock being issued.

What is the Operating (master) Budget?

It ties together all of the firms other budgets and summarizes the business's proposed financial activities -Generally the most detailed

Obtaining Short Term Financing: What is a promissory note?

It's a written contract with a promise to pay a supplier a specific sum of money at a definite time - Way to obtain short term financing -Promissory notes can be sold by the supplier to a bank at a discount

What is venture capital?

Money that is invested in new or emerging companies that are perceived as having great profit potential. - possible source of a start up capital for new companies or companies moving into expanding stages of business

What are Retained Earnings?

Often a major source of long term funds, especially for small businesses, which have fewer financing alternatives, such as selling bonds or stock, than large businesses do.

What are Dividends?

Part of a firms profits that may be distributed to shareholders as either cash payments or additional shares of stock

What are financial managers responsible for?

Paying company bills at the appropriate time and for collecting overdue payments to make sure the company does not lose too much money to bad debts

What is a Long Term forecast?

Predicts revenues, costs, and expenses for a period longer than one year, and sometimes as far as five or ten years into the future. -This forecast plays a crucial part in the company's long-term strategic plan

What is a short term forecast?

Predicts revenues, costs, and expenses for a period of one year or less -Part of the short term forecast may be in the form of a cash flow forecast, which predicts the cash inflows and outflows in future periods, usually months or quarters

1. What is Debt Financing?

Refers to funds raised through various forms of borrowing that must be repaid

What is the Budget Process?

The budgeting process depends on the accuracy of the firms financial statements - A budget sets forth management's expectations for revenues and on the basis of those expectations, allocated the use of specific resources throughout the firm

What is Financial Management?

The business function that is responsible for cash - acquisition and disbursements

What is Initial Public Offering (IPO)

The first time a corporation offers to sell new stock to the general public

What are common shares?

The most basic form of ownership in a firm. In fact, if a company issues only one type of stock it must be common

Obtaining Short Term Financing: What is Trade Credit?

The practice of buying goods or services now and paying for them later - way to obtain short term financing

What happens with owners of a preferred share?

They have prior claim on company assets if the firm is forced out of business and its assets are sold

What do Financial Managers do?

They obtain money and then control the use of that money effectively. Financial managers are responsible for seeing that the company pays its bills