Chapter

17
Financial Management

Learning Objectives
1

Define finance and explain the role of financial managers. Describe the components of a financial plan and the financial planning process. Outline how organizations manage their assets. Compare the two major sources of funds for a business, and explain the concept of leverage.

Identify sources of short-term financing for business operations. Discuss long-term financing options. Describe mergers, acquisitions, buyouts, and divestitures.

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The Business Function of Finance

Finance planning, obtaining, and managing the companys funds in order to accomplish its objectives

Maximizing overall worth Meeting expenses Investing in assets Increasing profits to shareholders

The Role of the Finance Manager

Implement the firms financial plan Determine the most appropriate source of funds Many CFOs are members of the board of directors

Risk-Return Tradeoff

The process of maximizing the wealth of the firms shareholders by striking the optimal balance between risk and return.

Financial Planning

Financial Plan the inflows and outflows and sources of funds. Financial plans are built by answering the following questions:

What funds will the firm require during the planning period? When will it need additional funds? Where will it obtain the necessary funds?

Financial plans are based on the forecasts of costs and expected sales activities for a given period.

Managing Assets
Sound financial management requires assets to be managed and acquired.

What a firm owns Use of funds

Short-Term Assets

Cash
Marketable Securities Accounts Receivable

Inventory

Capital Investment Analysis

Long-lived assets Produce economic benefit for more than one year Substantial investments Capital Investment Analysis

Expansion: new assets Replacement: upgrading assets

Managing International Assets

Todays firms have facilities and assets worldwide. Sales occur outside of the home country. International assets require the management of activities to reduce the financial risk of exchange rates.

Balance

Sources of Funds and Capital Structure

Debt Capital funds obtained through borrowing. Equity Capital investment in the firm in exchange for ownership.

Leverage and Capital Structure

Goal: increasing the rate of return on funds invested by borrowing funds

Mixing Short and Long-Term Funds

Short-term funds

Current liabilities Less expensive Volatile interest rates

Long-term debt and equity Used for long-term assets

Long-term funds

Dividend Policy

Dividends are cash payments to shareholders.

Highest dividend yielding stocks

Financial managers must make decisions regarding their dividend policy.

Should we pay a dividend? When should it be paid?

Short-Term Funding Options

Trade Credit
Short-term Loans Commercial Paper

Sources of Long-Term Financing

Public Sale of Stocks and Bonds Private Placements Venture Capitalists Private Equity Funds

Hedge Funds

Mergers, Acquisitions, Buyouts, and Divestitures

Financial managers evaluate mergers, acquisitions, and other opportunities.

Leveraged buyouts Divestiture

Sell-off/Spin-off