Financial Management

Chapter 17:
 The Role of Finance and
Financial Managers
• Finance: the function in a business that acquires
funds for the firm and manages those funds
within the firm.
• Financial Management: the job of managing a
firm’s resources so it can meet its goals and
objectives.
• Financial Managers: make recommendations to
top executives regarding strategies for improving
the financial strength of a firm.
Financial Planning
 Working with the Budget Process
• Budget: a financial plan that sets forth management’s
expectations, and, on the basis of those expectations,
allocates the use of specific resources throughout the firm.
• Types of Budgets
– Operating (Master)
– Capital
– Cash
• Financial controls: comparing actual revenues, costs, and
expenses with the budget.
Sample Cash Budget
 Need for Funds

• Managing day-to-day needs of the business

• Controlling credit operations
• Acquiring inventory
• Making capital expenditures
Sources of Short-Term and
Long-Term Financing
 Obtaining Short-Term Financing
• Trade credit
• Family and friends
• Commercial banks and other financial
institutions
• Short-term loans
• Factoring accounts receivable
• Commercial paper
• Credit cards
 Obtaining Long-Term Financing
• Debt Financing
– borrowing money from lending institutions that
must be repaid.
– term loan agreement: a promissory note that
requires the borrower to repay the loan in
specified installments.
– bond: a corporate certificate indicating that a
person has lent money to a firm (corporation or
government).
 Different Classes of Bonds
• Debenture bonds: bonds that are unsecured
(i.e., not backed by any collateral such as
equipment).
• Secured bonds: backed by some tangible asset
(collateral) that is pledged to the bondholder if
bond interest isn’t paid or the principal isn’t
paid back when promised.
 Equity Financing

Internal
Internal Retained
Retained
Sources Earnings
Earnings
Sources

Equity
Equity
Capital
Capital Venture
Venture
External Capital
Capital
External
Sources
Sources
Public
PublicSale
Saleof
of
Stock
Stock
Selling Stock as Equity Financing
• IPO: Initial Public Offering
• Stock certificate
• Dividends
• Common shares
• Preferred shares
Differences between Debt
and Equity Financing
Comparison of Bonds and
Stocks of Public Companies
Optional Features of Preferred Shares