WEEK 13:
FINANCIAL MANAGEMENT
BUSN 102 – Özge Can
Financial Management
Financial Management Planning for a firm’s money needs and managing
the allocation and spending of funds
Three fundemental concepts: Balancing short-term and long-term demands Balancing potential risks and rewards Balancing leverage and flexibility
18-2
Three Fundamental Concepts
18-3
Financial Management
Risk/ Return Trade-Off The balance of potential risks against potential
rewards
Example: A company with free cash: Invest in the stock market? Put the money in a bank account? Invest in a new facility or a new product?
18-4
Tasks of Financial Managers: Ultimate responsibility => Making
decisions about alternative sources and uses of funds with the goal of maximizing company’s value
1) Develop and implement financial plans
2) Monitor cash flows and manage cash reserves
3) Make budgets
5
1. Developing a Financial Plan Financial Plan
A document that outlines the funds needed for a certain period of time, along with the sources and intended uses of those funds
Uses input from three sources: Strategic plan Company’s financial statements External financial environment
18-6
Finding and Allocating Funds
18-7
2. Monitoring Cash Flows
Cash is necessary to: Purchase the needed assets and supplies Pay dividends to shareholders
Liquidity Crisis Having insufficient cash to meet short-term needs
18-8
2. Monitoring Cash Flows
In order to maintain positive cash flows: Monitor working capital accounts
Working capital accounts: A firm’s cash on hand as well as economic value
that can be converted to cash (inventory) or expected from customers (account receivable) minus what is scheduled to pay out (accounts payable)
18-9
2. Monitoring Cash Flows18-10
3. The Budgeting Process
Budget: A planning and control tool that reflects expected
revenues, operating expenses, and cash receipts and outlays
18-11
Budgeting Challenges:18-12
The Budgeting Process
Hedging Protecting against cost increases with contracts that
allow a company to buy supplies in the future at designated prices
Rolling forecasts Reviewing economic performance regularly to see
whether budget needs to be modified Scenario planning
Identfying two or more ways that events could unfold and having budgetary responses for each one
18-13
Types of Budgets:
Start-Up Budget A budget that identifies the money a new
company will need to spend to launch operations
Operating Budget (Master Budget) A budget that identifies all sources of revenue
and coordinates the spending of those funds throughout the coming year
18-14
Types of Budgets:
Capital Budget A budget that outlines expenditures for real
estate, new facilities, major equipment, and other capital investments
Project Budget A budget that identifies the costs needed to
accomplish a particular project
18-15
Financing Alternatives:
1) Debt Financing Arranging funding by borrowing money
2) Equity Financing Arranging funding by selling ownership shares in
the company, publicly or privately
18-16
Debt Financing vs. Equity Financing
18-17