Chapter 18 – Financial Management
18-1
Financial Manage-
ment
chapter
=
what’s new in this edition 18.3
brief chapter outline and learning goals 18.3
lecture outline and lecture notes 18.5
PowerPoint slide notes 18.44
lecture links 18.62
lecture link 18-1: LEARNVEST TEACHES THE FINANCIAL BASICS 18.62
lecture link 18-2: THE EXPANDING ROLE OF THE CFO 18.63
lecture link 18-3: IVY LEAGUE ENDOWMENT DIFFICULTIES 18.63
lecture link 18-4: THE NUMBERS SPEAK WHEN DEALING WITH YOUR 18.64
BANKER
lecture link 18-5: MAKING PAYMENTS OVERSEAS 18.66
lecture link 18-6: THE MYTHS OF VENTURE CAPITAL 18.67
lecture link 18-7: AMERICA’S DANGEROUS LACK OF FINANCIAL FACTS 18.68
lecture link 18-8: REAL ESTATE WOES FOR REGIONAL BANKS 18.68
critical thinking exercises 18.69
critical thinking exercise 18-1: BUDGETARY CONTROL 18.69
critical thinking exercise 18-2: EXTENDING CREDIT 18.71
18
Chapter 18 – Financial Management
18-2
critical thinking exercise 18-3: FINDING THE COST OF BANK LOANS 18.72
critical thinking exercise 18-4: FINANCING OPTIONS 18.74
critical thinking exercise 18-5: OBTAINING FINANCING 18.75
bonus case 18.77
bonus case 18-1: THE REBUILDING DECISION 18.77
what’s new in
this edition
additions to the 10th edition:
• Getting to Know Carol Tomé of Home Depot
• Name That Company: General Motors
• Discussion of Credit Card Responsibility Accountability and Disclosure Act added to subsection
Credit Cards
• Legal Briefcase: Financial Order of Financial Martial Law?
• Making Ethical Decisions: Good Finance or Bad Medicine?
Chapter 18 – Financial Management
18-3
• Legal Briefcase
• Reaching Beyond Our Borders
brief chapter outline
and learning goals
c h a p t e r 18
Financial Management
Getting To Know CAROL TOMÉ, CFO of HOME DEPOT
learning goal 1
Explain the role and responsibilities of financial managers.
I. THE ROLE OF FINANCE AND FINANCIAL MANAGERS
A. The Value of Understanding Finance
B. What Is Financial Management?
Chapter 18 – Financial Management
18-4
learning goal 4
Identify and describe different sources of short-term financing.
IV. OBTAINING SHORT-TERM FINANCING
Chapter 18 – Financial Management
Getting to Know CAROL TOMÉ, CFO of HOME DEPOT
Tomé started at Home Depot in 1995 and moved up to CFO in 2001. At that time, the
country was in a building frenzy and Home Depot was opening new stores left and right.
Once building slowed later in the decade, Tomé’s financial focus turned from opening new
stores to implementing new technology.
learning goal 1
Explain the role and responsibilities of financial managers.
I. THE ROLE OF FINANCE AND FINANCE MAN-
AGERS
A. WHAT IS FINANCIAL MANAGEMENT?
1. Finance activities include:
a. Preparing budgets
sets such as plant, equipment, and machin-
ery
funds within the firm.
its goals and objectives.
At one time this company was the largest automobile maker in the world. Due to se-
vere financial problems in 2009, the company came very close to extinction. A $7
billion government-backed loan and an additional $43 billion government invest-
ment in the company helped it survive. It is now attempting a comeback as a much
smaller company. Name that company.
(Students should read the chapter before guessing the company’s name: GM.)
Chapter 18 – Financial Management
Financial
Management
Copyright © 2012 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Chapter 18
(See complete PowerPoint slide notes on page 18.44.)
(See complete PowerPoint slide notes on page 18.44.)
(See complete PowerPoint slide notes on page 18.45.)
Financial management skills are essential to sustain person-
al success. Alexa von Tobel developed a website to help oth-
ers understand finance. (See the complete lecture link on page
18.62 in this manual.)
(See complete PowerPoint slide notes on page 18.45.)
• Financial Management —
The job of managing a firm
’
s
resources to meet its goals
and objectives.
FINANCIAL MANAGEMENT
18-6
LG1
The Role of
Finance and
Financial
Managers
(See complete PowerPoint slide notes on page 18.45.)
Chapter 18 – Financial Management
18-7
b. The role of an ACCOUNTANT is like that of
a skilled technician who takes measure of a
charge of financial operations, generally the
5. The need for careful financial management re-
6. The text gives the example of GM’s buyout in
2009.
Chapter 18 – Financial Management
(See complete PowerPoint slide notes on page 18.46.)
(See complete PowerPoint slide notes on page 18.46.)
WHAT FINANCIAL
MANAGERS DO
18-9
LG1
The Role of
Finance and
Financial
Managers
(See complete PowerPoint slide notes on page 18.47.)
Today’s CFO is a combination strategist, venture capitalist,
and chief communicator. (See the complete lecture link on
page 18.62 in this manual.)
The Ivy League’s investment guru managed to bring in mil-
lions through investments. However, after the recession hit,
much of that money is needed to pay off debts. (See the com-
plete lecture link on page 18.63 in this manual.)
(See complete PowerPoint slide notes on page 18.47.)
18-9
B. THE VALUE OF UNDERSTANDING FINANCE
1. The most common ways for firms to FAIL FI-
NANCIALLY are:
4. Financial understanding is also important to any
one who wants to start a business or make an
C. WHAT IS FINANCIAL MANAGEMENT?
Chapter 18 – Financial Management
1) Undercapitalization
2) Poor control over
cash flow
3) Inadequate expense
control
WHY DO FIRMS
FAIL FINANCIALLY?
The Value of
Understanding
Finance
18-11
LG1
(See complete PowerPoint slide notes on page 18.48.)
(See complete PowerPoint slide notes on page 18.48.)
(See complete PowerPoint slide notes on page 18.48.)
Chapter 18 – Financial Management
a. Buying merchandise on credit (ACCOUNTS
much money on BAD DEBTS
taxes.
5. It is the INTERNAL AUDITOR, usually a mem-
Chapter 18 – Financial Management
1. It involves analyzing short-term and long-term
MONEY FLOWS to and from the firm.
2. The overall objectives of financial planning are
USE OF MONEY.
3. STEPS IN FINANCIAL PLANNING:
a. FORECASTING both long-term and short-
2. A CASH FLOW FORECAST is a forecast that
predicts cash inflows and outflows in future pe-
a. The inflows and outflows of cash are based
on expected sales revenues and on various
costs and expenses.
Chapter 18 – Financial Management
(See complete PowerPoint slide notes on page 18.49.)
(See complete PowerPoint slide notes on page 18.49.)
Chapter 18 – Financial Management
ing 5 or 10 years into the future.
specific resources throughout the firm.
a. The CAPITAL BUDGET is a budget that
highlights a firm’s spending plans for major
sums of money.
Chapter 18 – Financial Management
This exercise asks the students to analyze a company’s
monthly budgetary report to determine which expenses are
over- or underbudget. (See complete exercise on page 18.69 of
this manual.)
(See complete PowerPoint slide notes on page 18.49.)
(See complete PowerPoint slide notes on page 18.50.)
Chapter 18 – Financial Management
b. The CASH BUDGET estimates cash in-
flows and outflows during a particular peri-
4. The final step in financial planning is to ES-
TABLISH FINANCIAL CONTROLS.
nues, costs, and expenses with its budget.
3. Control procedures help managers identify var-
iances to the financial plan and make correc-
5. Example: the rapid spike and rapid fall in oil
prices in 2011.
Chapter 18 – Financial Management
FINANICAL PLANNING
18-18
LG2
Working with
the Budget
Process
(See complete PowerPoint slide notes on page 18.50.)
This text figure presents a sample cash budget for Very
Vegetarian, showing the cash inflows and outflows.
Just as with corporations, individuals can compile a month-
ly budget of income and expenses.
• Financial Control — A process
in which a firm periodically
compares its actual revenues,
costs and expenses with its
budget.
ESTABLISHING
FINANCIAL CONTROL
Establishing
Financial
Control
18-19
LG2
(See complete PowerPoint slide notes on page 18.50.)
(See complete PowerPoint slide notes on page 18.51.)
(See complete PowerPoint slide notes on page 18.51.)
Chapter 18 – Financial Management
learning goal 3
ness
2. Money has TIME VALUE—$200 today is more
valuable than $200 a year from today.
bearing accounts.
4. Efficient cash management is particularly im-
1. Making credit available helps keep current cus-
tomers happy and attracts new ones.
Chapter 18 – Financial Management
PPT 18-22
Key Needs for Operational Funds in
a Firm
(See complete PowerPoint slide notes on page 18.51.)
legal
briefcase
(Text page 501)
PPT 18-23
Financial Order
or Financial Mar-
tial Law?
• In Michigan, half of the state’s communities are
in financial distress.
• Local Government and School District Fiscal
Accountability Act allows cities, towns, and school
districts to be taken over by state-appointed
emergency financial managers (EFMs) selected
by the Governor.
• Indiana is considering similar legislation. New
York and other states’ boards have been given
similar power.
FINANCIAL ORDER or
FINANCIAL MARTIAL LAW?
(Legal Briefcase)
18-20
(See complete PowerPoint slide notes on page 18.52.)
PPT 18-24
How Small Businesses Can
Improve Cash Flow
HOW SMALL BUSINESSES
CAN IMPROVE CASH FLOW
• Be more aggressive in
collecting accounts receivable.
• Offer customers discounts for
paying early.
• Take advantage of special
payment terms from vendors.
• Raise prices.
• Use credit cards discriminately.
Source: American Express Small Business Monitor. 18-24
LG3
The Need for
Operating
Funds
(See complete PowerPoint slide notes on page 18.52.)
MAKING
ethical
decisions
(Text page 503)
PPT 18-25
Good Finance or
Bad Medicine?
• You’re a new hospital administrator at a small
hospital that, like many others, is experiencing
financial problems.
• You suggest discontinuing the hospital’s large
stockpile of drugs and shift to ordering them just
when they are needed.
• Some like the idea, but the doctors claim you’re
sacrificing patients’ well-being for cash. What do
you do? What could be the result of your
decision?
GOOD FINANCE
or BAD MEDICINE?
(Making Ethical Decisions)
18-25
(See complete PowerPoint slide notes on page 18.52.)
2. During 2008, credit was especially critical since
banks were hesitant to make loans.
3. If a firm offers credit, as much as 25% of a
company’s assets can be tied up in AC-
4. Some of the firm’s available funds are needed
to pay for the goods or services already sold.
CREDIT HISTORY of all credit customers.
1. Providing the inventory that customers expect,
firm’s available funds to maximizing profitability.
1. CAPITAL EXPENDITURES are major invest-
ments in either tangible long-term assets such