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Chapter 18 - Financial Management
lecture link 18-6
THE MYTHS OF VENTURE
CAPITAL
Misconceptions about the venture capital industry are based
on myths that have developed among firms looking for VC
financing. (See the complete lecture link on page 18.67 of this
manual.)
TEXT FIGURE 18.6
Differences between Debt and
Equity Financing
(Text page 513)
PPT 18-46
Differences between Debt and
Equity Financing
(See complete PowerPoint slide notes on page 18.60.)
PPT 18-47
Using Leverage for Funding Needs
(See complete PowerPoint slide notes on page 18.60.)
critical thinking
exercise 18-5
OBTAINING FINANCING
This exercise presents three business scenarios and asks the
students to suggest financing options. (See complete exercise
on page 18.75 of this manual.)
Chapter 18 - Financial Management
18-42
a. LEVERAGE RATIOS are a way to compare
leverage relative to other firms in the indus-
E. LESSONS FROM THE FINANCIAL CRISIS
1. The collapse of financial markets in 2008 fo-
cused attention on the failure of financial man-
agement.
2. Credit tightened as financial institutions instituted
more restrictions.
3. Financial managers will have to earn back the
public’s trust.
Chapter 18 - Financial Management
TEXT FIGURE 18.7
Using Leverage (Debt) versus
Equity Financing
(Text page 514)
This text figure shows two options (100% equity and 90%
debt/10% equity) for raising the $500,000 that Very Vegetari-
an needs.
PPT 18-48
Lessons of the Financial Crisis
(See complete PowerPoint slide notes on page 18.61.)
lecture link 18-7
AMERICA’S DANGEROUS LACK
OF FINANCIAL FACTS
Some believe the recent financial chaos could have been
avoided if more companies were transparent with their finan-
cial facts (See the complete lecture link on page 18.68 in this
manual.)
lecture link 18-8
REAL ESTATE WOES FOR
REGIONAL BANKS
Before the recession, local banks lacked the clout to diver-
sify their investments like the big banks. Instead they turned to
commercial real estate, and that led to big problems (See the
complete lecture link on page 18.68 in this manual.)
progress
assessment
(Text page 514)
PPT 18-49
Progress Assessment
(See complete PowerPoint slide notes on page 18.61.)
18-44
PPT 18-1
Chapter Title
Financial
Management
Copyright © 2012 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Chapter 18
PPT 18-2
Learning Goals
PPT 18-3
Carol Tomé
18-45
PPT 18-4
Name That Company
Company: General Motors (GM)
PPT 18-5
What’s Finance?
The finance function is responsible for managing a scarce
resource—capital.
PPT 18-6
Financial Management
• 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
Chapter 18 - Financial Management
PPT 18-7
Financial Managers
1. This slide provides insight into the role of financial
management.
2. One point that is critical to communicate to stu-
dents is that financial managers must understand
accounting (and in fact many of them have back-
grounds in accounting), but they are not account-
ants within the company. They are decision makers
and managers in the truest sense of the word.
3. You might want to work through each of the func-
tions of the financial manager and make certain
students see exactly what’s involved in such a job.
Students often perk up when they hear that quite of-
ten next to the company CEO, the chief financial
officer (CFO) is the highest-paid person within.
PPT 18-8
Who’s Who in Finance
1. This slide presents the positions a person in finance
might hold.
2. Help students understand that there are a variety of
positions a person in finance might strive to obtain.
3. Ask the students, What are some of the func-
tions/responsibilities of each of these positions?
How are these positions alike? How might they be
different?
Chapter 18 - Financial Management
PPT 18-9
What Financial Managers Do
WHAT FINANCIAL
MANAGERS DO
18-9
LG1
The Role of
Finance and
Financial
Managers
1. This slide (based on Figure 18.1) gives the students
a broad overview of what responsibilities financial
managers have within a corporation. The CFO’s re-
sponsibilities are rooted in the functions of “con-
trol” and “treasury.”
2. The control function has its basis in the budgeting
process:
• The budget represents the quantification of
the goals and missions of the company as
manifested by the resources required to at-
tain those goals.
• The budget becomes the scorecard by
which the company as a whole is meas-
ured.
3. The other area of responsibility for CFOs is the
treasury function.
(continued)
PPT 18-9
What Financial Managers Do
(continued)
• Procurement of financial resources availa-
ble to the company
• Ongoing communication with financial
sources, investors, and debt holders who
must be kept apprised of the firm’s finan-
cial performance
• Allocation of resources within the context
of the company budget
PPT 18-10
What Worries Financial Managers
1. This slide highlights the things that worry financial
managers.
2. Financial managers are required to wear many hats
in the organization. While specific responsibilities
of a CFO will vary between large and small com-
panies, and public and closely held companies, the
principles of control and treasury responsibilities
transgress all boundaries.
3. The number of issues that financial managers face
18-48
PPT 18-11
Why Do Firms Fail Financially?
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
PPT 18-12
Top Financial Concerns of
Company CFOs—Macro
1. This slide highlights the top concerns of company
CFOs in the macroeconomy (the nation’s econo-
my).
2. The chief financial officers of companies must con-
cern themselves with a multitude of issues.
PPT 18-13
Top Financial Concerns of
Company CFOs—Micro
1. This slide highlights the top concerns of company
CFOs in the microeconomy (within their own busi-
nesses).
2. The chief financial officers of companies must
concern themselves with a multitude of issues.
Chapter 18 - Financial Management
PPT 18-14
Financial Planning
PPT 18-15
Financial Forecasting
PPT 18-16
Budgeting
1. Budgeting is critical for the organization to control
expenses and to understand revenue expectations.
2. Think of a budget as a guidepost or a reference point
for the organization’s managers.
18-50
PPT 18-17
Types of Budgets
PPT 18-18
Financial Planning
FINANICAL PLANNING
18-18
LG2
Working with
the Budget
Process
1. This slide is based on Figure 18.2.
2. The capital and cash budgets are part of the operat-
ing (master) budget.
PPT 18-19
Establishing Financial Control
• 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
Financial controls also help reveal which specific ac-
counts, departments, and people are varying from the finan-
cial plan.
Chapter 18 - Financial Management
PPT 18-20
Factors Used in Assessing
Financial Control
1. This slide highlights the factors used in assessing
financial control.
2. Financial control is used in conjunction with the
firm’s budget to ensure the organization is meeting
its commitments and goals.
3. Ask the students, Why is it important for the CFO
to maintain financial control?
PPT 18-21
Progress Assessment
1. The three finance functions are financial planning,
budgeting, and the establishment of financial con-
trol.
2. The three primary financial problems causing firms
to fail are undercapitalization, poor control of cash
flow, and inadequate expense control.
3. Short-term forecasts attempt to project revenue,
costs, and expenses for a period of one year or less,
while long-term forecasts are for a period greater
than one year.
4. A budget sets forth management’s expectations for
revenues and becomes the organization’s primary
guide for the financial operations as well as ex-
pected financial needs. The three types of budgets
are capital, cash, and operating.
PPT 18-22
Key Needs for Operational
Funds in a Firm
PPT 18-23
Financial Order or Financial
Martial 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)
18-23
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
1. The slide lists methods small businesses use to im-
prove cash flow.
2. Lack of cash flow can impact a business of any size
and may lead to the business shutting its doors.
3. It is critical that students understand cash is king
for a business of any size.
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
GOOD FINANCE
or BAD MEDICINE?
(Making Ethical Decisions)
Chapter 18 - Financial Management
18-53
PPT 18-26
Using Alternative Sources of Funds
• Debt Financing -- The
funds raised through various
forms of borrowing that must
be repaid.
• Equity Financing -- The
funds raised from within the
firm from operations or
through the sale of ownership
in the firm (such as stock).
USING ALTERNATIVE
SOURCES of FUNDS
Alternative
Sources of
Funds
18-26
LG3
PPT 18-27
Short and Long-Term Financing
• Short-Term Financing --
Funds needed for a year or
less.
• Long-Term Financing --
Funds needed for more than
a year.
SHORT and LONG-TERM
FINANCING
18-27
LG3
Alternative
Sources of
Funds
PPT 18-28
Why Firms Need Financing
Chapter 18 - Financial Management
PPT 18-29
Progress Assessment
1. Time value of money means money can grow over
time through interest earned.
2. Providing credit to customers is often necessary to
keep current customers happy and to attract new
customers. The problem with selling on credit is
that as much as 25% of the firm’s assets could be
tied up in accounts receivable. This forces the busi-
ness to use it own funds to pay for goods or ser-
vices sold to customers who bought on credit.
3. To attract customers a firm must purchase inventory
as well as invest in tangible long-term assets such as
land, buildings, and equipment, or intangible assets
such as patents, trademarks, and copyrights.
4. The primary difference between debt and equity fi-
nancing is that debt must be repaid at maturity,
while there is no obligation to repay equity financ-
ing. Interest must be paid on debt while the compa-
ny is under no obligation to issue dividends on eq-
uity financing. The interest paid is tax deductible
while dividends are not. Finally, debt holders do not
have the right to vote on company matters as equity
holders do.
PPT 18-30
Types of Short-Term Financing
Trade credit is the most common form of financing. The
terms 2/10 net 30 mean a firm can receive a 2% discount if
the bill is paid within 10 days. If it chooses not to take the
discount, the net amount is due in 30 days.
Chapter 18 - Financial Management
18-55
PPT 18-31
Types of Short-Term Financing
PPT 18-32
Difficulty of Obtaining
Short-Term Financing
Chapter 18 - Financial Management
PPT 18-33
Exploring the Financing Universe
• Peer-to-peer lending sites like Lending Club
match small businesses with lenders and receive
a fee for their services.
• Lendio claims to have developed a technology
that matches business owners with the right type
of business loan and lender.
• Lendio also offers services such as a business
plan makeover and website design for a fee.
EXPLORING the
FINANCING UNIVERSE
(Spotlight on Small Business)
18-33
1. Securing capital is the lifeblood to a small business.
2. Students can learn more about Lendio at the web-
site: www.lendio.com.
PPT 18-34
Different Forms of Short-Term Loans
PPT 18-35
Factoring
PPT 18-36
Commercial Paper
1. The commercial paper market is an important
source of funding for financially stable companies.
2. During the financial crisis that started in 2008, this
important market completely shut down, forcing
the Federal Reserve to step in and assist many
companies with their short-term financing by pur-
chasing their commercial paper.
PPT 18-37
Credit Cards
PPT 18-38
Ways to Raise Start-Up Capital
1. This slide profiles some of the unique methods
businesses can use to raise capital.
2. Trade credit and factoring are two of the oldest
methods of raising capital. To start a discussion
with students, ask what are the advantages and dis-
advantages of using each of these methods.
3. Peer-to-peer lending involves individuals loaning
money to other individuals or businesses, thus by-
passing traditional lending outlets.
4. For more information on this new method use loan
Chapter 18 - Financial Management
PPT 18-39
Progress Assessment
1. The terms 2/10 net 30 mean a firm can receive a 2%
discount if the bill is paid within 10 days. If it
chooses not to take the discount, the net amount is
due in 30 days.
2. Trade credit is buying goods and services now and
paying for them later, while a line of credit is a giv-
en amount of unsecured short-term funds a bank
will lend a business, provided the funds are readily
available.
3. A secured loan requires collateral, whereas an un-
secured loan does not.
4. Factoring is the process of sell accounts receivable
for cash. Things to consider in establishing the dis-
count rate are age of the accounts receivable, the
nature of the business, and the condition of the
economy.
PPT 18-40
Setting Long-Term Financing
Objectives
PPT 18-41
The Five Cs of Credit
1. This slide highlights the five Cs of credit that lend-
ers use to make decisions.
2. It is essential that lenders make good decisions
when deciding whether or not to loan capital to po-
tential borrowers.
not?
18-59
PPT 18-42
Using Long-Term Debt Financing
Lenders may also require certain restrictions to force the
firm to act responsibly.
PPT 18-43
Using Debt Financing by
Issuing Bonds
• Indenture Terms -- The terms of
agreement in a bond issue.
• Secured Bond -- A bond issued
with some form of collateral (i.e.
real estate).
• Unsecured (Debenture) Bond
-- A bond backed only by the
reputation of the issuing company.
USING DEBT FINANCING
by ISSUING BONDS
18-43
LG5
Debt
Financing
1. It is critical that students understand bonds are a
form of debt issued by companies.
2. The terms debt, bond, and loan are all four-letter
words that basically mean the same thing.
3. Students should walk away from this discussion
knowing that the government and private industry
compete insofar as the sale of bonds to the invest-
ing public. The issue of investor security can easily
be addressed here, as well as the differences in in-
terest rates paid on specific bonds depending on the
issuer. Students should understand that U.S. gov-
ernment bonds are considered the safest investment
in the bond market. There is a high probability that
students will be familiar with U.S. government sav-
ings bonds, and may in fact have received such a
bond as a gift. They clearly need to understand the
difference between such bonds and issues involving
investments in corporate bonds.
PPT 18-44
Securing Equity Financing
1. This slide shows how venture capitalists assess the
many pitches they receive all year.
they get their money back, but that they will also
Chapter 18 - Financial Management
PPT 18-45
Want to Attract a Venture Capitalist?
PPT 18-46
Differences between Debt
and Equity Financing
1. This slide is based on Figure 18.6.
2. Financial managers must evaluate the benefits of is-
suing debt or equity and then weigh those benefits
with the drawbacks.
PPT 18-47
Using Leverage for Funding Needs
