Chapter 18 – Financial Management
18-1
chapter
.
Financial Management
what’s new in this edition 18.3
brief chapter outline and learning objectives 18.5
lecture outline and lecture notes 18.7
PowerPoint slide notes 18.49
lecture enhancers 18.67
lecture enhancer 18–1: LEARNVEST TEACHES THE FINANCIAL BASICS 18.67
lecture enhancer 18-2: THE EXPANDING ROLE OF THE CFO 18.68
lecture enhancer 18-3: IVY LEAGUE ENDOWMENT DIFFICULTIES 18.68
lecture enhancer 18-4: CROWDFUNDING BEYOND KICKSTARTER 18.69
lecture enhancer 18-5: THE NUMBERS SPEAK WHEN DEALING WITH YOUR BANKER 18.69
lecture enhancer 18-6: AMERICA’S DANGEROUS LACK OF FINANCIAL FACTS 18.72
lecture enhancer 18-7: REAL ESTATE WOES FOR REGIONAL BANKS 18.73
18
Chapter 18 – Financial Management
18-2
critical thinking exercises 18.74
critical thinking exercise 18–1: BUDGETARY CONTROL 18.74
critical thinking exercise 18–2: EXTENDING CREDIT 18.77
critical thinking exercise 18–3: FINDING THE COST OF BANK LOANS 18.79
critical thinking exercise 18–4: FINANCING OPTIONS 18.81
critical thinking exercise 18–5: OBTAINING FINANCING 18.82
bonus case 18.84
bonus case 18–1: THE REBUILDING DECISION 18.84
Chapter 18 – Financial Management
18-3
what’s new in
this edition
additions to the 11th edition:
• Getting to Know Sabrina Simmons of Gap
• Name That Company: Pfizer
• Adapting to Change: Threading the Financial Needle
• Reaching Beyond Our Borders: Are They Heroes or Hustlers?
• Video Case: Tom & Eddie’s
revisions to the 11th edition:
• Making Ethical Decisions: Good Finance or Bad Medicine?
• Statistical data and examples throughout the chapter were updated to reflect current information.
deletions from the 10th edition:
• Getting to Know Carol Tome
• Name That Company: GM
• Social Media in Business
• Legal Briefcase
Chapter 18 – Financial Management
18-4
Chapter 18 – Financial Management
18-5
brief chapter outline
and learning objectives
CHAPTER 18
FINANCIAL MANAGEMENT
Getting to Know SABRINA SIMMONS, of GAP
learning objective 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?
learning objective 2
Outline the financial planning process, and explain the three key budgets in the
financial plan.
II. FINANCIAL PLANNING
A. Forecasting Financial Needs
B. Working with the Budget Process
C. Establishing Financial Controls
learning objective 3
Explain why firms need operating funds.
III. THE NEED FOR OPERATING FUNDS
A. Managing Day-by-Day Needs of the Business
B. Controlling Credit Operations
C. Acquiring Needed Inventory
D. Making Capital Expenditures
E. Alternative Sources of Funds
learning objective 4
Identify and describe different sources of short-term financing.
Chapter 18 – Financial Management
18-6
IV. OBTAINING SHORT-TERM FINANCING
A. Trade Credit
B. Family and Friends
C. Commercial Banks
D. Different Forms of Short-Term Loans
E. Factoring Accounts Receivable
F. Commercial Paper
G. Credit Cards
learning objective 5
Identify and describe different sources of long-term financing.
V. OBTAINING LONG-TERM FINANCING
A. Debt Financing
B. Equity Financing
C. Comparing Debt and Equity Financing
D. Lessons Learned from the Recent Financial Crisis
VI. SUMMARY
Chapter 18 – Financial Management
18-7
Getting to Know SABRINA SIMMONS, of GAP
As CFO of Gap, Simmons balanced the company’s books while accepting and
learning from failures.
learning objective 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
b. Doing cash flow analysis
c. Planning for the expenditure of funds on as-
sets such as plant, equipment, and machinery
2. FINANCE is the function in a business that ac-
quires funds for the firm and manages those
funds within the firm.
a. FINANCIAL MANAGEMENT is the job of
managing a firm’s resources so it can meet its
goals and objectives.
b. The role of an ACCOUNTANT is like that of a
skilled technician who takes measure of a
The company spends over $6 billion a year on research to develop new products even though
it may take as longs as ten years before the products are approved and introduced to the
market. Since long-term financing is very critical in our business, high-level managers are very
involved in the finance decisions. Name that company.
(Students should read the chapter before guessing the company’s name: Pfizer.)
Chapter 18 – Financial Management
18-8
PPT 18-1
Chapter Title
Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Financial
Management
CHAPTER 18
PPT 18-2
Learning Objectives
LEARNING OBJECTIVES
18-2
1. Explain the role and responsibilities of financial
managers.
2. Outline the financial planning process, and explain
the three key budgets in the financial plan.
3. Explain why firms need operating funds.
4. Identify and describe different sources of short-term
financing.
5. Identify and describe different sources of long-term
financing.
PPT 18-3
Sabrina Simmons
SABRINA SIMMONS
Gap
18-3
• Simmons earned her
bachelor’s in finance at UC-
Berkeley and her MBA at
UCLA.
• Joined Gap as treasurer in
2001, balanced the books, and
eliminated the reliance on risky
investments.
• Encourages Gap to not be
afraid to create new brands,
even after failure.
PPT 18-4
Name That Company
NAME that COMPANY
18-4
This company spends over $6 billion a year on
research to develop new products even though it
may take as long as ten years before the
products are approved and introduced to the
market. Since long-term funding is very critical in
our business, high-level managers are very
involved in the finance decisions.
Name that company!
(See complete PowerPoint slide notes on page 18.49.)
lecture enhancer 18-1
LEARNVEST TEACHES THE FINAN-
CIAL BASICS
Financial management skills are essential to sustain personal
success. Alexa von Tobel (Bonus Chapter D profile) developed
a website to help others understand finance. (See the complete
lecture enhancer on page 18.67 of this manual.)
PPT 18-5
What’s Finance?
WHAT’S FINANCE?
18-5
• Finance — The function in a business that acquires
funds for a firm and manages them within the firm.
• Finance activities include:
– Preparing budgets
– Creating cash flow analyses
– Planning for expenditures
LO 18-1
PPT 18-6
Financial Management
FINANCIAL MANAGEMENT
18-6
• Financial Management —
The job of managing a firm
’
s
resources to meet its goals and
objectives.
LO 18-1
Chapter 18 – Financial Management
18-9
company’s health and writes a report.
c. FINANCIAL MANAGERS are managers
who examine financial data prepared by ac-
countants and recommend strategies for im-
proving the financial performance of the firm.
3. A manager can’t make sound financial decisions
without understanding accounting information.
a. Most organizations designate a manager in
charge of financial operations, generally the
CHIEF FINANCIAL OFFICER (CFO).
b. In large and medium-sized companies, the
CFO is responsible for both accounting and
finance functions.
c. Financial management could also be as-
signed to the company TREASURER or
VICE PRESIDENT OF FINANCE.
d. A COMPTROLLER is the chief accounting
officer.
4. Two key responsibilities of the financial manager
are:
a. To obtain funds
b. To control the use of those funds
5. The need for careful financial management re-
mains an ONGOING CHALLENGE in a busi-
ness throughout its life.
6. The text gives the examples of GM’s buyout in
2009.
Chapter 18 – Financial Management
18-10
PPT 18-7
Financial Managers
• Financial Managers — Examine financial data and
recommend strategies for improving financial
performance.
FINANCIAL MANAGERS
18-7
• Financial managers are
responsible for:
– Paying company bills
– Collecting payments
– Staying abreast of market
changes
– Assuring accounting
accuracy
LO 18-1
PPT 18-8
Who’s Who in Finance
WHO’S WHO in FINANCE
18-8
• CFO — Chief Financial Officer
• CFP — Certified Financial
Planner
• CFA — Chartered Financial
Analyst
• Comptroller — Chief
Accounting Officer
LO 18-1
PPT 18-9
Four Signs You Need a CFO
FOUR SIGNS YOU NEED a CFO
18-9
1. You do not have information on key items like
cash flow, working capital, or forecasts.
2. No one is carefully watching and analyzing your
expenses.
3. You are not aware of regulatory changes that
could affect your business.
4. You are unable to generate financial reports.
LO 18-1
Source: Karen Stern, St. Louis Small Business Monthly, January 2014.
PPT 18–10
What Financial Managers Do
TEXT FIGURE 18.1
What Financial Managers Do
WHAT FINANCIAL
MANAGERS DO
18-10
LO 18-1
lecture enhancer 18-2
THE EXPANDING ROLE OF THE
CFO
Today’s CFO is a combination strategist, venture capitalist,
and chief communicator. (See the complete lecture enhancer
on page 18.68 of this manual.)
lecture enhancer 18-3
IVY LEAGUE ENDOWMENT DIFFI-
CULTIES
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 enhancer on page 18.68 of this manual.)
PPT 18-11
What Worries Financial Managers
WHAT WORRIES FINANCIAL
MANAGERS
Source: CFO Magazine, www.cfo.com, accessed November 2014. 18-11
• Consumer demand for their
firm’s products
• Credit markets and interest
rates
• Financial regulations from the
government
• Volatility of the dollar
• Foreign competition
• Environmental regulations
LO 18-1
Chapter 18 – Financial Management
18-11
B. THE VALUE OF UNDERSTANDING FINANCE
1. The most common ways for firms to FAIL FI-
NANCIALLY are:
a. UNDERCAPITALIZATION, or not enough
funds to start with
b. Poor CASH FLOW, or cash in minus cash
out
c. INADEQUATE EXPENSE CONTROL
2. The text describes a small organization called
Parsley Patch, begun with a $5,000 investment.
a. The company initially sold its product
through gourmet stores.
b. When the owners expanded into the health-
food market, sales soared.
c. However, neither woman understood cash
flow procedures nor how to control expens-
es, and profits did not materialize.
d. They eventually hired a CPA and an experi-
enced financial manager, and soon they
earned a comfortable margin on operations.
3. This company’s experience illustrates the im-
portance of UNDERSTANDING FINANCE BE-
FORE starting a business.
4. Financial understanding is also important to any
one who wants to start a business or make an
investment.
C. WHAT IS FINANCIAL MANAGEMENT?
Chapter 18 – Financial Management
18-12
PPT 18-12
Why Do Firms Fail Financially?
WHY DO FIRMS
FAIL FINANCIALLY?
18-12
1) Undercapitalization
2) Poor control over cash
flow
3) Inadequate expense
control
LO 18-1
PPT 18-13
Top Financial Concerns of Compa-
ny CFOs—Macro
TOP FINANCIAL CONCERNS
of COMPANY CFOs – MACRO
Source: CFO Magazine, www.cfo.com, accessed November 2014. 18-13
• Consumer demand
• Federal-government policies
• Price pressure from
competitors
• Credit markets/interest rates
• Global financial instability
LO 18-1
PPT 18-14
Top Financial Concerns of Compa-
ny CFOs—Micro
TOP FINANCIAL CONCERNS
of COMPANY CFOs – MICRO
18-14
• Ability to maintain margins
• Ability to forecast results
• Maintaining morale/
productivity
• Cost of healthcare
• Working-capital
management
LO 18-1
Source: CFO Magazine, www.cfo.com, accessed November 2014.
Chapter 18 – Financial Management
18-13
1. Financial managers are responsible for:
a. Buying merchandise on credit (ACCOUNTS
PAYABLE)
b. Collecting payment from customers (AC-
COUNTS RECEIVABLE)
c. Making sure the company doesn’t lose too
much money on BAD DEBTS
2. These functions are especially critical to small
and medium-sized companies.
3. Financial managers must keep up with opportu-
nities and prepare for change.
4. Financial managers also handle TAX MAN-
AGEMENT.
a. As tax laws change, finance specialists must
carefully analyze the TAX IMPLICATIONS
of various decisions.
b. Businesses of all sizes constantly manage
taxes.
5. It is the INTERNAL AUDITOR, usually a mem-
ber of the firm’s finance department, who checks
on the journal, ledgers, and financial statements
to make sure that all transactions are properly
treated.
a. Without such audits, accounting statements
would be less reliable.
b. It is important that internal auditors be OB-
JECTIVE and CRITICAL of any improprie-
ties.
Chapter 18 – Financial Management
18-14
Chapter 18 – Financial Management
18-15
learning objective 2
Outline the financial planning process, and explain the three key budgets in the fi-
nancial plan.
II. FINANCIAL PLANNING
A. Financial planning is a key responsibility of the fi-
nancial manager.
1. It involves analyzing short-term and long-term
MONEY FLOWS to and from the firm.
2. The overall objectives of financial planning are
to OPTIMIZE PROFITS and make the BEST
USE OF MONEY.
3. STEPS IN FINANCIAL PLANNING:
a. FORECASTING both long-term and short-
term financial needs
b. DEVELOPING BUDGETS to meet those
needs
c. ESTABLISHING FINANCIAL CONTROL to
see how well the company is following the
financial plans
B. FORECASTING FINANCIAL NEEDS
1. A SHORT-TERM FORECAST is a forecast that
predicts revenues, costs, and expenses for a pe-
riod of one year or less.
2. A CASH FLOW FORECAST is a forecast that
predicts cash inflows and outflows in future peri-
ods, usually months or quarters.
a. The inflows and outflows of cash are based