Chapter 18 – Financial Management
18-16
PPT 18-15
Financial Planning
FINANCIAL PLANNING
18-15
• Financial planning involves analyzing short-term
and long-term money flows to and from the
company.
• Three key steps of financial planning:
1. Forecasting the firm’s short-term and long-term financial
needs.
2. Developing budgets to meet those needs.
3. Establishing financial controls to see if the company is
achieving its goals.
LO 18-2
PPT 18-16
Financial Forecasting
FINANCIAL FORECASTING
18-16
• Short-Term Forecast — Predicts revenues, costs
and expenses for a period of one year or less.
• Cash-Flow Forecast — Predicts the cash inflows
and outflows in future periods, usually months or
quarters.
• Long-Term Forecast — Predicts revenues, costs,
and expenses for a period longer than one year and
sometimes as long as five or ten years.
LO 18-2
Chapter 18 – Financial Management
18-17
on expected sales revenues and on various
costs and expenses.
b. A firm often uses its past financial state-
ments as a basis for projecting expected
sales and various costs and expenses.
3. A LONG-TERM FORECAST is a forecast that
predicts revenues, costs, and expenses for a pe-
riod longer than 1 year, sometimes extending 5
or 10 years into the future.
a. This forecast is crucial to the company’s
long-term strategic plan.
b. The long-term financial forecast gives man-
agers an overview of the income or profit po-
tential with different strategic plans.
C. WORKING WITH THE BUDGET PROCESS
1. A BUDGET is a financial plan that sets forth
management’s expectations, and, on the basis
of those expectations, allocates the use of spe-
cific resources throughout the firm.
a. The KEY FINANCIAL STATEMENTS form
the basis for the budgeting process.
b. A budget becomes the primary GUIDE for
the financial operations and financial needs.
2. There are SEVERAL BUDGETS in a company:
a. The CAPITAL BUDGET is a budget that
highlights a firm’s spending plans for major
asset purchases that often require large
sums of money.
Chapter 18 – Financial Management
18-18
critical thinking
exercise 18-1
BUDGETARY CONTROL
This exercise asks the students to analyze a company’s month-
ly budgetary report to determine which expenses are over- or
under-budget. (See the complete exercise on page 18.74 of this
manual.)
PPT 18-17
Budgeting
BUDGETING
18-17
• Budget — Sets forth management
’
s expectations for
revenues and allocates the use of specific resources
throughout the firm.
• Budgets depend heavily on the balance sheet,
income statement, statement of cash flows and
short-term and long-term financial forecasts.
• The budget is the guide for financial operations
and expected financial needs.
LO 18-2
PPT 18-18
Types of Budgets
TYPES of BUDGETS
18-18
• Capital Budget — Highlights a firm
’
s spending
plans for major asset purchases that often require
large sums of money.
• Cash Budget — Estimates cash inflows and outflows
during a particular period like a month or quarter.
• Operating (Master) Budget — Ties together all the
firm
’
s other budgets and summarizes its proposed
financial activities.
LO 18-2
Chapter 18 – Financial Management
18-19
b. The CASH BUDGET estimates cash inflows
and outflows during a particular period like a
month or a quarter.
c. The OPERATING BUDGET (MASTER
BUDGET) is the budget that ties together all
of a firm’s other budgets and summarizes its
proposed financial activities.
3. Financial planning often determines:
a. What long-term investments are made
b. When specific funds will be needed
c. How the funds will be generated
4. The final step in financial planning is to ESTAB-
LISH FINANCIAL CONTROLS.
D. ESTABLISHING FINANCIAL CONTROLS
1. FINANCIAL CONTROL is a process in which a
firm periodically compares its actual revenues,
costs, and expenses with its budget.
2. Most companies hold monthly financial reviews
to ensure financial control.
3. Control procedures help managers identify vari-
ances to the financial plan and make corrections
if necessary.
4. Financial adjustments to the plan may be need-
ed.
5. Example: currency problems among emerging
markets or a slowdown in the Chinese economy.
Chapter 18 – Financial Management
18-20
PPT 18-19
Financial Planning
TEXT FIGURE 18.2
Financial Planning
FINANCIAL PLANNING
18-19
LO 18-2
TEXT FIGURE 18.3
A Sample Cash Budget for Very
Vegetarian
This text figure presents a sample cash budget for Very Vege-
tarian, showing the cash inflows and outflows.
TEXT FIGURE 18.4
You Incorporated Monthly Budget
Just as with corporations, individuals can compile a monthly
budget of income and expenses.
PPT 18-20
Establishing Financial Control
ESTABLISHING
FINANCIAL CONTROL
18-20
• Financial Control — A process
in which a firm periodically
compares its actual revenues,
costs and expenses with its
budget.
LO 18-2
PPT 18-21
Factors Used in Assessing
Financial Control
FACTORS USED in ASSESSING
FINANCIAL CONTROL
18-21
• Is the firm meeting its short-term financial
commitments?
• Is the firm producing adequate operating profits
on its assets?
• How is the firm financing its assets?
• Are the firms owners receiving an acceptable
return on their investment?
LO 18-2
test
prep
PPT 18-22
Test Prep
TEST PREP
18-22
• Name three finance functions important to the
firm’s overall operations and performance.
• What three primary financial problems cause firms
to fail?
• How do short-term and long-term financial
forecasts differ?
• What’s the purpose of preparing budgets? Can
you identify three different types of budgets?
Chapter 18 – Financial Management
18-21
learning objective 3
Explain why firms need operating funds.
III. THE NEED FOR OPERATING FUNDS
A. Businesses continually need operating funds.
1. Financial requirements of a business change as
businesses grow or venture into new markets.
2. All organizations need funds for CERTAIN OP-
ERATIONAL NEEDS:
a. Managing day-by-day needs of the business
b. Controlling credit operations
c. Acquiring needed inventory
d. Making capital expenditures
B. MANAGING DAY-BY-DAY NEEDS OF THE BUSI-
NESS
1. Funds must be made available to meet DAILY
CASH EXPENDITURES without endangering
the firm’s financial health.
2. Money has TIME VALUE—$200 today is more
valuable than $200 a year from today.
3. Financial managers try to keep cash expendi-
tures to a minimum and invest in interest–
bearing accounts.
4. Efficient cash management is particularly im-
portant to small firms.
C. CONTROLLING CREDIT OPERATIONS
1. Making credit available helps keep current cus-
tomers happy and attracts new ones.
Chapter 18 – Financial Management
18-22
PPT 18-23
Key Needs for Operational Funds
in a Firm
KEY NEEDS for OPERATIONAL
FUNDS in a FIRM
18-23
• Managing day-by-day
needs of the business
• Controlling credit
operations
• Acquiring needed
inventory
• Making capital
expenditures
LO 18-3
lecture enhancer 18-4
CROWDFUNDING BEYOND KICK-
STARTER
The need for day-to-day operating funds is intense. Crowd-
funding has been a huge source for entrepreneurs to gain capi-
tal and manage their businesses. (See the complete lecture en-
hancer on page 18.69 of this manual.)
PPT 18-24
How Small Businesses Can Im-
prove Cash Flow
HOW SMALL BUSINESSES
CAN IMPROVE CASH FLOW
Source: American Express Small Business Monitor. 18-24
• 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.
LO 18-3
MAKING
ethical
decisions
PPT 18-25
Good Finance
or Bad Medi-
cine?
GOOD FINANCE
or BAD MEDICINE?
18-25
• You are 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 are
sacrificing patients’ well-being for cash. What do
you do? What could be the result of your
decision?
Chapter 18 – Financial Management
18-23
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 com-
pany’s assets can be tied up in ACCOUNTS
RECEIVABLE.
4. Some of the firm’s available funds are needed to
pay for the goods or services already sold.
a. Providing cash or quantity discounts are
possible collection procedures.
b. Financial managers need to scrutinize the
CREDIT HISTORY of all credit customers.
5. It is possible to minimize the cost of accounts
receivable by ACCEPTING BANK CREDIT
CARDS such as MasterCard or Visa.
D. ACQUIRING NEEDED INVENTORY
1. Providing the inventory that customers expect,
the business ties up a significant amount of
funds.
2. A sound inventory policy helps managers use
firm’s available funds to maximizing profitability.
3. JUST-IN–TIME INVENTORY may help reduce
the funds companies must tie up in inventory.
E. MAKING CAPITAL EXPENDITURES
1. CAPITAL EXPENDITURES are major invest-
ments in either tangible long-term assets such
as land, buildings, and equipment or intangible
assets such as patents, trademarks, and copy-
rights.
Chapter 18 – Financial Management
18-24
critical thinking
exercise 18-2
EXTENDING CREDIT
This exercise explores the advantages and disadvantages of
accepting credit cards. (See the complete exercise on page
18.77 of this manual.)
Chapter 18 – Financial Management
18-25
2. Purchasing major assets uses a huge portion of
the organization’s funds.
a. The firm should weigh all possible options
before committing major resources.
b. Financial managers must evaluate the ap-
propriateness of capital expenditures.
3. Text example: Should an increase in demand be
dealt with by building a new plant, purchasing an
existing one, or renting space.
4. The financial manager has to decide how to fi-
nance operations.
F. ALTERNATIVE SOURCES OF FUNDS
1. Two questions that need answers:
a. How much money is needed?
b. What is the appropriate source?
2. METHODS OF RAISING MONEY
a. DEBT FINANCING refers to funds raised
through various forms of borrowing that must
be repaid; these funds can be short-term or
long-term.
b. EQUITY FINANCING is money raised from
within the firm, from operations or through
the sale of ownership in the firm (stock).
3. SHORT-TERM VERSUS LONG–TERM FUNDS
a. SHORT-TERM FINANCING are funds
needed for a year or less.
b. LONG-TERM FINANCING are funds need-
Chapter 18 – Financial Management
18-26
PPT 18-26
Using Alternative Sources of Funds
USING ALTERNATIVE
SOURCES of FUNDS
18-26
• 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).
LO 18-3
PPT 18-27
Short– and Long-Term Financing
SHORT and LONG-TERM
FINANCING
18-27
• Short-Term Financing —
Funds needed for a year or less.
• Long-Term Financing —
Funds needed for more than a
year.
LO 18-3
PPT 18-28
Why Firms Need Financing
TEXT FIGURE 18.5
Why Firms Need Funds
WHY FIRMS NEED FINANCING
18-28
LO 18-3
Chapter 18 – Financial Management
18-27
ed for more than a year (usually 2 to 10
years).
learning objective 4
Identify and describe several sources of short-term financing.
IV. OBTAINING SHORT-TERM FINANCING
A. Everyday operation of the firm requires manage-
ment of short-term financial needs.
1. Firms need to borrow short-term funds to FI-
NANCE INVENTORY or MEET BILLS.
2. Short-term financing can be either secured or
unsecured.
B. TRADE CREDIT
1. Trade credit, the most widely used source of
short-term funding, is the LEAST EXPENSIVE
and MOST CONVENIENT form of short-term fi-
nancing.
2. TRADE CREDIT is the practice of buying goods
and services now and paying for them later.
3. The invoice term 2/10, NET 30 means that:
a. The buyer can take a 2% discount for paying
within 10 days
b. The total bill is due (net) in 30 days if the
discount is not taken.
4. Taking the discount is, in effect, saving 36%.
5. If the business has a poor credit rating or history
of slow payment, the supplier may insist on a
promissory note.
Chapter 18 – Financial Management
18-28
test
prep
PPT 18-29
Test Prep
TEST PREP
18-29
• Money has time value. What does this mean?
• Why is accounts receivable a financial concern of
the firm?
• What’s the primary reason an organization
spends a good deal of its available funds on
inventory and capital expenditures?
• What’s the difference between debt and equity
financing?
PPT 18-30
Types of Short-Term Financing
TYPES of
SHORT-TERM FINANCING
18-30
• Trade Credit — The practice of buying goods or
services now and paying for them later.
• Businesses often get terms such as 2/10 net 30
when receiving trade credit.
• Promissory Note — A written contract agreeing to
pay a supplier a specific sum of money at a definite
time.
LO 18-4
Chapter 18 – Financial Management
18-29
6. A PROMISSORY NOTE is a written contract
with a promise to pay a supplier a specific sum
of money at a definite time.
C. FAMILY AND FRIENDS
1. This source may be convenient, but it can also
create problems.
2. It is better not to borrow from friends and rela-
tives.
3. Fewer entrepreneurs today rely on family and
friends for funding.
4. If an entrepreneur does borrow from family or
friends, it is best to:
a. Agree on specific loan terms
b. Put the agreement in writing
c. Arrange for repayment in the same way you
would a bank loan
D. COMMERCIAL BANKS
1. Banks are highly SENSITIVE TO RISK and
hesitate to make small business loans.
2. A promising venture may be able to get a bank
loan.
3. The person in charge of finance should keep in
CLOSE TOUCH WITH THE BANK and visit the
banker periodically.
E. DIFFERENT FORMS OF SHORT–TERM LOANS
1. A SECURED LOAN is a loan backed by collat-
eral, something valuable such as property.
Chapter 18 – Financial Management
18-30
PPT 18-31
Types of Short-Term Financing
TYPES of
SHORT-TERM FINANCING
18-31
• Many small firms obtain short-term financing from
friends and family.
• If asking for help from family or friends, it’s
important both parties:
1) Agree to specific loan terms
2) Put the agreement in writing
3) Arrange for repayment the same way they would for
a bank loan
LO 18-4
PPT 18-32
Difficulty of Obtaining Short-Term
Financing
• Banks generally
prefer to lend short–
term money to larger,
more established
businesses.
DIFFICULTY of OBTAINING
SHORT-TERM FINANCING
18-32
• The recent financial crisis has made it difficult for
even promising and well-organized businesses
to get loans.
LO 18-4
ADAPTING TO
change
PPT 18-33
Threading the
Financial Nee-
dle
THREADING the FINANCIAL NEEDLE
18-33
• Started thredUP with classmates
while studying for his MBA at
Harvard.
• Launched the company in 2009
as a way to buy and sell adult
clothing.
• Transitioned into children’s
clothes.
• The company continues to attract
huge investments to further
improve the site.