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Business 135 Chapter 18

Finance
The function in a business that acquires funds for a firm and manages them within the firm.
What do finance activities include?
Preparing budgets, creating cash flow analyses, and planning for expenditures.
Financial Management
The job of managing a firm’s resources to meet its goals and objectives.
Financial Managers
Examine financial data and recommend strategies for improving financial performance.
What are financial managers responsible for?
Paying company bills, collecting payments, staying abreast of market changes, and assuring accounting accuracy.
Who’s who in finance?
CFO- Chief Financial Officer
CFP- Certified Financial Planner
CFA- Charteres Financial Analyst
Comptroller- Chief Accounting Officer
Four signs you need a CFO
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.

What financial managers do
Planning, budgeting, auditing, managing taxes, obtaining funds, controlling funds, collecting funds, managing taxes, and advising top management on financial matters.
What worries financial managers
*Consumer’s demand for for their firm’s products
*Credit markets and interest rates
*Financial regulations from the government
*Volatility of the dollar
*Foreign competition
*Environmental regulations
Why do firms fail financially?
Undercapitalization, poor control over cash flow, and inadequate expense control.
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.

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.
Budget
Sets forth management’s expectations for revenues and allocates the use of specific resources throughout the firm.
What do budgets depend on?
Budgets depend heavily on the balance sheet, income statement, statement of cash flows and short-term and long-term financial forecasts.
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.
Why Do Firms Fail?
*Undercapitalization
*Poor control over cash flow
*Inadequate expense control
Three finance functions important to the firm’s overall operations and performance
Paying company bills, collecting payments, and assuring accounting accuracy.
Key needs for operational funds in a firm
*Managing day-by-day needs of the business
*Controlling credit operations
*Acquiring needed inventory
*Making capital expenditures
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.
Using alternative sources of funds
Debt financing and equity financing
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).
Short-Term Financing
Funds needed for a year or less.
Long-Term Financing
Funds needed for more than a year.
Why Firms Need Financing
Short-term funds and long-term funds.
What do short-term funds include?
Monthly expenses, unanticipated emergencies, cash flow problems, expansion of current inventory, and temporary promotional programs.
What do long-term funds include?
New-product development, replacement of capital equipment, mergers or acquisitions, expansion into new markets, and new facilities.
Trade Credit
The practice of buying goods or services now and paying for them later.
Promissory Note
A written contract agreeing to pay a supplier a specific sum of money at a definite time.
Types of Short-Term Financing
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

Different Forms of Short-Term Loans
Secured loans, unsecured loans, line of credit, and revolving credit agreement.
Secured Loans
Backed by collateral.
Unsecured Loans
Don’t require collateral from the borrower.
Line of Credit
A given amount of money the bank will provide so long as the funds are available.
Revolving Credit Agreement
A line of credit that’s guaranteed but comes with a fee.
Factoring
The process of selling accounts receivable for cash.
Commercial Paper
Unsecured promissory notes in amounts of $100,000+ that come due in 270 days or less.
Credit Cards
Rates for small businesses grew almost 30% after The Credit Card Responsibility Accountability and Disclosure Act was passed.
Credit cards are convenient but costly for a small business.
Ways to Raise Start-Up Capital
*Seek out a microloan from a microlender
*Use asset-based lending or factoring
*Turn to the web and seek out peer-to-peer lending
*Research local banks
*Sweet-talk vendors you want to do business with.
How Companies Fail to Raise Capital
*There is no formalized business plan to show need.
*The company does not know how much to request from a lender.
*Poor credit.
*Management is unrealistic about growth.
Three questions of financial managers in setting long-term financing objectives
1.What are the organization’s long-term goals and objectives?

2.What funds do we need to achieve the firm’s long-term goals and objectives?

3. What sources of long-term funding (capital) are available, and which will best fit our needs?

The Five C’s of Credit
1. The CHARACTER of the borrow. (character)
2. The borrower’s CAPACITY to repay the loan. (capacity)
3.The CAPITAL being invested in the business by the borrower. (capital)
4. The CONDITIONS of the economy and the firm’s industry. (conditions)
5. The COLLATERAL the borrower has available to secure the loan. (collateral)
Long-term Financing
Long-term financing loans generally come due within 3 -7 years but may extend to 15 or 20 years.
Term-Loan Agreement
A promissory note that requires the borrower to repay the loan with interest in specified monthly or annual installments.
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.
Securing Equity Financing
*Selling shares of stock in the company.

*Earning profits and using the retained earnings as reinvestments in the firm.

*Attracting Venture Capital

Venture Capital
Money that is invested in new or emerging companies that some investors believe have great profit potential.
How do venture capitalists assess the many pitches they receive all year?
1. Can the company grow?
2. Will we get our money back and more?
3. Will it be worth our money and effort?
Differences Between Debt and Equity Financing
Chapter 18 Slide 48
Leverage
Raising funds through borrowing to increase the firm’s rate of return.
Cost of Capital
The rate of return a company must earn in order to meet the demands of its lenders and expectations of equity holders.

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