Ass. Prof. Dr. Özgür KÖKALAN
İstanbul Sabahattin Zaim University
Chapter Objectives
1.
2.
Define Financial Management
Sources of Funds
5-2
Financial Management
 Financial management is the process of managing the
tasks related with capital budgeting and financing
decisions within the organizations.
Working Capital
 Working capital primarily focuses on the current assets and
current (shortterm) liabilities of the firm. Current assets
less current liabilities simply states the firm’s working
capital.
 The difference between the current assets and liabilities is
also called net working capital.
 If the current assets exceed the current liabilities we might
say that the firm has positive net working capital. This is
the usual and typical situation, Otherwise, if the current
assets were less than the current liabilities, then the
company would possibly face a problem.
Cash Forecast
Financial managers prepare cash forecasts to assess the
possible movements of cash in the near future.
As we previously stated, the cash situation of the
company, especially in the recession or in buyers’ market
conditions, has ' vital influence over the company’s
achievements and survival. Therefore any organization
in business should give utmost attention to its cash
management.
Sources of Funds
 To operate a business, organizations need assets. The
assets needed should be purchased by utilizing the
company’s funds.
 Organizations have two sources from which they can
raise the’r needed funds. These sources are:
 Equity Capital
 Debt Capital
Equity Capital
 Funds
raised from the organization’s owners and
shareholders are called equity capital.
 Equity capital is not borrowed money, therefore it is not
supposed to be paid back to its providers. The owners or
shareholders provide the funds to their organization and
seek profit at the end of a specific period.
 When they seek the profit from business, they also take the
risk of losing the money if the organization fails.
 Equity capital is provided through an owner’s cash or noncash investments in starting a business.
 One popular type of equity capital is venture capital.
Capital owners investing their money in the new,
young and untried businesses in return for the excess
profits is called venture capital.
 This capital investment is risky/
Debt Financing
 Funds raised through borrowing from creditors is called
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debt capital.
Debt capital is a borrowed fund and therefore should be
paid back to its provider (creditor) at a specified date,
usually with interest payments.
Creditors do not have managing rights in operations, since
they are not the owners or stockholders.
They only lend the money to be paid back to them at a
specific time. But they have priority claims before the
owners or shareholders on company assets.
.
 Creditors more be concerned about the organization’s
giving them a guarantee for their lent funds to be paid
with the interest at the maturity date. Many lenders
may ask the borrower to give some concrete guarantees
for their re-payment at the maturity date. Secured
loans are those that provide guarantee for the lender
given by the borrower in the form of bonds, assets and
security deposits or mortgages.
 Unsecured loans do not provide any guarantee for the
lender and therefore are more risky than secured loans
 Debt capital can be classified as short- or long-term
debt.
 Short Term Debt: The debts to be paid back in less
than one year are commonly called short-term debts.
 These debts are used to meet the current needs for
cash or inventory.
 Some common types of short-term debts are the trade
credits, bank loans, commercial papers, and factoring.
 Trade Credit, is one of the primary sources of short-term
debt that is provided by suppliers to finance the
organization's purchasing goods and services from them.
These credits could be in unsecured or secured form.
 Bank Loans, are the simplest and most common form of
short-term debt provided by a commercial bank to finance
the organization’s cash needs. These loans also can be in
unsecured or secured form.
 Commercial Papers, is one of the safe style of loans that
enables the borrower to bypass the bank system. In this
type, the organization (borrower) issues its own shortterm, unsecured notes (bonds) and sells them in the
money market. Commercial papers should be paid back at
the maturity date with interest. . The most common
commercial paper maturity ranges up to 9 months
 Factoring, is another type of short-term loan.
Organizations sometimes sell their receivables
collected from their customers with a discounted price
to a financial institution (factoring companies) before
the due time. Factoring companies (usually called
factor), in turn, pay the organization immediately and
collect the money from the principal debtors
(customers of the borrower) on the maturity date.
Long Term Debts
Long term loans issued by financial institutions can
benefit by usually large companies. Financial
institutions like banks sometimes receive huge
international long-term credit facilities to be used to
finance long term needs of the several recognized large
companies in the national economy.
There are many kinds of long term debts. These are:
 Corporate bonds
 Financial leasing
 Banks
 Corporate bonds are one of the long-term borrowing
means by which organizations borrow money directly from
the public. These bonds usually pay annual or semiannual
coupons. Some of these bonds that give the bondholder an
option to exchange each bond with specified number of
shares of the common stocks of the organization are called
convertible bonds.
 Financial Leasing is defined as a long-term rental
agreement. Many companies lease or rent their assets such
as machinery or equipment on a long-term basis instead of
buying these assets with borrowed money. When the
organization decides not to invest for its needed assets, it
goes to a leasing company to make a long-term rental
agreement for those assets. A leasing company (called
lessor) pays the bill to the supplier and owns the assets.
 Banks are the financial intermediaries that raise funds by
borrowing money generated from individual savings and
lend that money to other borrowers in the market.
Financial Markets, Instruments and
Players
 Financial markets, are those in which the companies
and governments raise funds by selling financial assets
to the fund owners.
 The major players in the financial markets are as
follows:
 Companies and institutions that seek funds by issuing
financial assets to finance their various investments and
operations are the primary borrowers in the market.
 Individuals in society are typically the net savers and seek
financial assets that would maximize the return on their
investment.
 Governments may act as the borrower/lender depending on
their budgets. Their revenue/expenditure relationship
determines its role as a borrower or lender.
 Other important players in the financial markets are the
financial
market
regulators
and
the financial
intermediaries. Intermediaries connect the lenders with the
borrowers. They receive funds from the lenders and loans
the same to the borrowers.Institutions like banks,
investment companies, insurance companies and credit
unions are examples of financial intermediaries.
 Financial markets are classified as money markets and capital
markets.
 Money Market Players, The principal regulator and player in
the money market that carries out money and credit policy in
accordance with the needs of the economy is the Turkish Central
Bank (TCB). The TCB regulates money markets in the country
and sets rediscount ratios. It also executes treasury operations
and takes all measures to protect the Turkish currency.
 Financial leasing companies, are also special business finance
companies like factoring companies. They specialize in financing
companies through long term rental agreements, They first
purchase and then lease the assets to interested organizations for
a set number of years.
 Investment bankers specialize in the sale of new com-
mercial papers and securities to the public while
professional investment companies manage the money of
investors such as individuals and companies, and
institutions such as mutual funds.
 Insurance companies protect the policyholders in return
for their premium payments. These companies use these
funds generated by policyholders to make long-term loans
to companies and/or invest in government bonds.
 Credit unions are member-owned financial cooperatives
that pay interest to their member depositors and make
loans to interested individuals.
 Factoring companies are special business finance
companies that provide specialized forms of short term ,
credits to businesses/
Money Market Instruments
 Money
market instruments include short-term,
marketable, highly liquid and low risk debt papers.
Some popular instruments in the money market are.
 Treasury bills are short-term papers issued by the
government at discount prices to finance its spendings.
 Certificates of deposit (CD) are time deposits issued by a
bank stating that deposited money is payable at
maturity.
 Commercial papers are short-term, usually unsecured,
debt issued by large organizations to be paid by the
borrower at the maturity date.
 Repos (also called repurchase agreements) are a form of
short-term, usually overnight, borrowings
Capital Market Players
 The Capital Markets Board (CMB) is the regulatory and
supervisory authority in charge of security markets in
Turkey empowered by the capital market law.
 The Istanbul Stock Exchange (ISE) Borsa Istanbul.
was established as the only security exchange in Turkey to
provide trading in equities, bonds and bills, revenue
sharing certificates, private sector bonds, foreign securities
and real estate certificates.
 Intermediaries, such as investment companies including
real estate and venture capital investment companies,
mutual funds and private intermediaries, are licensed to
operate in the capital markets regulated by the capital
markets board.
Capital Market Instruments
 Capital markets include longer-term, relatively riskier
diversified securities.This market can also be subclassified
as longer-term fixed income markets, equity markets and
derivative markets for options and futures.
 The fixed-income capital market is composed of longer-
term securities like corporate bonds. The bonds usually are
issued with maturities ranging from 5 to 30 years and make
semiannual or annual interest payments to the holders.
 The equity market is composed of common or preferred
stocks, which represent ownership shares in the corporations.
 Derivative markets are founded as a result of a great
demand coming from financial institutions for risk
reduction. The practice of offsetting risks is usually
known as hedging.
 Some new financial instruments help financial
institution managers administer their risks in a better
way, These financial instruments, called derivatives (or
financial derivatives), are extremely useful risk
reduction tools.
 They provide payoffs that are linked to the values of
other assets such as previously issued bonds and
securities, commodity prices or market index values.
Some samples of derivatives markets are; option
markets, future markets, forward markets and swaps.
 Option market: To limit their downside risk
managers buy options on commodities and currencies.
Options are contracts that give the buyer (the buyer of
the option contract) the right to purchase or sell the
commodities or instruments at a specified price agreed
upon today (exercise price) within a specific period of
time.
 Future market: Future contracts are agreements to
purchase or sell an asset at a specified price set today at
a specified date in the future
 Forward market: As we stated above the future
contracts are usually standardized products that are
tradable. They can be sold and purchased in the
market. A forward contract is a typical future contract
but tailor-made for the parties involved.
 Swaps are financial agreements that put one party
under responsibility to exchange (swap) a set of
payments it has for another set of payments owned by
another party. There are two basic swaps: currency
swaps involve the currency exchange and interest rate
swaps involve the exchange of interest payments.