* * * ** Financial Management CHAPTER * 18 Nickels * McGraw-Hill/Irwin Understanding Business, 8e McHugh * McHugh 1-1 18-1 © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. * * * Finance & Managers • What is Financial Management? • Finance • Financial Manager • Importance of Finance 18-2 * * * Most Important Skills Needed by CFOs People Development 10% 19% Building Relationships Communication Skills 26% Creativity 27% 38% Objectivity 51% Leadership Strategic Planning 55% Analytical Thinking 75% 0% 10% 20% 30% 40% 50% 60% 70% 80% Source: CIO Enterprise 18-3 * * * Women CFOs • As of May 2006, 35 of the 500 largest companies in the US had a female CFO • Five largest companies with female CFO: Citigroup, Home Depot, Verizon, Marathon Oil, and Medco Health Solutions • Top 3 reasons that helped women achieve their current position: Supportive boss, Supportive spouse, and culture of the organization Source: cfo.com, June 1, 2006 18-4 * * * Non-Finance Functions of CFOs Business Development 60% P & L Responsibility 53% MIS 49% Reengineering 39% Revenue Growth 25% HR & Admin. 18% Other Skills 5% Sales Marketing 2% 1% 0% 10% 20% 30% 40% 50% 60% 70% Source: CIO Enterprise 18-5 * * * What Financial Managers Do 18-6 * * * Where CFOs Get Their Financial Information Magazines 9% Radio 5% Don't Know 1% Internet 11% Television 12% Newspaper 47% Colleagues 15% Source: USA Today 18-7 * * * Financial Managers: Ask Your Clients 1. What are the client's goals in areas like lifestyle, retirement, saving for college education and their health care as well as that of their dependents? 2. When do they want to reach their goals? 3. What steps have they already taken toward achieving their goals? 4. How do they feel about taking investment risks for a potential higher rate of return? 5. How involved do they want to be in monitoring their progress toward their goals? Source: Fpanet.org 18-8 * * * Financial Planning Short-term Forecasting Capital Budget Feedback Financial Plan Long-term Forecasting Operating Budget Financial Controls Cash Budget Feedback 18-9 * * * Budget Process • Financial Plan- Financial Statements • Types of Budgets • Capital • Cash • Operating (Master) • Financial Controls- Feedback 18-10 * * * Need for Operating Funds • Manage Daily Operations • Controlling credit operations • Acquire Inventory • Capital Expenditures 18-11 * * * Why Firms Need Funds Short-Term Funds • Meeting monthly expenses • Unanticipated emergencies • Cash-flow problems • Expanding current inventory • Temporary promotional programs Long-Term Funds • New product development • Replacing capital expenditure • Mergers or acquisitions • Expansion into new markets • Building new facilities 18-12 * * * Daily Profits Of Companies With The Highest Revenue • • • • • • Wal-Mart - $24.8 Million ExxonMobil - $58.9 Million General Motors - $10.5 Million Ford - $1.4 Million General Electric - $41.1 Million ChevronTexaco - $19.8 Million Source: World Feature Syndicate, 2005 18-13 * * * Sources of Funds Short-Term • Trade Credit • Promissory Notes • Family/Friends • Banks, etc. • Secured Loan • Unsecured Loan • Factoring • Commercial Paper • Credit Cards Long-Term • Debt • Term-Loan • Bonds • Secured • Unsecured • Equity • Stock • Retained Earnings • Venture Capital 18-14 * * * Who Can Issue Bonds? 1. Federal, state, and local governments 2. Federal government agencies 3. Corporations 4. Foreign governments and corporations 18-15 * * * Sources of Equity Financing Internal Sources Retained Earnings Owner Contributions Sale of Partnerships Equity Capital External Sources Venture Capital Public Sale of Stock 18-16 * * * IPO Summer of 2006 • 89 companies filed plans to raise money through IPO – looking to raise $16.3 billion • 17 companies withdrew their plans to proceed with their IPO – were hoping to raise $3.89 billion • Withdrawing – Go Daddy Group and PNY Technologies • Filing – Double-Take Software and Hansen Medical Source: redherring.com, August 18, 2006 18-17 * * * Google IPO • • • • • Launched – August 2004 IPO Price -- $ 85 per share Seeking to raise $2.7 billion Unusual auction-style offering With IPO, the company must shed light on the inner workings • Key competitors – Yahoo and Microsoft • As of March 31, 2004 Google employed about 1,900 employees Source: cnet news.com, April 30, 2004; Forbes, September 17, 2004 18-18 * * * Venture Capitalists • Finance new and rapidly growing companies • Purchase equity securities • Assist in the development of new products or services • Add value to the company through active participation • Take higher risks with the expectation of higher rewards • Have a long-term orientation Source: NVCA.com 18-19 * * * Making Use of Leverage Leverage- Selling Bonds Equity- Sale of Stock Common Stock Bonds (@10%) $ 50,000 $450,000 Common Stock Bonds (@10%) $500,000 0 Funds Raised $500,000 Funds Raised $500,000 Earnings Less: Bond Interest $ 125,000 $ 45,000 Earnings $ 125,000 Total Earnings $ 80,000 Total Earnings $ 125,000 Return to = Stockholders $80,000 $50,000 = 160% Return to = Stockholders $125,000 $500,000 = 25% 18-20