Chapter Eighteen
Mastering Financial
Management
Learning Objectives
1. Explain the need for financing and financial
management in business.
2. Summarize the process of planning for
financial management
3. Describe the advantages and disadvantages
of different methods of short-term debt
financing.
4. Evaluate the advantages and disadvantages
of equity financing.
5. Evaluate the advantages and disadvantages
of long-term debt financing.
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Chapter 18 Outline
– What Is Financial Management?
• The Need for Financing
• The Need for Financial Management
• Careers in Finance
– Planning—The Basis of Sound Financial Management
• Developing the Financial Plan
• Monitoring and Evaluating Financial Performance
– Sources of Short-Term Debt Financing
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Sources of Unsecured Short-Term Financing
Sources of Secured Short-Term Financing
Factoring Accounts Receivable
Cost Comparisons
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Chapter 18 Outline (cont’d)
– Sources of Equity Financing
• Selling Stock
• Retained Earnings
• Venture Capital and Private Placements
– Sources of Long-Term Debt Financing
• Long-Term Loans
• Corporate Bonds
• Cost Comparisons
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What Is Financial Management?
• All the activities concerned with obtaining money
and using it effectively
– Determining the best ways to raise money
– Ensuring money is used in keeping with the
organization’s goals
– Planning
• The need for financing
– When expenses are high or sales are low
– Opportunities to expand
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The Need for Financing
• Short-term financing
– Money that will be used for one year or less
• Cash flow
• Inventory
• Long-term financing
– Money that will be used for longer than one
year
– Often involves large amounts of money
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The Need for Financial Management
• Risk-return ratio
• Proper financial management can ensure that
– Financing priorities are in line with organizational goals
and objectives
– Spending is planned and controlled
– Sufficient financing is available when it is needed
– Credit customers pay on time and delinquencies are
reduced
– Bills are paid promptly
– Taxes are paid in a timely manner
– Excess cash is invested in interest-bearing securities
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Careers in Finance
• Skills and traits of successful financial managers
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Responsible and honest
Strong background in accounting or math
Knowledge of how to use a computer to analyze data
Expert in written and oral communications
• Jobs
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–
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Bank officer
Credit officer
Financial analyst
Financial planner
Insurance analyst
Investment account executive
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Planning—The Basis of Sound
Financial Management
• Financial plan
– A plan for obtaining and using the money
needed to implement an organization’s goals
• Developing the financial plan
– Establishing organizational goals and
objectives
– Budgeting for financial needs
– Identifying sources of funds
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Developing the Financial Plan
• Establishing goals and objectives
– Goals
– Objectives
– Must be specific and measurable
– Must be realistic
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Developing the Financial Plan (cont’d)
• Budgeting for financial needs
– Budget
– Cash budget
• Traditional
• Zero-based budgeting
– Capital budget
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Developing the Financial Plan (cont’d)
• Identifying sources of funds
– Sales revenues
– Equity capital
– Debt capital
– Proceeds from the sale of assets
• Monitoring and evaluating financial performance
– Prevents minor problems from becoming major ones
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Short-Term Debt Financing
• Short-term financing is usually easier to obtain
than long-term
– Shorter repayment period means less risk of
nonpayment
– Amounts of short-term loans are smaller than
long-term loans
– There is a closer relationship between borrower
and lender
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Sources of Unsecured Short-Term
Debt Financing
• Unsecured financing
• Trade credit
• Promissory notes
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Sources of Unsecured Short-Term
Debt Financing (cont’d)
• Unsecured bank loans
– Interest rates vary with each borrower’s credit
rating
– Prime interest rate
– Offered through promissory notes, a line or credit,
or revolving credit agreement
• Commercial paper
– Short-term promissory note issued by a large
corporation
– Interest rates are usually below that charged by
banks for short-term loans
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Sources of Secured Short-Term
Debt Financing
• Loans secured by inventory
– Inventory is pledged as collateral
– Control of the inventory passes to the lender until the
loan is repaid
– The borrow must pay storage for the inventory
– Floor planning
• Loans secured by receivables
– Amounts owed the firm in the form of accounts
receivable from trade credit given to customers are
pledged as collateral
– Quality of receivables is considered
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Factoring Accounts Receivable
• Another method of raising short-term financing
• Factor
– The factor buys accounts receivable for less than their
face value
– The factor collects the full dollar amounts when each
account is due
– The factor’s profit is the difference between the face
value and what it paid for the accounts receivable
– Profit is based on the risk (probability that the accounts
receivable will not be paid) the factor assumes
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Sources of Equity Financing
• For sole proprietorships or partnerships
– Owner or owners invest money in the
business
– Venture capital
• For corporations
– Sale of stock
– Use of profits not distributed to owners
– Venture capital
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Sources of Equity Financing (cont’d)
• Selling stock
– Initial public offering
• When a corporation sells common stock to the
general public for the first time
– Advantages of selling stock
• Firm does not have to repay money received
from sale of stock
• Firm does not have to pay dividends to
stockholders
– Two types of stock
• Common stock
• Preferred stock
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Sources of Equity Financing (cont’d)
• Selling stock (cont.)
– Common stock
– Preferred stock
– Par value
– Convertible preferred stock
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Sources of Equity Financing (cont’d)
• Retained earnings
• Venture capital
• Private Placement
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Sources of Long-Term Debt Financing
• Financial leverage
• Lease
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Sources of Long-Term
Debt Financing (cont’d)
• Long-term loans
– Term-loan agreement
– Getting a loan
• Know potential lenders
• Maintain a good credit rating
• Fill out an application; submit a business
plan and financial statements; compile
references
• Meet with loan officer
• If denied, determine why
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Sources of Long-Term
Debt Financing (cont’d)
• Corporate bonds
– Types of bonds
• Registered bond
• Debenture bond
• Mortgage bond
• Convertible bond
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Sources of Long-Term
Debt Financing (cont’d)
• Corporate bonds (cont.)
– Repayment provisions for corporate bonds
• Bond indenture
• Call premium
• Serial bonds
• Sinking fund
• Trustee
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