Chapter 16 Notes

Terms in this set (64)

Why Financial Management is important?
-Without:
Not be able to pay bills
-fund research needed to develop new products and services
- acquire other companies to maintain its market leadership.
- Or to borrow money (debt capital) or obtain money from stockholders (equity capital)
-Creditors and lenders can't be paid, employees don't get paychecks and business pay close its doors and cease to exist.
Why Financial Management?
- If you want to avoid bankruptcy, financial managers have to borrow money in anticipation of a downturn in the company's sales and profits. Managers and employees must find money needed to keep a business operating and pay lenders and suppliers, employees, and fund all the goals and objectives that a successful business wants to achieve.
The Need For Financial Management: Financial Management
Consists of all the activities concerned with obtaining money and using it effectively. Two-side problem use of funds and types of finance for business, activities are based on financing available.
Jobs for Financial Managers
Must ensure that funds are available when needed by a business, and are obtained are the lowest cost.
Financial Management must ensure that:
- Financing priorities are established in line with goals and objectives
- Spending is controlled
- Sufficient financing is available when need, both now and in the future
- Credit customers pay bills on time
-The funds required for paying taxes are available when needed.
- Excess Cash is invested in certificates of deposit.
Financial Reform After Economic Crisis
After a crisis hit business firms, regulations and reforms became high priority. Obama signed Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. Goals are to hold Wall Street Journal Firms accountable for their actions, end taxpayer bailouts, tighten regulations, and increase government oversight., limit the amount of executive pay and bonuses, limiting size of large financial firms
Careers in Finance
9% increase in the # of jobs in the financial sector of economy between no and 2020. People that needed finance are manufacturing, marketing, colleges, and not-for-profit organizations. Must be honest, have a strong background in accounting or mathematics, know how to use a computer to analyze data, and be an expert at both written and oral communication. Jobs Include: bank officer, credit officer, financial analyst, financial planner, loan officer. Insurance analyst
Chief Financial Officer
A high I've who level corporate executive who manages a firm's finances and reports directly to the company's chief executive officer or president. i.e. vice president of financial management, treasurer, or controller.
The Need For Financing
Income and expenses may vary from month to month or year to year, temporary financing may be needed when expenses are high.
Short-Term Financing: Definition
Money that will be used for one year or less.
Short Term Financing: Three Financing Needs
1. Certain business practices may affect a firm's cash flow and create a need for short-term financing.
2. Speculative Production
3. Increase Inventory
Short-Term Financing: Cash Flow
The movement of money into and out of an organization. Goal is to have sufficient money coming into the firm in any period to cover the firm's expenses during that period.
Short-Term Financing: Speculative Production
Refers to the time lag between the actual production of goods and when the goods are sold. Negotiates short term financing and covers inventory costs until products are sold later that year, even if they sell all their products, expenses peak, sales revenue are low, and retailers and wholesalers don't actually receive payment until 30-60 days sales revenues repay short-term financing.
Short-Term Financing: Increase Inventory
Need short-term financing to build up there inventories before peak of selling period, and during short-term financing repays the loans when the merchandise are sold
Long-Term Financing: Definition
Money that will be used for long than one year. Needed to start a new business, mergers and acquisitions, new product development, long-term marketing activities, replacement of equipment that has become obsolete, and expansion of facilities.
The Risk-Return Ratio: Define and Explanation
Business find it more difficult for long/short financing. Because, financial reform and increased regulations with lengthen process required to obtain financing, and both lenders and investors are more cautious about who receives financing, When financial managers make a financial plan they must consider risk-return ratio which is based on the principle that high risk decisions should generate higher financial returns for a business and more conservation decisions often generate lower returns. Strive to balance risk and return. HOW MUCH ARE THEY GOING TO GET OUT OF WHAT THEY SPEND
Planning: Define
An outline of actions by which an organization intends to accomplish its goals and objectives.
Planning: Financial Plan
Plan for obtaining and using the money needed to implement an organizations goals and objectives.
Developing a Financial Plan
-Establishing a set of valid goals and objectives. (how much $ needed)
-Must Identify available sources of financing and decided which to use.
Establishing Goals and Objectives: Objectives
Specific statement detailing what an organization intends to accomplish over a short period of time. Need to be specific and measurable
Establishing Goals and Objectives:Goals
End result that an organization expects in a one to ten year period. Need to be specific and measurable
Budgeting Financial Needs: Budget
A financial statement that projects income, expenditures, or both over a specified future period. Begins with the construction of departmental budgets for sales and various type of expenses.
Budgeting Financial Needs: Cash Budget
Estimates cash receipts and cash expenditures over a specific period. Cash soles and collections are listed at the top for each calendar quarter. Payments for purchases and routine expenses are listed in the middle section. Possible to calculate the anticipated cash gain or loss at the end of each quarter
Budgeting Financial Needs: Traditional Budget Approach
Each new budget is based on dollar amounts contained in the budget for the preceding year. Modified to reflect goals, and managers justify new expenditures. Problem: Leaves room for padding budget items to protect the interest of the manager.
Budgeting Financial Needs: Zero-Based Marketing
Budgeting approach in which every expense in every budget must be justified.
Budgeting Financial Needs: Capital Budget
Estimates a firms expenditures for major assets, including new product development, expansion of facilities, replacement of obsolete facilities, mergers and acquisitions.
Identifying Sources of Funds
Four Primary Sources of Funds: sales revenue, equity capital, debt capital, and proceeds from the sale of assets. Primary reasons for financial planning is to provide management with adequate lead time to solve this type of cash-flow problem.
Identifying Sources of Funds: Equity Capital
Money received from the owners or from the sales of shares of ownership In a business.Business- provided by owners of business. Corporation- sales of shares of ownership in the business. Long-Term Financing
Identifying Sources of Funds: Debt Capital
Borrowed Money for short/long term use.
Identifying Sources of Funds:: Proceeds from the Sales
Selling assets, used when sales revenue declines and equity capital is not found. Assets also may be sold to increase a firms cash balance, when they are no longer needed, or do not fit financial institutions
Monitoring and Evaluating Financial Performance
Financial Plan should be implemented properly and to catch potential problems. Financial managers should establish means of monitoring financial performance. Interim Budgets may be prepared for comparison. Comparison point out area that require additional revised planning, improve future budgets
There Broad Categories of Banking Services
Traditional Services, Electronic Banking Services, and International Services
Traditional Services
Include savings/checking account loans, processing credit and debit-card transactions, and providing professional advice.
Saving and Checking Accounts
Safe Place to store money, and conservative investing. Book Savings Account earn between 0.10-0.50 percent in banks and savings.
Saving a Checking Accounts: CD Define and Explanation
A business with excess cash.it is willing to leave on deposit with a bank for a set period of time can earn a higher rate of interest. Certificate of deposit is document stating that the bank will pay the depositor a guaranteed interest rate on money left on deposit for a specified period of time,.
Savings and Checking Accounts: Check
A written order for a bank or other financial institutions to pay a stated dollar amount to the business or person indicated on the face of check.
Business Loans
Banks, savings and loan associations, credit unions, and other financial institutions provide short/long term loans. Short term and long term loans are arranged between lender and borrower.
Short Term Loans
Must be paid within one year or less. Involve solving cash-flow problems, purchasing inventory, meeting unexpected emergencies
Line of Credit
A loan that is approved before the money is actually needed. Some firms still might not be able to borrow money if the bank does not have sufficient funds available.
Revolving Credit Agreement
Guaranteed line of credit, bank guarantees money when the borrower needs, and the bank charges a commitment fee ranging from 0.25 to 1.0 percent of the unused portion of the revolving credit agreement,
Long Term Loans
Repaid over a period of years, average 3-7 years but some 15-20 years. Used for expansion of buildings and retail facilities, mergers and acquisitions, replacement of equipment, and product development.
Collateral
Real estate of property pledged as security for a loan e.g. stocks bonds equipment, any other asset of value.
The Basics of Getting A Loan
Preparation is key, begins before you apply. Get to know potential leaders before asking for $, borrow money where business does banking, check firms credit rating, with D&B, loan application, current business plan, submit current financial statements, references, loan request,
Why Has the Use of Credit Transactions Increased?
Credit Card: By depositing charge slips in a bank or other financial institutions, the merchant can convert credit-card sales into cash. Fee ranges 1.5 to 4 percent. The # of credit card transactions, the total dollar amount of credit card sales, and how well the merchant can negotiate the fees the financial institution charges determine actual fees. Banks and other financial institutions charge merchant fees ( a % of each credit card transaction) for handling transactions to merchants.
Debit Card: Electronically subtracts the amount of a customers purchase from her or his bank account at the moment the purchase it made.
Electronic Banking Services:Define
A means of performing financial transactions through a computer terminal.
Four EFT Terminals
-Automatic Teller Machines (ATMS)- Electronic bank teller; a machine that provides almost any service a human teller can provide. Dispenses cash from checking/savings account. Fee for transaction
- Automated Clearinghouses (ACHs)- Designed to reduce the # of paper checks, automated clearinghouses process checks, recurring bill payments, SS benefits, and employee salaries
- Point-Of-Sales Terminals (POS)- Is a computerized cash register located in a retail store and connected to a banks computer. Pull out bank card, through magnetic card reader, processing center notifies, as your bank that you want to make a purchase, bank immediately adds the amount to transaction, deducts the amount if credit card, purchase is added to the store's account
-Electronic Check Conversion (ECC) Process used to convert information from a paper check into a electronic payment for merchandise, services, or bills. Check is processed through an electronic system that captures your banking information and the dollar amount, sign receipt, and you get voided a check back.

Speed banking transactions
Electronic Funds Transfer Act
Protects the customer in case the bank makes an error or customer's credit or debit care is stolen.
International Banking Services: Letter of Credit
A legal document issued by a bank or other financial institutional guaranteeing to pay a seller a stated amount for a specific period of time- usually 30 to 60 days. Delivery of merchandise, may be specified before the payment is made Popular method of paying import/export transaction
International Banking Services: Banker's Acceptance
A written order for a bank to pay a third party a stated amount of money on a specific date., it is simply an order to pay without any strings attached. Popular method of paying import/export transaction
Sources of Unsecured Short-Term Debt Financing; Three Reasons why it is easier to obtain
1. For the lender, the shorter repayment period means less risk of nonpayment
2. The $ amounts of short-term loans means less risk of nonrepayment
3.A close working relationship normally exists between the short-term borrower and the leader.
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Unsecured financing
Financing that is not backed by a collateral.
Trade Credit: Define and Explanation
Wholesalers often provide financial aid to retailers by allowing them 30 to 60 days in which to pay for merchandise. Trade Credit is a delayed payment, is a type of short-term financing extended by a seller who does not require immediate payment after delivery of merchandise. Most popular form of short-term financing, 70 to 90 percent of all transactions between business involve trade credit.
Terms of Payment for an Invoice
First, the retailer may pay the invoice promptly and take advantage of any cash discount a manufacturer offers. Second, wait until the end of the credit period before making a payment. Payment is made between 11-30 days after invoice. Payment must be made before the end of the credit period, for the retailer to maintain the ability to purchase additional merchandise.
Promissory Notes Issued To Suppliers
Written pledge by a borrower to pay a certain sum of money to a creditor at a specified future date. Usually require a borrower to pay interest, most notes are paid 60-180 days. It is a legally binding and enjoyable contract, and negotiable instrument. wholesaler may be able to sell its note to its own bank. Note discounted- money received sightless less than maturairity value.
Unsecured Bank Loans
Bank and other financial institutions offer unsecured bank loans to businesses at interest rates that vary with each borrower's credit rating.
Prime Interest Rate
:Lowest Rate Charged by a bank for a short-term loan. Lowest Rate generally reserved fort large corporations with excellent credit ratings. Good credit- 2% Questionable Ratings - 4% Higher interest rate for higher-risked loan
Compensating. Balance
Kept in deposit at a bank. 10-20% of borrowed funds.
Clean up (Pay Off Completely)
Short-Term loans at least once a year and not use it again for a period of 30 to 60 days.
Commercial Paper
Raise large sums of money by quickly issuing commercial paper; short-term promissory note issued by a large corporation. Maturity Rate 270 days or less. Secured only by the reputation of an issuing firm. Interest Rate of a corporation pays when it sells commercial paper is tied to its credit rating and its ability to repay the commercial paper. Corporations selling commercial paper pay interest rates slightly below most cases, selling commercial paper is cheaper. Commercial Paper is most used to purchase inventory, finance a firm's account receivables, salaries and other necessary expenses, and solve cash flow problems.,
Sources of Secured Short Term Financing
Inventory and accounts receivable are assets most commonly pledged for short-term financing
Loans Secured By Inventory
Wholesalers, retailers and manufacturers have money invested in finished goods. Manufacturers carry work-in-progress inventories. May be pledged as a collateral be stored in a public warehouse. Receipt needs to release merchandise, pay interest on loan, borrower must may for storage in publics warehouse.
Loans Secured By Accounts Receivable
Accounts Receivable- amounts owed to a firm by its customers. Advance 70-80% on accounts receivable. Quality of receivables is the credit standing of the firm's customers, coupled with customers' ability to repay their credit obligations when they are due. When the account has been pledged the collateral, generally it must turn the money over to the lender as partial repayment of the loan.
Favorable Accounts Receivable: Factor
Accounts Receivable specializes in buying other firms' accounts receivable; for less than their face value; collect full dollar when each account is dues. Factors profit is the difference between accounts receivable face value and amount a factor has paid them.
Risk
Is the probability that accounts receivable will not be repaid when they mature.
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