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*. The Role of Finance and Financial Managers . *. LG1. Finance -- The function in a business that acquires funds for a firm and manages them within the firm. Finance activities include: Preparing budgets Creating cash flow analyses Planning for expenditures. WHAT’S FINANCE?. 18- 1. *.

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what s finance

*

The Role of Finance and Financial Managers

*

LG1

  • Finance -- The function in a business that acquires funds for a firm and manages them within the firm.
  • Finance activities include:
    • Preparing budgets
    • Creating cash flow analyses
    • Planning for expenditures

WHAT’S FINANCE?

18-1

financial management

*

The Role of Finance and Financial Managers

*

LG1

FINANCIAL MANAGEMENT

  • Financial Management -- The job of managing a firm’s resources to meet its goals and objectives.

18-2

financial managers

*

The Role of Finance and Financial Managers

*

LG1

  • Financial Managers -- Examine financial data and recommend strategies for improving financial performance. Financial managers are responsible for:
    • Paying company bills
    • Collecting payments
    • Staying abreast of market changes
    • Assuring accounting accuracy

FINANCIAL MANAGERS

18-3

what financial managers do

*

The Role of Finance and Financial Managers

*

LG1

WHAT FINANCIAL MANAGERS DO

18-4

financial planning

*

Financial Planning

*

LG2

  • Financial planning involves analyzing short-term and long-term money flows to and from the company.
  • Three key steps of financial planning:
    • Forecasting the firm’s short-term and long-term financial needs.
    • Developing budgets to meet those needs.
    • Establishing financial controls to see if the company is achieving its goals.

FINANCIAL PLANNING

18-5

financial forecasting

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Forecasting Financial Needs

*

LG2

  • 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.

FINANCIAL FORECASTING

18-6

budgeting in the firm

*

Working with the Budget Process

*

LG2

  • Budget -- Sets forth management’s expectations for revenues and allocates the use of specific resources throughout the firm.
  • Budgets depend heavily on the balance sheet, income statement, statement of cash flows and short-term and long-term financial forecasts.
  • The budget is the guide for financial operations and expected financial needs.

BUDGETING in the FIRM

18-7

types of budgets

*

Working with the Budget Process

*

LG2

  • 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.

TYPES of BUDGETS

18-8

finanical planning

*

Working with the Budget Process

*

LG2

FINANICAL PLANNING

18-9

establishing financial control

*

Establishing Financial Control

*

LG2

ESTABLISHING FINANCIAL CONTROL

  • Financial Control -- A process in which a firm periodically compares its actual revenues, costs and expenses with its budget.

18-10

using alternative sources of funds

*

Alternative Sources of Funds

*

LG3

  • 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).

USING ALTERNATIVE SOURCES of FUNDS

18-11

short and long term financing

*

Alternative Sources of Funds

*

LG3

SHORT and LONG-TERM FINANCING

  • Short-Term Financing -- Funds needed for a year or less.
  • Long-Term Financing -- Funds needed for more than a year.

18-12

why firms need financing

*

Alternative Sources of Funds

*

LG3

WHY FIRMS NEED FINANCING

18-13

types of short term financing

*

Obtaining Short-Term Financing

*

LG4

  • Trade Credit -- The practice of buying goods or services now and paying for them later.
  • Businesses often get terms 2/10 net 30 when receiving trade credit.
  • Promissory Note -- A written contract agreeing to pay a supplier a specific sum of money at a definite time.

TYPES of SHORT-TERM FINANCING

18-14

different forms of short term loans

*

Different Forms of Short-Term Loans

*

LG4

  • Commercial banks offer short-term loans like:
    • 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.

DIFFERENT FORMS of SHORT-TERM LOANS

18-15

commercial paper

*

Commercial Paper

*

LG4

COMMERCIAL PAPER

  • Commercial Paper -- Unsecured promissory notes in amounts of $100,000+ that come due in 270 days or less.
  • Since commercial paper is unsecured, only financially stable firms are able to sell it.

18-16

setting long term financing objectives

*

Obtaining Long-Term Financing

*

LG5

  • Three questions of financial managers in setting long-term financing objectives:
    • What are the organization’s long-term goals and objectives?
    • What funds do we need to achieve the firm’s long-term goals and objectives?
    • What sources of long-term funding (capital) are available, and which will best fit our needs?

SETTING LONG-TERM FINANCING OBJECTIVES

18-17

using long term debt financing

*

Debt Financing

*

LG5

  • 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.
  • A major advantage of debt financing is the interest the firm pays is tax deductible.

USING LONG-TERM DEBT FINANCING

18-18

using debt financing by issuing bonds

*

Debt Financing by Issuing Bonds

*

LG5

  • 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.

USING DEBT FINANCING by ISSUING BONDS

18-19

securing equity financing

*

Equity Financing

*

LG5

  • A company can secure equity financing by:
    • Selling shares of stock in the company.
    • Earning profits and using the retained earnings as reinvestments in the firm.
    • Attracting Venture Capital -- Money that is invested in new or emerging companies that some investors believe have great profit potential.

SECURING EQUITY FINANCING

18-20

differences between debt and equity financing

*

Comparing Debt and Equity Financing

*

LG5

DIFFERENCES BETWEEN DEBT and EQUITY FINANCING

18-21