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Financial Decisions: Managing Financial Resources. Mike’s Bikes Part III due Wednesday March 21 st in-class Mike’s Bikes Part II returned at the end of class today Next class: In-lab; Read pp. 404-408 and pp. 518-525. Financial Management.
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Financial Decisions:Managing Financial Resources Mike’s Bikes Part III due Wednesday March 21st in-class Mike’s Bikes Part II returned at the end of class today Next class: In-lab; Read pp. 404-408 and pp. 518-525
Financial Management • Responsible for planning & overseeing the financial resources of a firm including • Cash flow management • Managing the cash inflows and outflows • Investing excess funds • Financial control • Checking actual performance against strategic plans to ensure that desired goals are achieved • Preparing budgets to ensure that sufficient cash is on hand to meet operational & debt service needs • Comparing actual and budgeted amounts • Financial planning • Projections of revenue flows • Sources & planned uses of funds • Timing of when funds will be required
Assets Economic resources owned by the firm Liabilities Amounts owed by the firm to others Owner’s equity Amounts contributed by shareholders and retained earnings The Accounting Equation is The Financing Equation = +
SDM: Financial Management • Why does Shoppers’Drug Mart need financing?
SDM: Financial Management • How does Shoppers’ Drug Mart finance its operations?
Sources of Short-Term Funds • Allows firms to cover operational expenses and implement short-term plans • Trade credit • Secured and unsecured loans • Commercial paper • Factoring accounts receivable
Sources of Long-Term Funds • Debt financing • seeking long-term funds through borrowing from external sources • Equity financing • seeking long-term funds through internal financing
Sources of Long-Term Funds: Debt Financing • Long-term loans • Borrowing money for 3 to 10 years at a fixed or floating rate • Loans are quick to process and do not require divulging business plans or the purpose for the loan • Corporate bonds • A promise by the borrower to pay the lender an amount of money on the maturity date • Interest payments are received in the interim • Assets may be pledged against the bond
Sources of Long-Term Funds: Equity Financing • Common stock • A firm sells ownership rights by issuing shares • Investors buy the stock hoping that it will appreciate • Retained earnings • Financing by retaining money in the firm and not paying dividends to shareholders
Comparing Debt and Equity Financing Debt Financing Considerations Equity Financing Fixed deadline No limit. When must it be paid? Yes, regular and Will it make claims on Only residual claim. fixed. income? In liquidation, Will it have claims on In liquidation, shareholders must wait creditors come first. assets? until creditors are paid and preferred equity precedes common equity. No Will it affect May cause challenge for management control? corporation control. Bond interest is tax Dividends are not tax How are taxes affected? deductible. deductible. Yes, many Will it affect No, few constraints. management flexibility? constraints.
SDM: Financial Management • What sources of short-term funds does SDM use? • What sources of long-term debt does SDM use? • What sources of equity does SDM use? • How do sources of debt financing differ from sources of equity financing?
