Chapt 18, intro to bus part 1
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This document provides an overview of key concepts in financial management. It defines finance as the study and management of money within a firm. The financial manager is responsible for projecting cash flows, finding funding sources, and ensuring funds are used efficiently. The manager compares monthly inflows and outflows to determine if there is a surplus or shortage. When there is excess cash, the manager considers expanding operations or investing in low-risk, liquid assets like Treasury bills, commercial paper, or certificates of deposit. The overall goal is to match monthly cash inflows with outflows.
Chapt 18, intro to bus part 1
- 1. Financial Management Chapter 18, Part 1 INTRODUCTION TO BUSINESS PREPARED BY: SHAFAYET ULLAH SECTION: A3 AND A4
- 2. Defining Finance The study of money within the firm. The functional area with the responsibility of: Finding funds for the firm Managing funds of the firm Determining best uses of the firm’s funds
- 3. The Financial Manager Individual who is responsible for the finance function Effective, financial manager must develop and follow a financial plan.
- 4. Role of the Financial Manager Projecting month-by-month flow of funds into and out of the business Comparing monthly inflows to monthly outflows Finding ways to generate revenue from excess funds Adjusting inflows and or outflows and looking for other funding sources ( in case of fund shortage) Analyzing alternate sources of funds and finding the most efficient source ( in case new funds are required) Monitoring and evaluating results of the financial plan.
- 5. Month-by-Month Outward Flow of Funds Represents the firm’s use of funds Cost of daily operations: Rent, utilities, wages, interest expense, taxes. Cost of credit service: Most firms cannot do business strictly on cash basis, so they provide customers with some form of credit to encourage larger purchases and gain new customers. Cost of inventory: To survive in a competitive environment firms must provide for customer needs and cannot afford to be out of product that customer demands. ( Further complicated by demand fluctuation).
- 6. Month-by-Month Outward Flow of Funds Purchase of major assets: Land, buildings, equipment (Must be periodically replaced and upgraded) Expansion also requires additional assets. Debt payment: Payment of interest and principal Dividend payment: Made to the shareholder as form of earnings on their stocks. Most firms pay dividends to keep their stock attractive to potential investors.
- 7. Month-by-Month Inward Flow of Funds From revenue generated by the business Can be projected by estimating sales volume Where credit sales are involved, rate of payment on accounts receivable must be estimated Interest income expected from investment of cash reserves and other excess funds.
- 8. Monthly Inflow to Monthly Outflow: Comparison Three possible outcomes: Perfect matching: No action required ( Unlikely) Expected expenditure for the month greater than expected income ( Additional funds must be found to cover shortfall) Expected income for the month greater than expected expenditure: Company has excess funds.
- 9. Generating Revenue from Excess Funds: Expansion Applicable for companies with substantial excess funds Achieved by: Increase in production capacity Addition of new sales outlets Acquiring another firm.
- 10. Generating Revenue from Excess Funds: High Liquidity Investments Most popular placement for excess funds: Marketable securities ( Easily converted into cash, pay relatively high interest rates) Three most commonly used marketable securities: U.S. Treasury Bills: • Issued each week to the highest bidder • Maturity Dates: Three or six months ( Date on which principal must be • • • • repaid to the purchaser) Often called T bills Virtually risk free One of the most popular marketable securities Issued in amounts of $ 10,000/more ( not for a small investor).
- 11. Generating Revenue from Excess Funds: High Liquidity Investments Commercial paper: • Short term note ( Represents a loan to a major • • • • corporation with a high credit standing) Maturity date: Three days to nine months Riskier than T bills, not as liquid Purchaser paid a higher rate of interest Normally issued in amounts of $25,000 to 100,000.
- 12. Generating Revenue from Excess Funds: High Liquidity Investments Certificates of deposit/CDs: • Notes issued by a commercial bank/ brokerage firm • Size runs from $100 to 100,000 • Maturity dates: Range from 24 hours to 10 years • Issued for 7 days to 42 months • CDs issued by banks: Early redeeming possible (Substantial interest penalty).
- 13. Financial Management Chapter 18, Part 1 Thank You