Managing

Managingthe
the
Firms
FirmsFinances
Finances
Chapter
20

THE
THEFUTURE
FUTUREOF
OFBUSINESS
BUSINESS
Gitman
Gitman&&McDaniel
McDaniel
55ththEdition
Edition

Prepared
Preparedby
by
Chapter 20

Deborah Baker
Deborah Baker
Texas
Texas ChristianUniversity
Christian University
 Learning Goals

1 What roles do finance and the financial manager play in

the firms overall strategy?
2 How does a firm develop its financial plans, including
forecasts and budgets?
3 What types of short-term and long-term expenditures
does a firm make?
4 What are the main sources and costs of unsecured and
secured short-term financing?
5 How do the two primary sources of long-term financing
compare?
Chapter 20

Copyright 2005 by South-Western, a division of 2

 Learning Goals
6 What are the major types, features, and costs of long-
term debt?
7 When and how do firms issue equity, and what are the
costs?
8 What trends are affecting the field of financial
management?

Risk and Insurance Appendix:

9 What is risk and how can it be managed? What makes a
risk insurable?
10 What types of insurance coverage should businesses
consider?
Chapter 20

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 1 Learning Goal 1

What roles do finance and

the financial manager play
in the firms overall strategy?
Chapter 20

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 1 How Cash Flows Through a Business
Borrowed
BorrowedFunds
Funds
Sale
Saleof
of
Owners
Ownersinvestment
investment Fixed
FixedAssets
Assets

Collection
Collectionof
of
Cash
CashSales
Sales Accounts
AccountsReceivable
Receivable

Purchase
Purchaseof
of Payment
Paymentof
of
Fixed
FixedAssets
Assets Expenses
Expenses

Payment
Paymentofof Purchase
Purchaseofof
Dividends
Dividends Inventory
Inventory
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 1
The Financial Managers Responsibilities

Financial
FinancialPlanning
Planning

Key
Key Investment
Investment
Activities
Activities (spending
(spending money)
money)

Financing
Financing
(raising
(raising money)
money)
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 1 The Goal of the Financial Manager

Maximize
Maximize Firms
Firms Value!
Value!

Opportunity
Opportunity Potential
Potential
for
for Profit
Profit for
for Loss
Loss
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 1 Risk and Return Factors

Changing
Changing Patterns
Patterns of
of Market
Market Demand
Demand

Interest
Interest Rates
Rates

General
General Economic
Economic Conditions
Conditions

Market
Market Conditions
Conditions

Social
Social Issues
Issues
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 2 Learning Goal 2

How does a firm develop its

financial plans, including
forecasts and budgets?
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 2 Forecasting the Future

Operating
OperatingPlans Project
Projectrevenues,
Short-Term
Short-Term Plans
costs
revenues,
Forecasts
for
for costsof
ofgoods,
goods,
Forecasts one-year
one-yearperiod
period operating
operatingexpenses
expenses

Strategic
StrategicPlans
Plans
Long-Term
Long-Term for
for Broader
Broaderview
viewofof
Forecasts longer
longer thanone-
than one-year financial
financialactivities
activities
Forecasts period
year
period
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 2 Budgets

Cash
Cash Forecast
Forecast cash
cash inflows
inflows and
and outflows
outflows
Budgets
Budgets

Capital
Capital Forecast
Forecast outlays
outlays for
for fixed
fixed assets
assets
Budgets
Budgets

Operating
Operating Forecast
Forecast profits
profits
Budgets
Budgets
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 3 Learning Goal 3

What types of short-term

and long-term expenditures
does a firm make?
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 3 How Organizations Use Funds

Cash
Cash

Manage
Manage
Current
Current Accounts
Accounts Receivable
Receivable
Assets
Assets

Inventory
Inventory
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 3 How Organizations Use Funds

Land
Land

Buildings
Buildings
Manage
Manage
Long-Term
Long-Term Machinery
Machinery
Capital
Capital
Expenditures
Expenditures
Equipment
Equipment

Information
Information Systems
Systems
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 4 Learning Goal 4

What are the main sources

and costs of unsecured
and secured short-term
financing?
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 4 Obtaining Short-Term Financing

Borrow
Borrow Money
Money
(Debt)
(Debt)

Sell
SellOwnership
OwnershipShares
Shares
Raising
Raising (Equity)
Funds (Equity)
Funds
Retain
RetainEarnings
Earnings
(Profits)
(Profits)
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 4 Unsecured Short-Term Loans

Trade
Trade Seller
Sellerextends
extendscredit
creditto
tothe
thebuyer
buyer
Credit
Credit

Lines
Linesof
ofcredit
credit
Bank
BankLoans
Loans Revolving
Revolvingcredit
creditagreement
agreement

Commercial
Commercial Unsecured
Unsecuredshort-term
short-termdebt
debtissued
issued
Paper
Paper by
byaafinancially
financiallystrong
strongcorporation
corporation
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 4 Secured Short-Term Loans

Borrower
Borrowerpledges
pledgesspecific
specificassets
assets
Secured
Secured as
ascollateral,
collateral,such
suchasas
Loans
Loans accounts
accountsreceivable
receivableororinventory.
inventory.

Firm
Firmsells
sellsits
itsaccounts
accountsreceivable
receivableto
toaa
Factoring
Factoring factor,
factor,such
suchas asaacommercial
commercialbank
bank
or
orcommercial
commercialfinance
financecompany.
company.
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 5 Learning Goal 5

How
How dodo the
the two
two primary
primary sources
sources of
of
long-term
long-term financing
financing compare?
compare?
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 5 Debt versus Equity Financing
Chapter 20

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 6 Learning Goal 6

What
What are
are the
the major
major types,
types, features,
features,
and
and costs
costs of
of long-term
long-term debt?
debt?
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 6 Debt Financing

AAbusiness
businessloan
loanwith
withaamaturity
maturityof
of
Term
TermLoans
Loans more
morethan
thanone
oneyear.
year.

Long-term
Long-termdebt
debtobligations
obligationsissued
issued
Bonds
Bonds by
bycorporations
corporationsand
andgovernments.
governments.

AAlong-term
long-termloan
loanmade
madeagainst
against
Mortgage
MortgageLoans
Loans real
realestate
estateas
ascollateral.
collateral.
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 7 Learning Goal 7

When
When and
and how
how do
do firms
firms issue
issue equity,
equity,
and
and what
what are
are the
the costs?
costs?
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 7 Equity Financing

Selling
Selling Common
Common Stock
Stock

Dividends
Dividends && Retained
Retained Earnings
Earnings

Preferred
Preferred Stock
Stock

Venture
Venture Capital
Capital
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 8 Learning Goal 8

What
What trends
trends are
are affecting
affecting the
the
field
field of
of financial
financial management?
management?
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 8 The Changing Role of the CFO

Work with top management to develop and

implement the firms strategic direction
Reestablish public trust
Assure stakeholders of honest transactions
and reporting
Maintain a higher profile with their companies
boards
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 8 Weighing the Risks after 9-11-2001

Credit
Credit risk
risk

Market
Market risk
risk

Operational
Operational risk
risk
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 9 Learning Goal 9

What
What is is risk
risk and
and how
how can
can
itit be
be managed?
managed?

What
What makes
makes aa risk
risk insurable?
insurable?
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 9 Risk Management

Risk
Risk avoidance
avoidance

Self-insurance
Self-insurance
Strategies
Strategies
to
to
Manage
ManageRisk
Risk Risk
Risk reduction
reduction

Risk
Risk transference
transference
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1 Learning Goal 10
0

What
What types
types of
of insurance
insurance coverage
coverage
should
should businesses
businesses consider?
consider?
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1
0
Insurance Concepts
Insurable Risks
The
The loss
loss must
must not
not be
be under
under control
control of
of insured
insured

There
There must
must be
be many
many similar
similar exposures
exposures to
to peril
peril

Losses
Losses must
must be
be financially
financially measurable
measurable

Peril
Peril must
must not
not be
be likely
likely to
to affect
affect all
all parties
parties at
at same
same time
time

Potential
Potential loss
loss must
must be
be significant
significant
Company
Company must
must have
have thethe right
right to
to set
set
Chapter 20

standards
standards for
for coverage
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1 Types of Insurance
0
Property
Property

Liability
Liability

Health
Health

Life
Life
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1 Special Types of Business Liability Insurance
0
Business
Business interruption
interruption insurance
insurance

Theft
Theft insurance
insurance

Fidelity
Fidelity and
and surety
surety bonds
bonds

Title
Title insurance
insurance

Professional
Professional liability
liability insurance
insurance
Chapter 20

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