Module 09: Financial Management

Financial management and the

BMC

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Topics for discussion

1. What is the role of a financial manager and why are

they an important resource to business leaders?
2. What are the three steps in the financial planning
process? Describe the types of information created
at each step.
3. They say “cash is king”. Why do firms need funds?
4. What are the three main sources of funds? Describe
each source and provide examples.

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Module 09: Financial Management
The role and responsibility of financial managers
 The role of financial managers

• Financial management: • Management and

acquisition of financial
resources
• To meet goals or
objectives
• Financial manager
• Examine the financial data
prepared by accountants
• Develop financial plans
• Manage and monitor the
execution of those plans to
maximize wealth

Image source: leremy/iStock/Thinkstock

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 The role of financial managers
At Wells Fargo’s Consumer Lending Group, says
Rewcastle, finance leaders emphasize “the ability to tell
a story with a strategic viewpoint. It’s not just explaining
the variances—what happened last month or last
quarter. That’s a minimum expectation. We also look for
the ability to interpret trends, and to provide actionable
insights to business leaders about what those trends
mean, and how they might affect the business three
months or two years from now. We need leaders who
can think two, three, four steps ahead, but also juggle
multiple priorities and understand the
interconnectedness of all the different pieces.”

SOURCE: Strategy+Business, “The Redefined No of the CFO”, https://www.strategy-business.com/article/00307?gko=ff56f

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 The role of financial managers

Image source: Loblaw Companies Limited

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Module 09: Financial Management
The financial planning process
 Financial planning

Figure: Figure 17.2, Understanding Canadian Business, 9th Cdn ed. © 2016 McGraw-Hill Education Limited
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 Financial planning
Forecasting financial need
• Short-term forecast:
• Long-term forecast:
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predicting revenues, costs, and
expenses and the related cash
flows for a period of one year or
less
predicting revenues, costs, and
expenses for periods longer
than one year
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 Financial planning
The budget process
• Budget:
management‘s expectations for revenues
and, on the basis of those expectations,
allocates the use of specific resources
throughout the company

• Departmental/division
budgets
• Departmental/division
managers:
• Will submit a budget for
approval
• Accountable to monitor
actual versus budget

Image source: Macrovector/iStock/Thinkstock

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Financial planning
The budget process
• Operating (master) budget: ties together all of the
company’s other budgets
• Capital budget: plans for major asset
purchases
• Cash budget: projected cash inflows/
outflows
– Minimum balance
(cushion)

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 Financial planning
Establishing financial controls
• Financial control:
process in which a firm
periodically compares its actual
revenues, costs, and expenses with
its budget

Image source: vasabii/iStock/Thinkstock

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Financial planning
The budget process – Operating (master) budget
________________________________________________________________________

WEINSTEIN MANUFACTURING COMPANY

MONTHLY BUDGETARY CONTROL WORKSHEET
________________________________________________________________________

EXPENSE BUDGETED ACTUAL DIFFERENCE

CATEGORY AMOUNT EXPENDITURE FROM BUDGET
________________________________________________________________________

Labour $162,500$195,000 +32,500+20.0%

Raw materials 172,500 151,500 -21,000 -12.2%

Utilities 6,500 6,300 -200 -3.1%

Maintenance 9,750 8,950 -800 -8.2%

Other variable expenses 16,750 18,000 +1,250 +7.5%

Fixed overhead expenses 25,00025,000 0 0.0%

TOTAL EXPENSES $393,000 $404,750 +11,750 +3.0%

________________________________________________________ 14
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Financial Planning
• Safeguarding assets
– Fraud
• detection
• prevention

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 Test your knowledge
Financial Managers identify three steps to financial planning.
Which of the following is not one of the three key steps to
financial planning?

A. Forecasting both short-term and long-term financial

needs.
B. Developing budgets top meet anticipated needs.
C. Preparing the income statement and balance sheet.
D. Establishing financial control to see how well the
company is following the financial plans.

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 Test your knowledge
The managers of Dakoti Clothing regularly compare their actual
profits with the firm’s projected profits. When deviations occur,
the managers use the feedback to take corrective action when
necessary. The management of Dakoti Clothing is exercising
financial:
A. derivatives.
B. control.
C. planning.
D. budgeting.

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Module 09: Financial Management
Importance of cash and why firms need operating funds
 The need for funds

Image source: Loblaw Companies Limited

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 The need for funds
• Manage day-to-day needs of the business
– Need to pay monthly expenses
– Cushion for unanticipated emergencies

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 The need for funds
• Manage credit
– Need to offer credit terms for customers (especially B2B)
– Credit and collection management
– Flip side – purchase on credit as well!

Image source: ratch0013/iStock/Thinkstock

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 The need for funds
• Manage inventory
– Need to have inventory on hand to satisfy customers
• Just-in-time inventory
– Converting inventory to cash
• Inventory turnover ratio
– Very Vegetarian: 1.9 times a year
– Shoppers: Approx. 3 times a year
• 365/Inventory turnover ratio
– Days to convert inventory into cash
– Very Vegetarian: 192 days
– Shoppers: 121 days

Image source: Created by Dmitry Mirolyubov from the Noun Project

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 The need for funds
• Making capital expenditures
– Need to invest in long-term assets or intangible assets that
help to generate revenue

Image source: Askold Romanov/iStock/Thinkstock; BoeniceboY/iStock/Thinkstock

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 The need for funds
• Cash flow management is important
• Money has time value
– $1 today is worth more than $1 in a year
– Earns interest over time

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 Test your knowledge
When a business doesn’t have the funds to do the things that it
needs to do to be successful, it is referred to as:

A. underfunded.
B. under-utilized.
C. undercapitalized.
D. out of luck.

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Module 09: Financial Management
Sources of financing
Sources of funds

• Operations: From the company’s profits

= retained earnings

• Debt financing: From creditors

= liabilities

• Equity financing: From owners (e.g.

shareholders)
= share capital/owner’s
contributions

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 Sources of funds

Image source: Loblaw Companies Limited

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 Sources of funds - Operations
Retained earnings
• Profits of a company can be:
– Returned to owners (e.g. drawings or dividends)
– Retained for future growth or to maintain current operations

• Startup:
– Limited ability to obtain financing
(debt or equity)
– No interest costs

• Growth:
– Find right balance between debt and equity
– Owners/Shareholders may expect a return

Image source: Jane_Kelly/iStock/Thinkstock

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 Sources of funds

Image source: Loblaw Companies Limited

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Sources of funds - Debt
Debt terminology
• Interest rate • Covenants
– fixed or variable – financial
– simple or compounding – non-financial
• Repayment • Term
– principal – short vs long term
– interest – amortization
• Security
– secured vs unsecured
– collateral
– guarantee

Fun fact: governments and corporations borrow from

you on a long-term basis through issuance of bonds
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 Sources of funds – Debt (short-
term)
• Trade credit or company credit cards:
– Practice of buying goods/services now and paying later

– Most common source of short-term financing

• Line of credit:
– a credit limit granted by a bank that can be used and repaid at
any time

– Secured or unsecured, interest is paid on the amount you

borrow (not the limit)

• Factoring A/R
– Selling accounts receivable to a factor for cash

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Image source: ARTQU/iStock/Thinkstock
 Sources of funds – Debt (short-
term)
• Banks and other financial institutions
– Short term bank loans
• Collateral
• Guarantee

• Family and friends

– Formalize
• Set the terms of the loan
• Document it – put it in writing
• Set the terms of repayment

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Image source: ARTQU/iStock/Thinkstock
 Sources of funds – Debt (long-term)
• Term-loan:
Image source: Askold Romanov/iStock/Thinkstock
requires the borrower to
repay the loan in specified
installments (regular
payments of interest and
principal)
– Banks assume more risk in
granting long-term loans
– Risk/return trade-off
• Collateral
• Higher interest rates
• Covenants
– Maturity date
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 Sources of funds – Debt (long-term)
Repayment terms and
amortization
• Regular payments
• principal and interest
(blended payments)

• When the principal

balance is higher
– more of each
payment will cover
interest
• As the principal gets
smaller
– more of each
payment will cover
principal
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Image source: © 1995 - 2015 by Timothy R. Mayes, Ph.D. via tvmcalcs.com
Sources of funds - Debt
Borrowing funds
– Advantages
• Creditors are not owners and have no ownership in your
business
• A variety of sources (banks, credit unions, government,
family & friends, suppliers etc.)

– Disadvantages
• Can raise risk profile of company
• Interest cost
• Cash flow requirements (repayment of principal and/or
interest)

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 Sources of funds

Image source: Loblaw Companies Limited

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 Source of funds - Equity
Equity financing
• Equity financing: selling ownership in the firm
– Initial Public Offering (IPO)
– Venture capital

• Stocks: represent ownership in a company

• Dividends: distributions of profit to shareholders

Image source: Medioimages/Photodisc/Thinkstock

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 Sources of funds - Equity
Issuing stocks
– Common shares: most basic form of ownership in a firm
• Voting rights
• Residual value

– Preferred shares: special class of ownership

• Non-voting
• Preference in receipt of dividends,
dividend rate is fixed
• Higher claim on company assets

Image source: vasabii/iStock/Thinkstock

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Sources of funds - Equity
Issuing stocks
– Advantages
• Shareholders don’t have to be repaid at a designated time
• Dividends are optional
• No borrowing costs, no additional financial risk

– Disadvantages
• Shareholders have voting rights
• Management decisions can be affected

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 Source of funds – Debt vs. Equity

Figure: Figure 17.8, Understanding Canadian Business, 9th Cdn ed. © 2016 McGraw-Hill Education Limited
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Module 09: Financial Management
Wrap up
 Financial management and the
cash flow statement

Image source: Loblaw Companies Limited 43

 How is this possible?
How can a profitable company, with
growing sales, be forced to close their
doors?
• Poor management of financial resources (cash)
– Poor credit management
– Mismanagement of inventory
– Too much debt
• Poor controls
– Poor planning
– Lack of control over spending

= POOR FINANCIAL MANAGEMENT

Image source: James Pauls/iStock/Thinkstock
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 Test your knowledge
The main reason why companies want to maintain a minimum
cash balance is:

A. the balance sheet always needs to reflect a cash

balance.
B. they are required by law.
C. cash, in and of itself, can earn a very high rate of
return.
D. to make sure there is a pool of cash available to deal
with an unexpected need.

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 Test your knowledge
Which of the following presents an effective technique to
improve cash management?

A. Speed up cash payments and slow down cash

collections.
B. Speed up cash collections and slow down cash
payments.
C. Speed up both collections and payments of cash.
D. Slow down both the payment and collections of cash.

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 Test your knowledge
Which of the following would not normally involve long-term
financing?

A. Workers’ salaries.
B. Plant expansion.
C. Purchase of modern equipment.
D. Purchase of a large tract of land.

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