WEEK 13:

FINANCIAL MANAGEMENT

BUSN 102 – Özge Can

Financial Management

Financial Management Planning for a firm’s money needs and managing

the allocation and spending of funds

Three fundemental concepts: Balancing short-term and long-term demands Balancing potential risks and rewards Balancing leverage and flexibility

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Three Fundamental Concepts

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Financial Management

Risk/ Return Trade-Off The balance of potential risks against potential

rewards

Example: A company with free cash: Invest in the stock market? Put the money in a bank account? Invest in a new facility or a new product?

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Tasks of Financial Managers: Ultimate responsibility => Making

decisions about alternative sources and uses of funds with the goal of maximizing company’s value

1) Develop and implement financial plans

2) Monitor cash flows and manage cash reserves

3) Make budgets

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1. Developing a Financial Plan Financial Plan

A document that outlines the funds needed for a certain period of time, along with the sources and intended uses of those funds

Uses input from three sources: Strategic plan Company’s financial statements External financial environment

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Finding and Allocating Funds

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2. Monitoring Cash Flows

Cash is necessary to: Purchase the needed assets and supplies Pay dividends to shareholders

Liquidity Crisis Having insufficient cash to meet short-term needs

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2. Monitoring Cash Flows

In order to maintain positive cash flows: Monitor working capital accounts

Working capital accounts: A firm’s cash on hand as well as economic value

that can be converted to cash (inventory) or expected from customers (account receivable) minus what is scheduled to pay out (accounts payable)

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2. Monitoring Cash Flows18-10

3. The Budgeting Process

Budget: A planning and control tool that reflects expected

revenues, operating expenses, and cash receipts and outlays

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Budgeting Challenges:18-12

The Budgeting Process

Hedging Protecting against cost increases with contracts that

allow a company to buy supplies in the future at designated prices

Rolling forecasts Reviewing economic performance regularly to see

whether budget needs to be modified Scenario planning

Identfying two or more ways that events could unfold and having budgetary responses for each one

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Types of Budgets:

Start-Up Budget A budget that identifies the money a new

company will need to spend to launch operations

Operating Budget (Master Budget) A budget that identifies all sources of revenue

and coordinates the spending of those funds throughout the coming year

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Types of Budgets:

Capital Budget A budget that outlines expenditures for real

estate, new facilities, major equipment, and other capital investments

Project Budget A budget that identifies the costs needed to

accomplish a particular project

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Financing Alternatives:

1) Debt Financing Arranging funding by borrowing money

2) Equity Financing Arranging funding by selling ownership shares in

the company, publicly or privately

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Debt Financing vs. Equity Financing

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