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Chapt 18, intro to bus part 1
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INTRODUCTION TO BUSINESS
PREPARED BY: SHAFAYET ULLAH
SECTION: A3 AND A4
Financial ManagementChapter 18, Part 1
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
The Financial Manager
Individual who is responsible for the finance function
Effective, financial manager must develop and follow a financial plan.
Role of the Financial Manager
Projecting month-by-month flow of funds into and out of the business
Comparing monthly inflows to monthly outflowsFinding ways to generate revenue from excess
fundsAdjusting 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.
Month-by-Month Outward Flow of Funds
Represents the firm’s use of fundsCost 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).
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.
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.
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.
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.
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).
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.
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).
Financial ManagementChapter 18, Part 1
Thank You