chapter 17 1 copyright © 2008 by nelson, a division of thomson canada limited chapter managing the...
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Ch
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1Copyright © 2008 by Nelson, a division of Thomson Canada Limited
Chapter
Managing the Firm’s FinancesManaging the Firm’s Finances
Prepared byNorm Althouse
University of Calgary
Prepared byNorm Althouse
University of Calgary
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2Copyright © 2008 by Nelson, a division of Thomson Canada Limited
Principles of Financial Management
The spending and raising of a firm’s money – is both ascience and an art. Chief Financial Officers(CFOs) needa broad understanding of their firm’s business and industry, as well as leadershipability and creativity.
The spending and raising of a firm’s money – is both ascience and an art. Chief Financial Officers(CFOs) needa broad understanding of their firm’s business and industry, as well as leadershipability and creativity.
FinancialManagement
FinancialManagement
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3Copyright © 2008 by Nelson, a division of Thomson Canada Limited
How Cash Flows Through a Business1
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4Copyright © 2008 by Nelson, a division of Thomson Canada Limited
The Financial Manager’s Responsibilities1
Key Key ActivitiesActivities
Key Key ActivitiesActivities
Financial PlanningFinancial Planning
Investment(spending money)
Investment(spending money)
Financing(raising money)
Financing(raising money)
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5Copyright © 2008 by Nelson, a division of Thomson Canada Limited
The Goal of the Financial Manager1
Maximize Firm’s Value!Maximize Firm’s Value!Maximize Firm’s Value!Maximize Firm’s Value!
Opportunity Opportunity for Profitfor Profit
Opportunity Opportunity for Profitfor Profit
Potential Potential for Lossfor Loss
Potential Potential for Lossfor Loss
ReturnReturn RiskRisk
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6Copyright © 2008 by Nelson, a division of Thomson Canada Limited
Risk and Return Factors1
Social Issues
Market Conditions
General Economic Conditions
Interest Rates
Changing Patterns of Market Demand
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Bank of Canada Interest Rate 1934-2007
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Bank of Canada Interest Rate 2000-2009
8Copyright © 2008 by Nelson, a division of Thomson Canada Limited
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9Copyright © 2008 by Nelson, a division of Thomson Canada Limited
2 Forecasting the Future
Short-TermForecasts
Short-TermForecasts
Operating Plansfor
one-year period
Operating Plansfor
one-year period
Project revenues, costs of goods,
operating expenses
Project revenues, costs of goods,
operating expenses
Long-TermForecasts
Long-TermForecasts
Strategic Plansfor
longer than one- year period
Strategic Plansfor
longer than one- year period
Broader view offinancial activitiesBroader view of
financial activities
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10Copyright © 2008 by Nelson, a division of Thomson Canada Limited
2 Budgets
OperatingBudgets
OperatingBudgets Forecast profitsForecast profits
Capital BudgetsCapital Budgets Forecast outlays for fixed assetsForecast outlays for fixed assets
CashBudgetsCash
Budgets Forecast cash inflows and outflowsForecast cash inflows and outflows
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11Copyright © 2008 by Nelson, a division of Thomson Canada Limited
3 How Organizations Use Funds
ManageManageCurrent Current AssetsAssets
ManageManageCurrent Current AssetsAssets
Cash Cash
Accounts ReceivableAccounts Receivable
InventoryInventory
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12Copyright © 2008 by Nelson, a division of Thomson Canada Limited
3 How Organizations Use Funds
ManageManageLong-TermLong-Term
CapitalCapitalExpendituresExpenditures
ManageManageLong-TermLong-Term
CapitalCapitalExpendituresExpenditures
MachineryMachinery
BuildingsBuildings
LandLand
EquipmentEquipment
Information SystemsInformation Systems
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13Copyright © 2008 by Nelson, a division of Thomson Canada Limited
4 Obtaining Short-Term Financing
RaisingRaisingFundsFunds
RaisingRaisingFundsFunds
Borrow Money(Debt)
Borrow Money(Debt)
Sell Ownership Shares(Equity)
Sell Ownership Shares(Equity)
Retain Earnings(Profits)
Retain Earnings(Profits)
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14Copyright © 2008 by Nelson, a division of Thomson Canada Limited
4 Unsecured Short-Term Loans
Bank LoansBank Loans•Lines of credit
•Revolving credit agreement(most are secured in Canada)
•Lines of credit•Revolving credit agreement(most are secured in Canada)
TradeCreditTradeCredit Seller extends credit to the buyer Seller extends credit to the buyer
CommercialPaper
CommercialPaper
Unsecured short-term debt issuedby a financially strong corporationUnsecured short-term debt issuedby a financially strong corporation
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4 Secured Short-Term Loans
SecuredLoans
SecuredLoans
Borrower pledges specific assets as collateral, such as
accounts receivable or inventory.
Borrower pledges specific assets as collateral, such as
accounts receivable or inventory.
FactoringFactoring Firm sells its accounts receivable to a
factor, such as a chartered bank or commercial finance company.
Firm sells its accounts receivable to a factor, such as a chartered bank or commercial finance company.
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BondsBonds Long-term debt obligations issuedby corporations and governments.Long-term debt obligations issuedby corporations and governments.
Term LoansTerm Loans A business loan with a maturity of more than one year.
A business loan with a maturity of more than one year.
Mortgage LoansMortgage Loans A long-term loan made againstreal estate as collateral.
A long-term loan made againstreal estate as collateral.
Debt Financing
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Venture CapitalVenture Capital
Preferred Shares Preferred Shares
Dividends & Retained EarningsDividends & Retained Earnings
Selling Common SharesSelling Common Shares
Equity Financing
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18Copyright © 2008 by Nelson, a division of Thomson Canada Limited
StrategiesStrategiestoto
Manage RiskManage Risk
StrategiesStrategiestoto
Manage RiskManage RiskRisk reductionRisk reductionRisk reductionRisk reduction
Risk avoidanceRisk avoidanceRisk avoidanceRisk avoidance
Self-insuranceSelf-insuranceSelf-insuranceSelf-insurance
Risk transferenceRisk transferenceRisk transferenceRisk transference
Risk Management8
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There must be many similar exposures to perilThere must be many similar exposures to peril
Losses must be financially measurableLosses must be financially measurable
Peril must not be likely to affect all parties at same timePeril must not be likely to affect all parties at same time
Company must have the right to set standards for coverage
Company must have the right to set standards for coverage
The loss must not be under control of insuredThe loss must not be under control of insured
Potential loss must be significantPotential loss must be significant
Insurance ConceptsInsurable Risks
9
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20Copyright © 2008 by Nelson, a division of Thomson Canada Limited
LifeLife
HealthHealth
LiabilityLiability
PropertyProperty
Types of Insurance9
Key executives Dead peasants
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21Copyright © 2008 by Nelson, a division of Thomson Canada Limited
Title insuranceTitle insurance
Fidelity and surety bondsFidelity and surety bonds
Theft insuranceTheft insurance
Business interruption insuranceBusiness interruption insurance
Professional liability insuranceProfessional liability insurance
Special Types of Business Liability Insurance9
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22Copyright © 2008 by Nelson, a division of Thomson Canada Limited
Work with top management to develop and implement the firm’s strategic direction
Re-establish public trust
Assure stakeholders of honest transactions and reporting
Maintain a higher profile with their companies’ boards
The Changing Role of the CFO10
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Market riskMarket risk
Operational riskOperational risk
Credit riskCredit risk
Weighing the Risks after 9-11-20011
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