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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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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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How Cash Flows Through a Business1

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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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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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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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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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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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3 How Organizations Use Funds

ManageManageCurrent Current AssetsAssets

ManageManageCurrent Current AssetsAssets

Cash Cash

Accounts ReceivableAccounts Receivable

InventoryInventory

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3 How Organizations Use Funds

ManageManageLong-TermLong-Term

CapitalCapitalExpendituresExpenditures

ManageManageLong-TermLong-Term

CapitalCapitalExpendituresExpenditures

MachineryMachinery

BuildingsBuildings

LandLand

EquipmentEquipment

Information SystemsInformation Systems

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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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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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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

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LifeLife

HealthHealth

LiabilityLiability

PropertyProperty

Types of Insurance9

Key executives Dead peasants

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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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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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