Business Copyright 2005 Prentice Hall Inc 1 Chapter
Business Copyright 2005 Prentice- Hall, Inc. 1
Chapter 20 Understanding Financial And Risk Management 20 -2
Business Chapter Outline üRole Of The Financial Manager üWhy Do Businesses Need Funds? üSources Of Short-Term Funds üSources Of Long-Term Funds üFinancial Management For Small Business üRisk Management Copyright 2005 Prentice- Hall, Inc. 3
Business Responsibilities Of Financial Management • Determine Long-Term Investments • Obtain Funds To Pay Investments • Conduct Everyday Financial Activities • Assist In Managing Risk Copyright 2005 Prentice- Hall, Inc. For 4
Business Responsibilities Of Financial Manager • Cash-Flow Management- Cash Inflows & Outflows • Financial Control- Performance Vs. Planned Results • Financial Planning- Strategies To Reach Goals/Objectives Copyright 2005 Prentice- Hall, Inc. 5
Business Financial Plan • How Much Does Company Need To Meet Immediate Needs? • When Will It Need More Funds? • What Are The Sources For Short-Term & Long. Term Funds? Copyright 2005 Prentice- Hall, Inc. 6
Business Short-Term Expenditures • Operating Needs • Accounts Payable • Accounts Receivable • Inventories Copyright 2005 Prentice- Hall, Inc. 7
Business Factors In Short-Term Needs • Credit Policies • Working Capital Current Assets – Current Liabilities Copyright 2005 Prentice- Hall, Inc. 8
Business Long-Term Expenditures • Capital Needs • Not Normally Converted Into Cash • Requires Large Investment • Binding, Long-Term Commitment By Company Copyright 2005 Prentice- Hall, Inc. 9
Business Trade Credit • Open-Book Credit • Promissory Notes • Trade Draft Vs. Trade Acceptance Copyright 2005 Prentice- Hall, Inc. 10
Business Secured Short-Term Loans • Collateral • Inventory Loans • Accounts Receivable – Pledging – Factoring Copyright 2005 Prentice- Hall, Inc. 11
Business Unsecured Short-Term Loans • No Collateral • Compensating Balance • Line Of Credit • Revolving Credit Agreement • Commercial Paper Copyright 2005 Prentice- Hall, Inc. 12
Business Debt Financing • Long-Term Obligation • Long-Term Loans – Often Arranged Quickly – No Public Disclosure – Duration Matched To Needs – Clauses Make It Possible To Change Terms Copyright 2005 Prentice- Hall, Inc. 13
Business Issues In Debt Financing • Interest Rates • Corporate Bonds • Bond Indentures Copyright 2005 Prentice- Hall, Inc. 14
Business Five “C’s” Of Credit Character Capacity Capital Conditions Collateral Copyright 2005 Prentice- Hall, Inc. 15
Business Equity Financing • • Claim To Earnings Common Stock – Dividends – Appreciation (Growth) • • • Retained Earnings Financial Burden Hybrid- Preferred Stock Copyright 2005 Prentice- Hall, Inc. 16
Business Stockholders’ Equity Copyright 2005 Prentice- Hall, Inc. 17
Business Debt Vs. Equity • Capital Structure • Financial Risk • Investors’ Return Expectations • Venture Capital = Equity Copyright 2005 Prentice- Hall, Inc. 18
Business Risk-Return Relationship Copyright 2005 Prentice- Hall, Inc. 19
Business Establishing Bank/Trade Credit • Long-Term Funding – Established Company – New Business • Business Plan • Venture Capital Copyright 2005 Prentice- Hall, Inc. 20
Business Projected Cash Flow Copyright 2005 Prentice- Hall, Inc. 21
Business Risk Management • Risk = Uncertain Outcome • Speculative Risk. Gain Vs. Loss • Pure Risk- Loss Vs. Loss Copyright 2005 Prentice- Hall, Inc. No 22
Business Risk-Management Process Copyright 2005 Prentice- Hall, Inc. 23
Business Risk Alternatives • Avoidance • Control • Retention RISK • Transfer Copyright 2005 Prentice- Hall, Inc. 24
Business Criteria For Insurable Vs. Uninsurable Risk • Predictability • Casualty • Unconnectedness • Verifiability Copyright 2005 Prentice- Hall, Inc. 25
Business Insurance Products • • • Liability Workers’ Compensation Property Business Interruption Special – Key Person – Business Continuation Copyright 2005 Prentice- Hall, Inc. 26
Business Riskiest Jobs Injury Rate Per 1, 000 Workers Source: Rutgers University, Crime Prevention Service, http: // crimeprevention. rutgers. edu/index. htm Copyright 2005 Prentice- Hall, Inc. 27
Business Employee Insurance Products • Life • Group Life • Health • Disability Copyright 2005 Prentice- Hall, Inc. 28
Business Special Health Insurance Providers • Health Maintenance Organization (HMO) • Preferred Provider Organization (PPO) • Point-Of-Service (POS) Copyright 2005 Prentice- Hall, Inc. 29
Business Areas Of Potential Risk In E-Commerce • Media Liability • Errors And Omissions • Loss Of Service Copyright 2005 Prentice- Hall, Inc. 30
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