Managing the Firms Finances Chapter 17 16 Chapter

Managing the Firm’s Finances Chapter 17 16 Chapter Prepared by Norm Althouse University of Calgary Copyright © 2008 by Nelson, a division of Thomson Canada Limited 1

Principles of Financial Management Chapter 17 Financial Management The spending and raising of a firm’s money – is both a science and an art. Chief Financial Officers(CFOs) need a broad understanding of their firm’s business and industry, as well as leadership ability and creativity. Copyright © 2008 by Nelson, a division of Thomson Canada Limited 2

Chapter 17 1 How Cash Flows Through a Business Copyright © 2008 by Nelson, a division of Thomson Canada Limited 3

1 The Financial Manager’s Responsibilities Financial Planning Key Activities Investment (spending money) Chapter 17 Financing (raising money) Copyright © 2008 by Nelson, a division of Thomson Canada Limited 4

1 The Goal of the Financial Manager Maximize Firm’s Value! Opportunity for Profit Chapter 17 Return Copyright © 2008 by Nelson, a division of Thomson Canada Limited Potential for Loss Risk 5

1 Risk and Return Factors Changing Patterns of Market Demand Interest Rates General Economic Conditions Market Conditions Chapter 17 Social Issues Copyright © 2008 by Nelson, a division of Thomson Canada Limited 6

Chapter 17 Bank of Canada Interest Rate 1934 -2007

Chapter 17 Bank of Canada Interest Rate 2000 -2009 Copyright © 2008 by Nelson, a division of Thomson Canada Limited 8

Forecasting the Future Chapter 17 2 Short-Term Forecasts Operating Plans for one-year period Project revenues, costs of goods, operating expenses Long-Term Forecasts Strategic Plans for longer than one- year period Broader view of financial activities Copyright © 2008 by Nelson, a division of Thomson Canada Limited 9

Budgets Chapter 17 2 Cash Budgets Forecast cash inflows and outflows Capital Budgets Forecast outlays for fixed assets Operating Budgets Forecast profits Copyright © 2008 by Nelson, a division of Thomson Canada Limited 10

How Organizations Use Funds 3 Cash Manage Current Assets Accounts Receivable Chapter 17 Inventory Copyright © 2008 by Nelson, a division of Thomson Canada Limited 11

3 How Organizations Use Funds Land Buildings Manage Long-Term Capital Expenditures Machinery Equipment Chapter 17 Information Systems Copyright © 2008 by Nelson, a division of Thomson Canada Limited 12

4 Obtaining Short-Term Financing Borrow Money (Debt) Raising Funds Sell Ownership Shares (Equity) Chapter 17 Retain Earnings (Profits) Copyright © 2008 by Nelson, a division of Thomson Canada Limited 13

Unsecured Short-Term Loans 4 Trade Credit Bank Loans Seller extends credit to the buyer • Lines of credit • Revolving credit agreement (most are secured in Canada) Chapter 17 Commercial Paper Unsecured short-term debt issued by a financially strong corporation Copyright © 2008 by Nelson, a division of Thomson Canada Limited 14

Secured Short-Term Loans Chapter 17 4 Secured Loans Borrower pledges specific assets as collateral, such as accounts receivable or inventory. Factoring Firm sells its accounts receivable to a factor, such as a chartered bank or commercial finance company. Copyright © 2008 by Nelson, a division of Thomson Canada Limited 15

Debt Financing 6 Chapter 17 Term Loans A business loan with a maturity of more than one year. Bonds Long-term debt obligations issued by corporations and governments. Mortgage Loans A long-term loan made against real estate as collateral. Copyright © 2008 by Nelson, a division of Thomson Canada Limited 16

Equity Financing 7 Selling Common Shares Dividends & Retained Earnings Preferred Shares Chapter 17 Venture Capital Copyright © 2008 by Nelson, a division of Thomson Canada Limited 17

Risk Management 8 Risk avoidance Strategies to Manage Risk Self-insurance Risk reduction Chapter 17 Risk transference Copyright © 2008 by Nelson, a division of Thomson Canada Limited 18

9 Insurance Concepts Insurable Risks The loss must not be under control of insured There must be many similar exposures to peril Losses must be financially measurable Peril must not be likely to affect all parties at same time Chapter 17 Potential loss must be significant Company must have the right to set standards for coverage Copyright © 2008 by Nelson, a division of Thomson Canada Limited 19

Types of Insurance 9 Property Liability Health Chapter 17 Life Key executives Copyright © 2008 by Nelson, a division of Thomson Canada Limited Dead peasants 20

9 Special Types of Business Liability Insurance Business interruption insurance Theft insurance Fidelity and surety bonds Title insurance Chapter 17 Professional liability insurance Copyright © 2008 by Nelson, a division of Thomson Canada Limited 21

10 The Changing Role of the CFO § Work with top management to develop and implement the firm’s strategic direction § Re-establish public trust § Assure stakeholders of honest transactions and reporting Chapter 17 § Maintain a higher profile with their companies’ boards Copyright © 2008 by Nelson, a division of Thomson Canada Limited 22

10 Weighing the Risks after 9 -11 -2001 Credit risk Market risk Chapter 17 Operational risk Copyright © 2008 by Nelson, a division of Thomson Canada Limited 23