Chapter 18

Finance

The function in a business that acquire funds for the firm and manages those funds within the firm

Financial Management

The job of management a firm's resources so it can meet its goals and objectives

Financial managers

Managers who examine financial data prepared by accountants and recommend strategies for improving the financial performance of the firm

Skills needed by CFO's

Analytical thinking, strategic planning, leadership, objectivity

Tasks perform by financial managers

Planning, budgeting, obtaining funds, controlling funds, collecting funds, auditing, managing taxes.

Budget

A financial plan that sets forth management's expectations and, on the basis of those expectations allocates the use of specific resources throughout the firm.

Capital budget

A budget that highlights a firm's spending plans for major asset purchases that often require large sums of money. Ex. Property, buildings, equipment

Cash budget

A budget that estimates cash inflows and outflows during a particular period like a month or a quarter. Helps managers anticipate borrowing needs, debt repayment, operating expenses, short-term investments, often last budget prepared.

Operating (master) Budget

The budget that ties together the firm's other budgets and summarizes its proposes financial activities.

Financial control

Is a process in which a firm periodically compares its actual revenues, costs and expenses with its budget. It helps identify variances to their financial plan and allow them to take corrective action if necessary.

Debt financing

Funds raised through various forms of borrowing that must be repaid

Equity financing

Money raised from within the firm, from operations or through the sale of ownership in the firm (stock or venture capital)

Short-term financing

Funds needed for a year or less

Long-term financing

Funds needed for more than a year (usually 2 to 10 years)

Short term funds

monthly expenses, unanticipated emergencies, cash flow problems, expansion of current inventory, temporary promotional programs.

Long-term funds

New product development, replacing capital expenditure, mergers or acquisition, expansion into new markets, building new facilities

Trade credit

The practice of buying goods and services now and paying for them later

Promissory note

A written contract with a promise to pay a supplier a specific sum of money at a define time

Secure loan

A loan backed by collateral such as property

unsecured loan

a loan that doesn't require any collateral

line of credit

A given amount of unsecured short-term funds a bank will lend to a business, provided the funds are ready available.

Factoring

The process of selling accounts receivable for cash

Commercial paper

Unsecured promissory notes of $100,000 and up that mature in 270 days or less.

Debt financing

Borrowing money the company has a legal obligation to repay