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Week 13: FINANCIAL MANAGEMENT

Week 13: FINANCIAL MANAGEMENT. BUSN 102 – Özge Can. Financial Management. Financial Management Planning for a firm’s money needs and managing the allocation and spending of funds Three fundemental concepts: Balancing short-term and long-term demands Balancing potential risks and rewards

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Week 13: FINANCIAL MANAGEMENT

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  1. Week 13: FINANCIAL MANAGEMENT BUSN 102 – Özge Can

  2. Financial Management • Financial Management • Planning for a firm’s money needs and managing the allocation and spending of funds • Three fundemental concepts: • Balancing short-term and long-term demands • Balancing potential risks and rewards • Balancing leverage and flexibility

  3. Three Fundamental Concepts

  4. Financial Management • Risk/ Return Trade-Off • The balance of potential risks against potential rewards • Example: A company with free cash: • Invest in the stock market? • Put the money in a bank account? • Invest in a new facility or a new product?

  5. Tasks of Financial Managers: • Ultimate responsibility => Making decisions about alternative sources and uses of funds with the goal of maximizing company’s value 1) Develop and implement financial plans 2) Monitor cash flows and manage cash reserves 3) Make budgets

  6. 1. Developing a Financial Plan • Financial Plan • A document that outlines the funds needed for a certain period of time, along with the sources and intended uses of those funds • Uses input from three sources: • Strategic plan • Company’s financial statements • External financial environment

  7. Finding and Allocating Funds

  8. 2. Monitoring Cash Flows • Cash is necessary to: • Purchase the needed assets and supplies • Pay dividends to shareholders • Liquidity Crisis • Having insufficient cash to meet short-term needs

  9. 2. Monitoring Cash Flows • In order to maintain positive cash flows: • Monitor working capital accounts • Working capital accounts: • A firm’s cash on hand as well as economic value that can be converted to cash (inventory) or expected from customers (account receivable) minus what is scheduled to pay out (accounts payable)

  10. 2. Monitoring Cash Flows

  11. 3. The Budgeting Process • Budget: • A planning and control tool that reflects expected revenues, operating expenses, and cash receipts and outlays

  12. Budgeting Challenges:

  13. The Budgeting Process • Hedging • Protecting against cost increases with contracts that allow a company to buy supplies in the future at designated prices • Rolling forecasts • Reviewing economic performance regularly to see whether budget needs to be modified • Scenario planning • Identfying two or more ways that events could unfold and having budgetary responses for each one

  14. Types of Budgets: • Start-Up Budget • A budget that identifies the money a new company will need to spend to launch operations • Operating Budget (Master Budget) • A budget that identifies all sources of revenue and coordinates the spending of those funds throughout the coming year

  15. Types of Budgets: • Capital Budget • A budget that outlines expenditures for real estate, new facilities, major equipment, and other capital investments • Project Budget • A budget that identifies the costs needed to accomplish a particular project

  16. Financing Alternatives: 1) Debt Financing • Arranging funding by borrowing money 2) Equity Financing • Arranging funding by selling ownership shares in the company, publicly or privately

  17. Debt Financing vs. Equity Financing

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