Chapter 3 Financial Management Part 2

1. Chapter 3 Financial ManagementPart 2 BCN 4772 Summer 2007

2. Financial Management • What are the two main reasons businesses fail? • Lack of a good Idea • Under Capitalization • Capitalization • Start-up Capital • Working Capital • Expansion Capital

3. Financial Management • Start-up Capital • Rents and deposits • Starting Inventory • Salaries • Advertising • Equipping and making repairs • Organizing Costs • Insurance Premiums • Taxes and Licenses • Attorney and accounting fees • Management, consultant and counseling fees • Utilities • Garbage removal

4. Financial Management • Sources of Start-up Capital • Personal Savings • Borrow from friends, banks, other • Borrow from life insurance policies • Mortgage residential real estate • Sell stock • Venture Capital from public or private sources

5. Financial Management • Working Capital • Cost of doing business • Direct costs • Indirect costs • Short term • Long term • Seasonal • Equipment costs • Applicable start-up costs

6. Financial Management • Sources of Working Capital • Some of the same sources for Start-up capital • Mortgage Commercial or industrial real estate • Good money management • Trade credit from suppliers • Finance A/R’s • Factor AR’s

7. Financial Management • Expansion Capital • Requires a great deal of capital • Easier to identify? • Needed to purchase new equipment • New Building • Finance a large project • May require sustained business period 2-5 yrs

8. Financial Management • Sources of Expansion Capital • Same as Start-up and Working Capital • Equipment leaseback option • Borrow from government • Bond • Community economic development program

9. Financial Management • Debt Restructuring • 4th type of capital need • Need if business is failing • Seek professional accounting and legal services

10. Financial Management • Sources for Capital • Bank Loans • Common Stock • Debentures • Notes Payable • Mortgages Payable • Capital Leasing

11. Financial Management • Bank Financing • How much? • Is it enough? • How long? • When and how to repay loan? • Is the debt secured? • What is the opportunity cost? • Is there a better way to get the money?

12. Financial Management • Bank Financing Terminology • Principal • Term • Rate • Maturity Value • Single Payment Loan • Ordinary Interest • Compounded Interest • Discount • Installment Loan

13. Common stock Preferred Stock Par Value No Par Value Stock Additional Paid in Capital Convertible Preferred Stock Cumulative Preferred Stock Class B Common Stock Mortgage Payable Note Payable Debentures Convertible Debentures Letter of credit Capital Lease Financial Management Corporate Financing

14. Financial Management • Record keeping and creating • Estimating Records • Job Cost Records • Change Order Records • Equipment Records • Contracts • Accounting Records

15. Financial Management • Estimating Records • Direct and Indirect Job Costs • Amounts of Material Needed • Man-power Needed • Estimating process • Determine labor, material and equipment needs • How much subcontracting? • Assign prices to quantities • Add in: indirect costs, overhead and profit

16. Financial Management • Job Cost Records • Must account for several jobs at same time • Each contract is treated as separate company • Bad record keeping leads to company failure • Include all costs • Also should contain data from original estimate

17. Financial Management • Change orders • Contract modification • Agreement between owner and contractor • Initiated by either owner or contractor • Must be reflected in contract files • Must update job cost records

18. Financial Management • Equipment Records • Assigning cost of equipment to job • Depreciation • Repairs • Maintenance • Insurance • Operating costs • Establish per hour rate for equipment • Daily rate

19. Financial Management • Construction Contracts • Fixed-price / lump-sum • Unit-price • Cost-plus • Time and material

20. Financial Management • Contract Completion • How do you know when the job id done? • Percentage of Completion Method • Revenue recognition • Required for tax purposes if $10,000,000 + annual sales • Cost to cost • Complete Contract Method • No revenue is recognized until contract is fully or nearly completed

21. Financial Management • Accounting Unique to Contractors • Accounting for Retainages • Accounting for Overhead Costs • Provision for losses on Uncompleted Contracts • Cost and Estimated Earnings in Excess of Billings

22. Financial Management • Financial Ratios • Liquidity ratios • Leverage ratios • Activity ratios • Profitability ratios

23. Financial Management • Liquidity ratios • Current Ratio • Quick Ratio • Leverage ratios • Debt to equity ratio • Times interest earned ratio • Activity ratio • Number of days of contract revenue in receivables

24. Financial Management • Profitability ratios • Gross profit margin • Net income as a percentage of sales • Return on beginning stockholders’ equity percentage

25. Financial Management • Acquiring Assets • Lease • Purchase • Evaluation of purchase decisions • Present value method • Return on investment method • Cash payback method

26. Present value method • Present Value • Purchase the equipment if: • The annual costs are < The present value of the annual savings • The cost of the equipment < the present value of the expected return on the equipment • The opportunity cost of purchasing the equipment is < the present value of the savings or expected return. • You must consider foregone income