Ch. 18: Financial Management

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Ch. 18: Financial Management by Mind Map: Ch. 18: Financial Management

1. Finance & Finance Managers

1.1. terms

1.1.1. finance function in a business that acquires & manages money

1.1.2. financial management managing a firms resources in order to meet its goals & objectives

1.1.3. financial managers examine data prepared by accountants recommend strategies for improving financial performance of the firm

1.2. value of understanding finance

1.2.1. 3 most common reasons a firm fails financially undercapitalization not enough $ to start a business poor control over cash inadequate expense control

2. Short-term Financing

2.1. trade credit

2.1.1. buying now & paying for it later

2.1.2. UPS

2.2. family & friends

2.2.1. do not recommend

2.3. commercial banks

2.3.1. prefer larger, more established businesses

2.4. loans

2.4.1. secured backed by collateral collateral something of value

2.4.2. unsecured doesn't require collateral harder to get since no collateral

2.4.3. line of credit an amount of unsecured money a banks will loan to a business

2.4.4. revolving credit guaranteed line of credit usually comes with a fee

2.4.5. commercial finance companies make short-term loans to borrowers who offer tangible assets as collateral General Electric Capital

2.5. factoring accounts receivable

2.5.1. process of selling accounts receivable for cash now

2.5.2. commercial bank or financial institution buys firm's AR at a discount for cash

2.5.3. common in textile & furniture industries

2.6. commercial paper

2.6.1. unsecured promissory notes that mature (come due) in 270 days or less

2.6.2. amounts up to $100,000

2.6.3. used when a firm needs money for just a few months

2.7. credit cards

2.7.1. nearly 1/3 of all small businesses use to finance their business

3. Long-term financing

3.1. debt

3.1.1. borrowing money that must legally be repaid

3.1.2. borrowing from a bank terms are usually 3-7 years but can go to 20 years term loan promissory note to repay the loan in specific installments advantage:

3.1.3. issue bonds bonds are a promise to repay the amount borrowed plus interest by a specific date 2 types of bonds secured unsecured

3.2. equity

3.2.1. 3 ways selling stock selling ownership (stock) in the company retained earnings profits the firm keeps to reinvest in company venture capital money that is invested in new or emerging companies that are perceived as having great profit potential used to start Apple; used to help Facebook & Google to grow

3.3. debt vs. equity financing

3.3.1. management influence debt: usually none equity: stockholders have voting rights

3.3.2. repayment debt: marturity date & must be repaid equity: no maturity date & not required to repay

3.3.3. yearly obligations debt: payment of interest equity: none

3.3.4. tax benefits debt: interest is tax-deductible equity: dividends are not tax-deductible

4. Financial Planning

4.1. forecasting financial needs

4.1.1. short-term forecast predicts revenues, costs, & expenses for 1 year or less cash flow forecast predicts cash inflows & outflows

4.1.2. long-term forecast predicts revenues, costs, & expenses for > 1 year

4.2. budgets in financial plan

4.2.1. budget financial plan that sets forth management's expectations for revenues expected revenues then guide allocation of resources

4.2.2. 3 typical budgets capital highlights spending plans for major assets cost large amounts of money cash estimates cash inflows & outflows operating ties together the other budgets summarizes its proposed activities

4.3. financial controls

4.3.1. process by which a firm periodically compares actual financials vs. budget

5. Need for Operating Funds

5.1. 4 key reasons to need funds:

5.1.1. managing day-by-day needs of business

5.1.2. controlling credit operations how do you manage giving credit to customers? controlling A/R can become a cash-flow issue one option is to accept credit cards for payment

5.1.3. acquiring needed inventory

5.1.4. making capital expenditures invest in either tangible long-term assets intangible assets