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What is Financial Management?
Financial management includes all the
activities concerned with obtaining money
and using it effectively.
 Sales revenues should be used to pay expenses and provide a
profit
 Income and expenses may vary from month/month or year/year.
 Temporary financing may be needed when expenses are high
and sales are slow or the opportunity to purchase a new plant or
expand an existing one arises.
Corporate Cash Needs
Short-Term Financing
Long-Term Financing
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Cash-flow problems
Current Inventory needs
Monthly expenses
Speculative production
Short-term promotional
needs
• Unexpected emergencies
Business start-up costs
Mergers and acquisitions
New product development
Long-term marketing
activities
• Replacement of equipment
• Expansion of facilities
Short-Term Financing
Short-term financing is money that will
be used for one year or less.
Operating cycle of a business [may be
longer than one year] and is the amount of
time between the purchase of raw
materials and the sale of finished products
to wholesalers, retailers or consumers.
Short-Term Financing. . .
(continued)
• Cash flow is the movement of money into
and out of an organization.
• Extension of credit to wholesalers, retailers, or
customers can cause cash-flow problems to firms.
Short-Term Financing. . .
(continued)
• Current inventory needs
Speculative production refers to the time
lag between the actual production of
goods and when the goods are sold.
 Most goods are manufactured from 4-9 months
before they are actually sold to customers.
 Must build their inventories before selling them
before peak times.
Long-Term Financing
Long-term financing is money that will
be used for longer than one year.
Financial Management
• Financing gets a business started in
the first place.
• Then it supports the firm’s production
and marketing activities, pays its bills,
and when carefully managed, produces
a reasonable profit.
Financial Management. . .
(continued)
Proper financial management ensures that:
Financing priorities are established in line with
organizational goals and objectives.
Spending is planned and controlled.
Sufficient financing is available when it is
needed, both now and in the future. (firm’s credit rating)
Excess cash is invested in certificates of
deposit (CDs), government securities or
conservative, marketable securities.
Financial Planning
Financial Plan is a formula for obtaining and using
the money needed to implement an
organization’s goals.
Process for developing the plan includes:
 establishing organizational goals and objectives
 determining how much money is needed to
accomplish each goal and objective
 identifying available sources of financing and decide
which to use
Review Figure 20.2, page 606
Financial Planning. . .
(continued)
1) Establishing Organizational Goals and
Objectives
a) Goal – end result to achieve from 1-10 yrs.
b) Objective – specific statements detailing
what the organization will accomplish within
a shorter period of time.
c) Must be specific and measurable and able
to translate into money costs.
Financial Planning. . .
(continued)
2) Budgeting for Financial Needs
a) Once goals and objectives are confirmed,
a budget can be planned for a specific
period including revenue and expenses.
b) Budget is a financial statement that
projects income and/or expenses over a
specified future period.
c) Sales Budget forecasts sales for a
department(s) over a specific time.
Review Figure 20.3, p 607
Financial Planning. . .
(continued)
d) Cash budget estimates cash receipts and
expenditures over a specific time.
Review Figure 20.4, p 607
d) Zero-base budgeting is a budgeting
approach in which every expense in
every budget must be justified.
e) Capital budget is a financial statement
that estimates a firm’s expenditures for
major assets and its long-term financing
needs.
Financial Planning. . .
(continued)
3) Identifying Sources of Funds
a) Sales revenue – greatest part of a firm’s financing
b) Equity capital – provided by owner(s) or stock
sales for start-up or expansion (generally used for
long-term financing)
c) Debt capital – borrowed capital provided as a line
of (pre-approved) credit
d) Proceeds from sale of assets – assets which no
longer needed or don’t ‘fit in’ with company’s core
business. (selling interest in related business to raise capital)