Chapter 18 ? Financial Management Finance & Managers Finance ? the functional area It acquires funds of a business & it manages the funds How cash wealthy is the company? Financial Managers ? Makes recommendations to top management of strategies to improve the financial condition of the firm Finance Dept. ? Manages the resources 2 Key Responsibilities ? To obtain firm funding and to control firm funding 3 Reasons why companies fail 1. Under capitalization 2. Poor Cash Management 3. Inadequate expense control Most Important Skills of CFO?s Analytical thinking Strategic planning Leadership objectivity Creativity Communication Skills Building relationships People Development What Financial Managers Do Budgeting Treasury Planning Auditing Budgeting Managing Taxes Obtain Funds Advising Top Management Controlling Funds on Financial Matters Collecting Funds Maintains Cash Flow for the Period Budget Process Financial Plan ? Financial Statements Types of Budgets Capital ? Land, Building, L-T goals Cash ? Daily inflows and outflows Operating (Master) ? Covers all functional areas of the corporation Financial Controls ? Feedback Need For Operating Funds Manage Daily operations Controlling credit operations Acquire inventory Capital expenditures Why Firms Need Funds Short Term Funds Meeting monthly expenses unanticipated emergencies Cash flow problems Expanding current inventory Temporary promotional programs Sources of Funds Short Term Trade credit Promissory Notes ? Promise to pay amount by a specified date Family/Friends ? Put it in writing Banks ? Secured Loans or Unsecured Loans Factoring ? Deals with accounts receivable Commercial paper ? Unsecured promissory note > 100,000 Credit Cards ? Most secure way to short term funds Long Term Debt Equity Term Loan Stock Bonds Retained Earnings Secured Venture Capital Unsecured Term Loan ? A promissory note, however it allows installments over time ? payments Bonds ? Written promise to pay a certain amount by a specific date, L-T use of funds, face amount on the bonds, all paid at once at bond maturity Venture Capital ? Loan short term funds in exchange for some say in management. They are shareholders. Who Can Issue Bonds Federal, State, and Local Govt. Federal Govt. Agencies Corporations Foreign governments and corporations Venture Capitalists Finance new and rapidly growing companies Purchase equity securities Assist in the development of new products or services Add value to the company through active participation Take higher risks Have L-T orientation Chapter 19 ? Securities Markets: Financing & Investing Opportunities Risk Return Market ? The bigger the risk, the higher gains you can make Derivative ? Contract whose values are based on the underlying assets 5 Principles of the G20 1. Strengthen transparency and accountability in the market place ? securities markets, Increased SEC of corporations 2. Improve regulation of financial industry 3. Promoting market integrity, Hold companies to a higher standard of ethics 4. Enforce global cooperation 5. Reform international institutions ? Directed at financial systems Functions of Securities Markets Long-Term Funding for Businesses ? Original Plan Place to Buy/Sell Securities (Investments) Capital Markets Primary Markets (IPO's) ? Initial Public Offering ? Only time a company receives money from selling stock Secondary Markets ? Involves investors and brokers, the company is no longer involved Investment Banker Assist Sale/Issue of New Securities Underwrite issues Sells to Institutional Investors Bond Market Coupon/Interest Rate Denomination ($1,000) Principal Maturity Date Classes Unsecured/Debenture Secured Ratings ? Likelihood of you getting back your money AAA Bond = Most secure C Bonds ? Junk bond (very poor security) When issuing ratings, they are looking at the general health of the company Bonds Advantages No Vote Interest is Tax-Deductible Temporary Source of Funds Can be repaid before maturity with call provision Disadvantages Increase debt Legal obligation to pay interest Repaid on maturity date Special Bond Features Sinking Fund ? Put money away to pay off Callable ? Corporations can recall bonds Convertible ? Can be converted into common shares (if there is a cash shortage) Debt vs. Equity Financing Debt Equity Secure or debenture Preferred or common Must be repaid on maturity date Investment never has to be repaid Interest must be paid when specified not legal or obligated to pay dividends What is Stock? Ownership Certificate Par Value ? Stated stock value (face value) Dividends ? Dual taxed Common vs. Preferred Common stock: Most accepted form of stock ownership, voting rights Preferred stock: If the company liquidates, they are the first to be paid after the debt holders, no voting rights, Option saying ?we will pay dividends? Stock Advantages Disadvantages No Repayment Voting Rights No Legal Obligation Dividends not tax deductable Does Not Create Debt Management works to keep stockholders happy Organized Securities Exchanges New York Stock Exchange (NYSE) ? Highest dollar amount in U.S., actual floor American Stock Exchange (AMEX) ? Combination of NYSE and Euro net Over-the-Counter (OTC) ? No regulation by SEC, have been delisted by SEC in other markets, Risk of losing all investments but have very high returns NASDAQ ? Largest volume of trades daily in the US, no actual floor, computer based Investment Criteria ? Determines how money will be invested Risk ? Possibility of deviation from your expected, determined by the attitude of the company, age determines risk Yield ? Return on money Duration ? Length of period you are willing to let your investment ride Liquidity ? Ability to convert your investment back into cash Tax Consequences ? Until you cash out, you pay no taxes on your investment. Tax bracket is lower the younger you are Investing In Bonds Corporate Bonds Municipal Bonds US Treasury Bonds From 1 to 20 years From 1 to 40 years From 2 to 30 years Taxable Exempt from federal taxes and some state and local taxes Exempt from state and local taxes May be riskier than government bonds, but have higher yields Attractive to investors in high tax brackets Government backing provides maximum safety Investing in Stock Growth vs. Income Growth ? Let the stocks grow overtime. You think the company value will go up over time (capital gain) Income ? Pays dividends all the time, Regular income for holder (Dividends) Blue Chip vs. Penny Blue Chip ? Large capitalization stocks, large high quality companies Penny Stocks ? Sell at 2 dollars or less (minimum value) Market Order ? Instruction to broker to buy a stock at market value Limit Order ? Order to buy a certain market value Stock Split Mutual Funds Pool Investors? Money Best for Small Investors Index Fund ? Bought shares to mimic what it was trying to follow Diversification ? Spreading Risk No-Load vs. Load No Load ? No fees involved Load ? Fee to get in or out of a fund Open-End vs. Closed-End Open End ? No limit to the number of shares they can sell to that fund Closed End ? Certain number of shares available & when they?re gone they cut it off Types of Investments Traditional High Risk Stocks/Bonds Stock on margin Govt. Securities/CDs Junk Bonds Money Market or Mutual Funds Commodities Real Estate Components for Optimal Portfolio Performance Diversification Timelines Safety & Risk Income & Total Return Measures of Investment Stock Quotations Bond Quotations ? In 1000% Mutual Fund Quotations Stock Quotes % Change in year to date price High/Low Price Company Name & Stock Symbol Last Dividend per Share Dividend Yield P/E Ratio # of Shares Traded Closing Price Net Change- Price Mutual Fund Quotations Fund Name Net Asset Value (NAV) Net Change in NAV YTD Return Long-Term Return ? 3 to 5 years Bonus Chapter ? Risk Management Risk Management ? Tries to measure, control, and minimize uncertainties that may directly or indirectly affect an outcome. Need to define risks you need to manage Need to identify risk management strategies Need to determine how efforts will be coordinated to meet goals 2 Types of Risks 1. Pure ? No possibility of gain (car accident, fire, flood) 2. Rule of Indemnity An insured person or organization cannot collect more than the actual loss from an insurable risk. Guidelines for Evaluating if Risk is Insurable The policy maker must have an insurable interest the loss should be measurable The chance of loss should not be measurable The loss should be accidental The risk should be dispersed The insurance company can set standards for accepting the risk Mutual Insurance Company ? You are buying a share in the company if you buy insurance from them. Uninsurable Risks Market Risk Political Risk Personal Risk Operational Risk Types of Insurance Health HMO (Health Maintenance Organization) ? Members don?t get billed, cheapest type, have to go to doctors provided PPO (Preferred Provider Organization) ? Just like HMO but gives employees the option to go to doctors outside the organization with a cost MSA (Medical Savings Account) ? Just like a regular savings account, put in tax-free dollars, employee can draw dollars from account to pay medical expenses. HSA (Health Savings Account) ? Allows all savings accounts to roll over year to year, federal act, standardized MSA state by state Disability ? can cover 50-70% of employees? wages and only lasts 120 days, optional, not the same as workers comp which is required Workers Compensation Liability Other Business Insurance ? Time when company has to suspend activity Life Insurance for Business ? Insure life of CEO, CFO, etc. Home-Based Business ? Insurance against someone suing you for getting hurt on your property Types of Property & Liability Insurance Fire 7. Nonperformance Loss Protection Auto 8. Criminal Loss Protection Homeowner?s 9. Commercial credit insurance Computer coverage 10. Title Insurance Professional Liability Business Interruption Types of Life Insurance Group Life ? Covers all employees Owner or Key Executive Life Insurance Retirement and Pensions plan Credit life insurance ? pays off whatever you state in the contract (mortgage) Managing Personal Finances ? Bonus Chapter 2 Perspectives 1. Finance ? Think in terms of buyers 2. Everyone Else ? think in terms of your own life How to Figure Your Net Worth List Everything you own Note present market value Total assets List all creditors Total Liabilities Subtract liabilities from assets Controlling Assets Take financial assets inventory Track expenses Prepare budget Pay off debts Start a savings plan Borrow only to increase value Building a Financial Base Create/Apply Strategy ? Get financial target and work towards that by balancing expenses Taxes and Home Ownership Savings Manage Credit Real Estate ? Safe Consumer Credit Cards Advantages Disadvantages Convenience Temptation to overspend Financial Emergencies Items become more expensive Purchase Goods Immediately Danger of excessive debt Track purchases Tie up future income Safer than carrying cash Missed payments lead to poor credit High interest rates & annual fees Credit Score A good credit score is 750, anything below 650 is bad. Affects how you get loans, insurance, cell phone, rent, employers. All of these have to request permission to see your credit score. You can look at your credit score free and will not hurt your score - Paying on time makes up about 30% of your credit score - Don?t maximize your credit, use it wisely - Having a history/Starting young -15% - Avoiding opening several accounts or closing several accounts -10% - Getting the right type of credit -10% - 2 Types 1. Fixed 2. Flexible (Revolving) ? Credit cards Personal Insurance Life Term ? Purchased outside of corporation for a set period of time, after term ends premium increases Whole Life ? Level premium or level benefit incorporates ability to accrue interest in the contract. Generally purchased until death Variable Life ? Combination of term & whole life Annuity ? Pay insurance premiums and after a certain period of time, you can pull out money that has been saved Health/Disability Homeowner?s & Renters Other Retirement Social Security ? Est. 1935 Individual Retirement Accounts (IRA) -Traditional - Roth: Pay tax upfront 401(K) Plans Keogh Plans Financial Planners Estate Planning Estate Planning Select a guardian Prepare a will Prepare a durable power of attorney Financial planner/Attorney Human Resources Chapter Core Responsibilities of Human Resource Management Planning for staffing needs Employee recruitment and selection Employee training and performance evaluation Employee compensation and benefits Employee separation HR Does: Planning Determine needs (full vs. part time)(permanent vs. temporary) Job Analysis: Breaks jobs down to its components Demand and Supply Strategic Planning: Succession planning Recruitment Internet: Able to reach a lot of people quickly Employment agencies: Specifically set up to help company find employees Unions Job fairs Networking: Know people RJP (Realistic Job Preview): Gives an idea of what it is really like to be in that job Selection Screening Interviews: worst way of selecting Background check: checks every part of a person?s history Physical Ability: Able to do the job Skills testing: computer, typing, filing Intelligence testing Personality testing Assessment Centers: Simulate a day of work (Discriminate against people that do not have the knowledge, skills, or abilities) Training When KSA?s are worth teaching OJT (on job training) Apprenticeship: follow a skilled person Online training Simulations: Looks like real equipment but in a safe environment Was training effective? Did the learn it? Are they applying it? Is it having impact? Performance Evaluation Performance Evaluation System Compare to establish standards Critical to improving performance Helps to make decisions Tie to compensation Compensation & Benefits Compensation Salary Hourly Commission based Profit-sharing Benefits Employee Separation RIF Downsizing Right sizing Attrition Progressive Discipline Union Terminology Types of Agreements Open shop: place of employment at which one is not required to join or financially support a HYPERLINK "http://en.wikipedia.org/wiki/Trade_union" \o "Trade union" labor union as a condition of hiring or continued employment Closed shop: Business where union membership is a precondition to employment Agency shop: Business where employees must pay union dues whether they are a member of the labor union or not Union shop: place of HYPERLINK "http://en.wikipedia.org/wiki/Employment" \o "Employment" employment where the employer may hire either HYPERLINK "http://en.wikipedia.org/wiki/Trade_union" \o "Trade union" labor union members or nonmembers but where nonmembers must become union members within a specified period of time or lose their jobs Collective Bargaining: process whereby workers organize together to meet, converse, and compromise upon the work environment with their employers Grievances: subject of a complaint filed by an employee to be resolved by procedures provided in the HYPERLINK "http://en.wikipedia.org/w/index.php?title=Union_contract&action=edit&redlink=1" \o "Union contract (page does not exist)" union contract Major Employment Laws Workers Comp: form of HYPERLINK "http://en.wikipedia.org/wiki/Insurance" \o "Insurance" insurance that provides compensation medical care for employees who are injured in the course of employment, in exchange for mandatory relinquishment of the employee's right to sue his or her employer for the HYPERLINK "http://en.wikipedia.org/wiki/Tort" \o "Tort" tort of negligence ADA (Americans with Disabilities Act): wide-ranging HYPERLINK "http://en.wikipedia.org/wiki/Civil_rights" \o "Civil rights" civil rights law that prohibits, under certain circumstances, HYPERLINK "http://en.wikipedia.org/wiki/Discrimination" \o "Discrimination" discrimination based on HYPERLINK "http://en.wikipedia.org/wiki/Disability" \o "Disability" disability FMLA (Family and Medical Leave Act): allowing an employee to take unpaid leave due to a serious health condition that makes the employee unable to perform his job or to care for a sick family member or to care for a new son or daughter (including by birth, adoption or foster care). Up to 12 weeks FLSA (Fair Labor Standards Act): Established minimum wage, guaranteed time and a half overtime pay for certain jobs, and prohibited most employment of minors Title VII (Civil Rights Act of 1964): Creates protective classes Reduces discrimination on sex, race, color, religion, national origin, or age Those protected by these laws are those who fall within the minority You do have to be a US citizen to have this protection Bona Fide Occupational Qualification (BFOQ): Some aspect of the job that may require discrimination, but it?s okay to pick someone who can perform the job.
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