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Chapter 18 – Financial Management

Chapter 18 – Financial Management - Chapter...

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Chapter 18 – Financial Management - The Role of finance and financial Managers o Finance – the function in a business that acquires funds for the firm and manages those funds within the firm Preparing budgets, doing cash flow analysis, planning for the expenditure of funds on assets Financial Management – Job of managing a firm’s resources so it can meet its goals and objectives. Financial Managers – Examine the financial data prepared by accountants and make recommendations to top executives regarding strategies for improving the health of the firm. Three most common ways for a firm to fail financially: Undercapitalization (lacking enough funds to start business) Poor control over cash flow Inadequate expense control - Financial Planning - optimizing the firms profitability and making the best use of its money (close link between financial planning and budgeting) o Involves three steps: Forecasting both short term and long term financial needs Developing budgets to meet those needs Establishing financial control to se how well the company is doing what it set out to do o Forecasting financial needs Short term forecast – Predicts revenues, costs, and expenses for a period of one year or less Cash flow forecast – predicts cash inflows and outflows in future periods, usually months/quarters Long term forecast – predicts revenues, costs, and expenses for a period longer than 1 year, and sometimes as far as 5 or 10 years o Working with the Budget Process Budget – Financial plan that sets forth management’s expectations, and on the basis of those expectations, allocates the use of specific resources throughout the firm Key financial statements form the basis of these expectations Three types of budgets in a firm’s financial plan: Capital budget –
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