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Unformatted text preview: AEM1200, Introduction to Business Management. AEM1200, Wednesday 3/2 Corporate Finance Financial management Budgeting Budgeting Sources and uses of funds Sources Financial Management
The job of managing a firm’s resources so it can meet its goals and objectives. What Financial Managers Do What The Three Financial Sins The
Undercapitalization Poor control over cash flow Inadequate expense control Budgeting
Budget -- Sets forth management’s expectations for revenues and allocates the use of specific resources throughout the firm. Budgets depend heavily on the balance sheet, income statement, statement of cash flows and short-term and long-term financial forecasts. The budget is the guide for financial operations and expected financial needs. Financial Planning Process Financial
Forecast cash flow Short-term uses – one year or less Long-term uses – from one to ten or more years in the future Cash budget
Estimate of a firm’s projected cash inflows and outflows that the firm Estimate can use to plan for any cash shortages or surpluses during a given period; period; Budget cash needs Capital budget
Firms’ spending plans for major asset purchases that often require Firms’ large amounts of money; large Operating (master) budget
Summary of a business’s proposed financial activities Control differences Actual vs. projected flows Modify forecasts and budgets Compare results Financial Control
A process in which a firm periodically compares its actual revenues, costs and expenses with its budget. Is the firm meeting its short-term financial commitments? Is the firm producing adequate operating profits on its assets? How is the firm financing its assets? Are the firms owners receiving an acceptable return on their investment? Financial Management: Responsibilities Financial
Short term finance Working capital and liquidity Working capital: the difference between current Working assets and current liabilities assets Long term finance Retained earnings Long term debt, including bonds Equity (stock) Corporate investment decision making Financing Daily Operations – Cash Flow Financing
Money received Money from (cash in) from
Credit Sales Cash Sales Investment Income Business expenses Business (cash out) (cash
Inventory Purchases Payment on Loans Payment on Assets Salaries Payable Supplies Taxes Accounting methods: a source of cash flow confusion Cash accounting method A method of accounting in which economic events are recorded only when cash is actually or constructively received or paid; A method of accounting in which revenue is recognized when it is earned and expenses are recognized in the period incurred, without regard to the receipt of cash. Accrual accounting method Accrual accounting: advantages and disadvantages
Accrual accounting: Fully considers the economic value of IOUs
Factoring of accounts receivable Explicates the financial situation of a startup
Statement of sources and uses However, accrual accounting does not guarantee that a company will have enough cash in hand to meet its obligations! Outstanding accounts receivable reduce liquidity! Profitability is deceiving!
If you… remember that profit always is a historic indication of the difference between revenue and expenses over some… period of time, then you understand that profit cannot be used to pay bills or purchase items because there is no cash available to do so! Profit is valuable for only two reasons Profit enhances a business’ borrowing power; Profit is a source of cash flow. Sources of Funds Sources
Short Term Long Term Trade Credit Promissory Notes Family/Friends Banks, etc.
Secured Loan Unsecured Loan Debt
Term-Loan Bonds Secured Unsecured Equity
Stock Factoring Commercial Paper Venture Capital and Venture Private Equity Private Retained Earnings Dealing with a “Cash Crunch” Dealing
Current Assets Long-term liabilities Factor accounts receivable; Factor accounts Sell inventory at a price well Sell inventory below market. below Increase your accounts Increase payable through the use of payable trade credit; trade Take short term debt
Promissory Notes Family/Friends Banks, etc. Term-Loan Bonds
Secured Unsecured Current Liabilities Equity Stock
Venture Capital and Venture Private Equity Private Retained Earnings Secured Loan Unsecured Loan Commercial Paper Improve the Flow
Minimize accounts receivable Reduce the raw material and finished products inventory Control your spending Delay your accounts payable Use of Excess Funds Use
Marketable securities Treasury bills Commercial paper Commercial deposits Expansion Increase working capital Asset purchases Take-Aways Take-Aways
Financial management: Matches sources and uses of funds in the business; Helps the CEO decide what is the best use of Helps investment funds; investment Designs funding structures to minimize cost of Designs capital. capital. The budget is the fundamental device for short The term financial management. term ...
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This note was uploaded on 04/19/2011 for the course AEM 1200 taught by Professor Perez,p.d. during the Spring '06 term at Cornell University (Engineering School).
- Spring '06