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1-1McGraw-Hill/IrwinUnderstanding Business, 8e © 2008 The McGraw-Hill Companies, Inc., All Rights
Reserved.
Nickels McHugh McHughNickels McHugh McHugh
**
Financial Management
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AP
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*** Finance & ManagersFinance & Managers
• What is Financial What is Financial Management?Management?
• FinanceFinance
• Financial ManagerFinancial Manager
• Importance of Importance of FinanceFinance
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Most ImportantMost Important Skills Needed by CFOsSkills Needed by CFOs
75%
55%
10%
51%
38%
19%
27%
26%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Analytical Thinking
Strategic Planning
Leadership
Objectivity
Creativity
Communication Skills
Building Relationships
People Development
Source: Source: CIO Enterprise
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Women CFOsWomen CFOs• As of May 2006, 35 of the 500 largest As of May 2006, 35 of the 500 largest
companies in the US had a female CFOcompanies in the US had a female CFO
• Five largest companies with female Five largest companies with female CFO: Citigroup, Home Depot, Verizon, CFO: Citigroup, Home Depot, Verizon, Marathon Oil, and Medco Health Marathon Oil, and Medco Health SolutionsSolutions
• Top 3 reasons that helped women Top 3 reasons that helped women achieve their current position: achieve their current position: Supportive boss, Supportive spouse, and Supportive boss, Supportive spouse, and culture of the organizationculture of the organization
Source: : cfo.com, June 1, 2006
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Non-FinanceNon-Finance Functions of CFOsFunctions of CFOs
1%
2%
5%
25%
53%
18%
39%
49%
60%
0% 10% 20% 30% 40% 50% 60% 70%
Marketing
Sales
Other Skills
HR & Admin.
Revenue Growth
Reengineering
MIS
P & L Responsibility
Business Development
Source: CIO Enterprise
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What Financial Managers DoWhat Financial Managers Do
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Where CFOs GetWhere CFOs Get Their Financial InformationTheir Financial Information
Radio5%
Magazines9%
Newspaper47%
Colleagues15%
Television12%
Internet11%
Don't Know1%
Source: : USA Today
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Financial Managers: Financial Managers: Ask Your ClientsAsk Your Clients
1.1. What are the client's goals in areas like What are the client's goals in areas like lifestyle, retirement, saving for college lifestyle, retirement, saving for college education and their health care as well as that education and their health care as well as that of their dependents?of their dependents?
2.2. When do they want to reach their goals?When do they want to reach their goals?
3.3. What steps have they already taken toward What steps have they already taken toward achieving their goals?achieving their goals?
4.4. How do they feel about taking investment How do they feel about taking investment risks for a potential higher rate of return?risks for a potential higher rate of return?
5.5. How involved do they want to be in How involved do they want to be in monitoring their progress toward their goals?monitoring their progress toward their goals?Source: : Fpanet.org
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*** Financial PlanningFinancial Planning
Financial Plan
Operating Budget
Financial Controls
Cash Budget
Capital Budget
Long-term Forecasting
Short-term Forecasting
Feedback Feedback
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*** Budget ProcessBudget Process
• Financial Plan- Financial StatementsFinancial Plan- Financial Statements
• Types of BudgetsTypes of Budgets• CapitalCapital
• CashCash
• Operating (Master)Operating (Master)
• Financial Controls- FeedbackFinancial Controls- Feedback
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Need for Operating FundsNeed for Operating Funds
• Manage Daily OperationsManage Daily Operations
• Controlling credit operationsControlling credit operations
• Acquire InventoryAcquire Inventory
• Capital ExpendituresCapital Expenditures
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Why Firms Need FundsWhy Firms Need FundsShort-Term FundsShort-Term Funds
• Meeting monthly Meeting monthly expensesexpenses
• Unanticipated Unanticipated emergenciesemergencies
• Cash-flow problemsCash-flow problems
• Expanding current Expanding current inventoryinventory
• Temporary Temporary promotional promotional programsprograms
Long-Term FundsLong-Term Funds
• New product New product developmentdevelopment
• Replacing capital Replacing capital expenditureexpenditure
• Mergers or Mergers or acquisitionsacquisitions
• Expansion into new Expansion into new marketsmarkets
• Building new Building new facilitiesfacilities
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Daily Profits Of CompaniesDaily Profits Of Companies With The Highest RevenueWith The Highest Revenue
• Wal-Mart - $24.8 MillionWal-Mart - $24.8 Million
• ExxonMobil - $58.9 MillionExxonMobil - $58.9 Million
• General Motors - $10.5 MillionGeneral Motors - $10.5 Million
• Ford - $1.4 MillionFord - $1.4 Million
• General Electric - $41.1 MillionGeneral Electric - $41.1 Million
• ChevronTexaco - $19.8 MillionChevronTexaco - $19.8 Million
Source: World Feature Syndicate, 2005
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Sources of FundsSources of Funds
Short-TermShort-Term
• Trade CreditTrade Credit
• Promissory NotesPromissory Notes
• Family/FriendsFamily/Friends
• Banks, etc.Banks, etc.• Secured LoanSecured Loan
• Unsecured LoanUnsecured Loan
• FactoringFactoring
• Commercial PaperCommercial Paper
• Credit CardsCredit Cards
Long-TermLong-Term
• DebtDebt• Term-LoanTerm-Loan
• BondsBonds• SecuredSecured• UnsecuredUnsecured
• EquityEquity• StockStock
• Retained EarningsRetained Earnings
• Venture CapitalVenture Capital
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1.1.Federal, state, and local Federal, state, and local governmentsgovernments
2.2.Federal government Federal government agenciesagencies
3.3.CorporationsCorporations
4.4.Foreign governments and Foreign governments and corporationscorporations
Who Can Issue Bonds?Who Can Issue Bonds?
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*** Sources of Equity FinancingSources of Equity Financing
Equity Equity CapitalCapitalEquity Equity CapitalCapital
Internal Internal SourcesSourcesInternal Internal SourcesSources
External External SourcesSourcesExternal External SourcesSources
Retained Retained EarningsEarnings
Retained Retained EarningsEarnings
Owner Owner ContributionContribution
ss
Owner Owner ContributionContribution
ssSale of Sale of
PartnershipsPartnerships
Sale of Sale of PartnershipsPartnerships
Venture Venture CapitalCapital
Venture Venture CapitalCapital
Public Sale of Public Sale of StockStock
Public Sale of Public Sale of StockStock
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IPOIPOSummer of 2006Summer of 2006
• 89 companies filed plans to raise money 89 companies filed plans to raise money through IPO – looking to raise $16.3 billionthrough IPO – looking to raise $16.3 billion
• 17 companies withdrew their plans to proceed 17 companies withdrew their plans to proceed with their IPO – were hoping to raise $3.89 with their IPO – were hoping to raise $3.89 billionbillion
• Withdrawing – Go Daddy Group and PNY Withdrawing – Go Daddy Group and PNY TechnologiesTechnologies
• Filing – Double-Take Software and Filing – Double-Take Software and Hansen MedicalHansen Medical
Source: : redherring.com, August 18, 2006
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Google IPOGoogle IPO
• Launched – August 2004Launched – August 2004
• IPO Price -- $ 85 per shareIPO Price -- $ 85 per share
• Seeking to raise $2.7 billionSeeking to raise $2.7 billion
• Unusual auction-style offering Unusual auction-style offering
• With IPO, the company must With IPO, the company must shed light on the inner workings shed light on the inner workings
• Key competitors – Yahoo and MicrosoftKey competitors – Yahoo and Microsoft
• As of March 31, 2004 Google employed As of March 31, 2004 Google employed about 1,900 employeesabout 1,900 employees
Source: : cnet news.com, April 30, 2004; Forbes, September 17, 2004
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*** Venture CapitalistsVenture Capitalists
• Finance new and rapidly growing companiesFinance new and rapidly growing companies
• Purchase equity securitiesPurchase equity securities
• Assist in the development of new products or Assist in the development of new products or servicesservices
• Add value to the company through active Add value to the company through active participationparticipation
• Take higher risks with the expectation of Take higher risks with the expectation of higher rewardshigher rewards
• Have a long-term orientationHave a long-term orientation
Source: : NVCA.com
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Making Use of LeverageMaking Use of Leverage
Common Stock $ 50,000Common Stock $ 50,000
Bonds (@10%) Bonds (@10%) $450,000$450,000
Funds Raised $500,000Funds Raised $500,000Earnings $ 125,000Earnings $ 125,000
Less: Bond Interest Less: Bond Interest $ 45,000$ 45,000
Total Earnings $ 80,000Total Earnings $ 80,000
Return to Return to $80,000$80,000
Stockholders Stockholders $50,000$50,000
Common StockCommon Stock $500,000 $500,000
Bonds (@10%) Bonds (@10%) 0 0
Funds RaisedFunds Raised $500,000 $500,000Earnings $ 125,000Earnings $ 125,000
Total Earnings $ 125,000 Total Earnings $ 125,000
Return to Return to $125,000$125,000
Stockholders Stockholders $500,000$500,000 == = = 160%160%
Leverage- Selling Leverage- Selling BondsBonds
== = 25%= 25%
Equity- Sale of StockEquity- Sale of Stock
