Chapt 18, intro to bus part 1

1. Financial Management
Chapter 18, Part 1
INTRODUCTION TO BUSINESS
PREPARED BY: SHAFAYET ULLAH
SECTION: A3 AND A4

2. Defining Finance
 The study of money within the firm.
 The functional area with the responsibility of:
 Finding funds for the firm
 Managing funds of the firm
 Determining best uses of the firm’s funds

3. The Financial Manager
 Individual
who is responsible for the finance
function
 Effective, financial manager must develop and follow
a financial plan.

4. Role of the Financial Manager
 Projecting month-by-month flow of funds into and
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out of the business
Comparing monthly inflows to monthly outflows
Finding ways to generate revenue from excess funds
Adjusting inflows and or outflows and looking for
other funding sources ( in case of fund shortage)
Analyzing alternate sources of funds and finding the
most efficient source ( in case new funds are
required)
Monitoring and evaluating results of the financial
plan.

5. Month-by-Month Outward Flow of Funds
 Represents the firm’s use of funds
 Cost of daily operations: Rent, utilities, wages, interest
expense, taxes.
 Cost of credit service: Most firms cannot do business
strictly on cash basis, so they provide customers with
some form of credit to encourage larger purchases and
gain new customers.
 Cost of inventory: To survive in a competitive
environment firms must provide for customer needs and
cannot afford to be out of product that customer
demands. ( Further complicated by demand fluctuation).

6. Month-by-Month Outward Flow of Funds
 Purchase
of major assets: Land, buildings,
equipment (Must be periodically replaced and
upgraded) Expansion also requires additional assets.
 Debt payment: Payment of interest and principal
 Dividend payment: Made to the shareholder as form
of earnings on their stocks. Most firms pay dividends
to keep their stock attractive to potential investors.

7. Month-by-Month Inward Flow of Funds
 From revenue generated by the business
 Can be projected by estimating sales volume
 Where credit sales are involved, rate of payment on
accounts receivable must be estimated
 Interest income expected from investment of cash
reserves and other excess funds.

8. Monthly Inflow to Monthly Outflow: Comparison
 Three possible outcomes:
 Perfect matching: No action required ( Unlikely)
 Expected expenditure for the month greater than
expected income ( Additional funds must be found to
cover shortfall)
 Expected income for the month greater than
expected expenditure: Company has excess funds.

9. Generating Revenue from Excess Funds:
Expansion
 Applicable for companies with substantial excess
funds
 Achieved by:
 Increase in production capacity
 Addition of new sales outlets
 Acquiring another firm.

10. Generating Revenue from Excess Funds: High
Liquidity Investments
 Most popular placement for excess funds: Marketable securities ( Easily
converted into cash, pay relatively high interest rates)
Three most commonly used marketable securities:
 U.S. Treasury Bills:
• Issued each week to the highest bidder
• Maturity Dates: Three or six months ( Date on which principal must be
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repaid to the purchaser)
Often called T bills
Virtually risk free
One of the most popular marketable securities
Issued in amounts of $ 10,000/more ( not for a small investor).

11. Generating Revenue from Excess Funds: High
Liquidity Investments
 Commercial paper:
• Short term note ( Represents a loan to a major
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corporation with a high credit standing)
Maturity date: Three days to nine months
Riskier than T bills, not as liquid
Purchaser paid a higher rate of interest
Normally issued in amounts of $25,000 to 100,000.

12. Generating Revenue from Excess Funds: High
Liquidity Investments
 Certificates of deposit/CDs:
• Notes issued by a commercial bank/ brokerage firm
• Size runs from $100 to 100,000
• Maturity dates: Range from 24 hours to 10 years
• Issued for 7 days to 42 months
• CDs issued by banks: Early redeeming possible
(Substantial interest penalty).

13. Financial Management
Chapter 18, Part 1
Thank You