Joseph Fabiilli | How Organizations Use Funds for Business?

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How Organizations Use Funds for Business?
Joseph Fabilli
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Learning Goals

• What roles do finance and the financial manager
  play in the firms overall strategy?
• How does a firm develop its financial plans,
  including forecasts and budgets?
• What types of short-term and long-term
  expenditures does a firm make?

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Learning Goals (contd)

1. What are the main sources and costs of unsecured
   and secured short-term financing?
2. How do the two primary sources of long-term
   financing compare?
3. What are the major types, features, and costs of
   long-term debt?
4. When and how do firms issue equity, and what are
   the costs?

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Learning Goals (contd)

• Where can investors buy and sell securities?
• What trends are affecting the field of financial
  management?

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Learning Goal 1

• What roles do finance and the financial manager
  play in the firms overall strategy?

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Financial Management

• the art and science of managing the firms money
  so that it can meet its goals

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The Role of the Financial Manager

• To maximize the value of the firm to its
• owners by
• financial planning
• investment (spending money)
• financing (raising money)

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Learning Goal 2

• How does a firm develop its financial plans,
  including forecasts and budgets?

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Financial Planning Requirements

• Forecasts
• short-term (operating plans)
• long-term (strategic plans)
• Budgets
• cash budget
• capital budget
• operating budget

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Learning Goal 3

• What types of short-term and long-term
  expenditures does a firm make?

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How Organizations Use Funds

• Short-term expenses
• cash management
• accounts receivable
• inventory
• Long-term expenditures
• capital expenditures
• capital budgeting

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Learning Goal 4

• What are the main sources and costs of unsecured
  and secured short-term financing?

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Unsecured Short-Term Financing

• Trade credits (accounts payable)
• Bank loans
• line of credit
• revolving credit agreement
• Commercial paper

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Secured Short-Term Financing

• Secured loans
• pledging specific assets as collateral
• Factoring
• selling accounts receivable outright at a discount

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Learning Goal 5

• How do the two primary sources of long-term
  financing compare?

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Comparing Long-Term Financing

• Debt financing (borrowing)
• interest expense is tax deductible
• no loss of ownership
• requires payment of interest and principal on
  specified dates
• Equity financing (ownership)
• not required to pay dividends (not tax
  deductible) or repay investment
• common shareholders have voting rights

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Learning Goal 6

• What are the major types, features, and costs of
  long-term debt?

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Long-Term Debt

• Term loans
• secured or unsecured
• 5- to 12-year maturity
• Corporate bonds
• 10- to 30-year maturity
• Mortgage loans
• secured by real estate

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Learning Goal 7

• When and how do firms issue equity, and what are
  the costs?

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Equity Financing

• Common stock
• cost includes issuing costs and potential
  dividend payments
• Retained earnings
• profits reinvested in firm
• Preferred stock
• more expensive than debt
• dividends not tax-deductible
• claims are secondary to those of stockholders
• less expensive than common stock

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Debt vs. Equity Financing
Debt Equity
Voice in Management Creditors have none Stockholders vote
Claim on income assets Greater claim Residual claim
Maturity Stated maturity No maturity
Tax treatment Interest is deductible Dividends not deductible
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Learning Goal 8

• Where can investors buy and sell securities?

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Securities

• investment certificates issued by corporations
  or governments that represent either equity or
  debt

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Types of Markets

• Primary market
• new securities are sold (IPO)
• Secondary market
• organized stock exchanges
• Toronto Stock Exchange (TSX)
• TSX Venture Exchange
• foreign exchanges
• New York Stock Exchange (NYSE)
• over-the-counter market

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Trends in Finance

• Finance goes global
• Risk management
• credit risk
• market risk
• operational risk

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Thank You