Finance for Non-Financial Managers Fifth Edition

Slides prepared by

Pierre G. Bergeron
University of Ottawa

2008 by Nelson, a division of Thomson Canada Limited

Transparency 1.1

Overview of Financial Management

Learning Objectives
1. Define the meaning of financial management. 2. Identify the individuals responsible for the finance function. 3. Explain the four financial objectives. 4. Comment on the three major types of business decisions.

Chapter Reference Chapter 1: Overview of Financial Management

2008 by Nelson, a division of Thomson Canada Limited Transparency 1.2

1. The Meaning of Financial Management

Balance sheet
Assets Investors

Return on
assets

Cost of
financing

15%

11%

How are we doing and is the business profitable? How much cash do we have on hand and can we pay our bills on time? What should we spend our funds on? Operating activities or capital assets?

Where will our funds come from? From internal operations? From lenders?
From shareholders? How will our investors interests be protected? How much will it cost?

2008 by Nelson, a division of Thomson Canada Limited

Transparency 1.3

2. The Changing Role of Financial Management

The Balance Sheet Today
Internal activities Working capital Capital budgeting Management information systems Focus Economy Efficiency Effectiveness Operating and financial matters
2008 by Nelson, a division of Thomson Canada Limited

Yesterday
External activities Mergers Acquisitions Reorganization Recapitalization

Focus: Raising funds

Legal matters
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Who is Responsible for the Finance Function?

CONTROLLER
General accounting Cost accounting Credit and collections Management information systems Accounts payable Corporate accounting Internal auditing Budgets and analysis Systems and procedures Planning and controlling Interpreting financial reports Evaluation and consultation Preparing reports for government agencies Reports on capital assets

TREASURER
Raising capital Investor relations Short-term financing Dividend and interest payments Insurance management Analysis of investment securities Retirement funds Property funds Property taxes Investment portfolio Cash flow requirements Actuarial Underwriting policy and manuals Tax administration

OPERATING MANAGERS
2008 by Nelson, a division of Thomson Canada Limited Transparency 1.5

3. The Four Financial Objectives Efficiency

(Incubation)
R.O.S R.O.A R.O.I R.O.E Current assets Less: current liabilities Net working capital Sales revenue Working capital Capital assets Earnings Debt Assets Equity %
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%
$ $ $

Liquidity
(Cash shortage: must rely on credit)

Growth
(Financial insolvency = inaction)

Stability
(Total insolvency: debt is out of proportion)
2008 by Nelson, a division of Thomson Canada Limited

4. Types of Business Decisions

Balance Sheet
Investing decisions Managers
Current assets

Operating decisions Managers

Income Statement
Sales revenue

Financing decisions

CEO/CFO/Treasurer
Liabilities Current Long-term

Capital assets

Cost of sales
Gross profit Operating expenses Income before taxes Income taxes Net income

Equity

Capital
Retained earnings
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2008 by Nelson, a division of Thomson Canada Limited

Operating Decisions

Balance Sheet

Working Capital Management

Cash Accounts receivable

Inventory
Accounts payable

Income Statement

Demassing
Planned downsizing Productivity indicators Rewarding simplification Cutting back useless activities Rewarding quality work Empowering workers Zero-based budgeting

2008 by Nelson, a division of Thomson Canada Limited

Transparency 1.8

Financing Decisions The matching principle

Sources and forms of financing

Cost of borrowed funds Financing mix
2008 by Nelson, a division of Thomson Canada Limited Transparency 1.9

Investing Decisions

Capital Assets
Research and development
Expansions
New plants

Modernizations
Acquisitions

2008 by Nelson, a division of Thomson Canada Limited

Transparency 1.10