Finance for Non-Financial Managers , 6 th edition

1. Finance for Non-Financial Managers, 6th edition PowerPoint Slides toaccompany Prepared by Pierre Bergeron, University of Ottawa

2. Finance for Non-Financial Managers, 6th edition CHAPTER 1 OVERVIEW OF FINANCIAL MANAGEMENT

3. Overview of Financial Management Chapter Objectives • Define the meaning of financial management. • Identify the individuals responsible for the finance function. • Explain the four financial objectives. • Comment on the three major types of business decisions. • Discuss the issues related to corporate transparency and accountability. Chapter Reference Chapter 1: Overview of Financial Management

4. The Changing Role of Financial Management The Statement of Financial Position Today Yesterday Internal activities • Working capital • Capital budgeting • Management information systems External activities • Mergers • Acquisitions • Reorganization • Recapitalization Focus • Economy • Efficiency • Effectiveness Focus: Raising funds Operating and financial matters Legal matters

5. Organization of the Book Finance for Non-Financial Managers Chapter 1 Overview of Financial Management Accounting, Financial Statements and Ratio Analysis Chapter 2 Accounting and Financial Statements Chapter 3 Statement of Cash Flows Chapter 4 Financial Statement Analysis Operating Decisions Chapter 5 Profit Planning and Decision-Making Chapter 6 Working Capital Management Chapter 7 Planning, Budgeting, and Controlling Financing Decisions Chapter 8 Sources and Forms of Financing Chapter 9 Cost of Capital, Capital Structure and Financial Markets Investing Decisions Chapter 10 Time Value of Money Concepts Chapter 11 Capital Budgeting Chapter 12 Business Valuation

6. 1. The Meaning of Financial Management Statement of Financial Position Assets Return on assets Investors Cost of financing 10% 7% • 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 non-current 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?

7. 2. Who is Responsible for the Finance Function? TREASURER CONTROLLER • General accounting • Cost accounting • Credit and collections • Management information systems • Trade and other payables • 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 • Raising capital • Investor relations • Short-term borrowings • Dividends 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 All MANAGERS

8. 3. The Four Financial Objectives Efficiency R.O.R R.O.A R.O.I R.O.E % (Incubation) Liquidity Current assets $ Less: current liabilities $ Net working capital $ (Cash shortage: must rely on credit) • Revenue • Working capital • Non-current assets • Profit for the year Growth (Financial insolvency = inaction) Stability Equity % Assets Debt % (Total insolvency: debt is out of proportion)

9. Return on Revenue Objective Non-current assets $3,000 or $0.03 Internal use (retained earnings) $5,000 or $0.05 Current assets $2,000 or $0.02 Return on revenue $8,000 or $0.08 Dividends $2,000 or $0.02 External use $3,000 or $0.03 Debt reduction $1,000 or $0.01

10. 4. Types of Business Decisions Statement of Financial Position Investing decisions Operating decisions Financing decisions Managers Managers CEO/CFO/Treasurer • Equity • • Share capital • • Retained earnings • Liabilities • Long-term • Short-term Statement of Income Revenue Cost of sales Gross profit Operating expenses Profit before taxes Income tax expense Profit for the year Non-current assets Current assets

11. Operating Decisions Statement of Financial Position Working Capital Management • Inventories • Trade receivables • Trade and other payables • Cash Statement of Income • Demassing • Planned downsizing • Productivity indicators • Rewarding simplification • Cutting back useless activities • Rewarding quality work • Empowering workers • Zero-based budgeting

12. Financing Decisions • The matching principle • Sources and forms of financing • Cost of borrowed funds • Financing mix

13. Investing Decisions Capital Assets • Research and development • Expansions • New plants • Modernizations • Acquisitions

14. 5. Corporate Transparency and Accountability • Government Legislation (most recent Act, Sabarnes-Oxley in 2002). • Corporate Governance (a push towards transparency, integrity and ethical behaviour). • Corporate Culture (emphasis on shared values and beliefs). • Global Accounting and Financial Statements (creation of the International Accounting Standards Committee (IASC), the International Financial Financial Reporting Interpretations Committee (IFRIC) and the development of the International Financial Reporting Standards (IFRS).