© Prentice Hall, 2007Excellence in Business, 3eChapter 17 - 1 Keeping the Engine Running: Financial Management and Banking

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 17 - 1

Keeping theKeeping theEngine Running:Engine Running:

Financial Management Financial Management and Bankingand Banking


The Role of Financial The Role of Financial ManagementManagement

• Current needs

• Future needs

–Sources of funds

–Uses of funds

–Maximizing company value


Implementing the Implementing the Financial PlanFinancial Plan

• Monitoring cash flow

–Accounts receivable and payable

– Inventory control

• Managing cash reserves

–Marketable securities

–Electronic cash management


Operating BudgetOperating Budget

• Master budget

–Cost control

–Expenditures

–Plan for the future

–Financial control


Capital Budget ProcessCapital Budget Process

• Request

• Review

• Evaluate

• recommend


Financing Operations Financing Operations and Growthand Growth

• Length of term

• Cost of capital

• Debt or equity


Length of TermLength of Term

• Less than one year

–Short-term financing

• Greater than on year

–Long-term financing


Long-Term FinancingLong-Term Financing

• Internal sources

–Retained earnings

–Sale of assets

• External sources

–Debt capital

–Equity capital


Cost of CapitalCost of Capital

• Company risk

• Interest rates

• Opportunity cost


Debt versus EquityDebt versus Equity

Characteristic Debt Equity

Maturity Specific Nonspecific

Claim on Income Fixed Cost Discretionary Cost

Claim on Assets Priority Residual

InfluenceOver Management

Little Variable


Types of Debt FinancingTypes of Debt Financing

• Trade credit

• Commercial paper

• Secured loans

• Unsecured loans

• Leases

• Bonds


The U.S. Financial The U.S. Financial SystemSystem

DepositDeposit

Commercial banks

Savings and loans

Mutual savings banks

Credit unions

NondepositNondeposit

Insurance companies

Pension funds

Finance companies

Brokerage firms


Financial ServicesFinancial Services

• Checking and savings accounts

• Business and consumer loans

• Credit, debit, and smart cards

• Electronic banking


Checking and Savings Checking and Savings AccountsAccounts

• Demand deposits

• Statement savings

• Money market and CDs


Business LoansBusiness Loans

• Expansion

• Construction

• Purchases

• Renovation


Short-Term CreditShort-Term Credit

• Credit cards

• Debit cards

• Smart cards


Online Payment SystemsOnline Payment Systems

• Advantages– Security– Ease of use– Easy to set up

• Disadvantages– Account maintenance– Software– Consumer protection


Electronic BankingElectronic Banking

• Automated teller

• Electronic funds transfer

• Online banking


Bank Safety and Bank Safety and RegulationRegulation

• Federal deposit insurance corporation

• National credit union association

• State banking association

• Office of the comptroller of Currency

• Credit thrift supervision

• Federal reserve system


The Future of BankingThe Future of Banking

• Industry competition

• Banking ethics

• Crime and terrorism


The Federal ReserveThe Federal Reserve

• Conducting monetary policy

• Stabilizing the banking system

• Stabilizing the economy

• Clearing checks


What is Money?What is Money?

• Medium of exchange

• Measure of value

• Store of value


U.S. Money SupplyU.S. Money Supply

• Hard Currency

• Demand deposits

• Time deposits


Influencing the Money Influencing the Money SupplySupply

• Reserve requirements

• Discount rate

• Open-market operations

• Selective credit controls


Federal Reserve Federal Reserve FunctionsFunctions

• Supplying currency

• Clearing checks

Documents

© Prentice Hall, 2007Excellence in Business, 3eChapter 17 - 1 Keeping the Engine Running: Financial Management and Banking