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FINANCIAL MANAGEMENT

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In the past, financial management was not a major concern for a business. A company used toestablish relations with a local bank. The bank handled the financing and the company took care of producing and selling.

 

Today only a few firms operate in this way. Usually busi­nesses have their own financial managers who work with the banks. They negotiate terms of financial transactions, compare rates amongcompeting financial institutions. Financial manage­ment begins with the creation of a financial plan. The plan in­cludes timing and amount of funds and the inflow and out­flow of money. The financial manager developsand controls the financial plan. He also forecasts the economic conditions, the company's revenues, expenses and profits.

 

The financial manager's jobstarts and ends with the company's objectives. He reviews them and determinesthe funding they require. The financial manager compares the ex­penses involved to the expected revenues. It helps him to pre­dict cash flow. The available cash consists of beginning cash plus customer payments and funds from financing.

 

The financial manager plans a strategy to make the ending cash positive. If cash outflow exceeds cash inflow the company will run out of cash. The solution is to reduce outflows. The financial manager can trim expenses or ask the customers to pay faster.

 

The financial manager also chooses financing techniques. One of them is short-term financing. Another is long term financ­ing.

 

Short-term financing. The seasonal financial needs of a company may be cov­ered by short term sources of funds. The company must pay them off within one year. Businesses spend these funds on salaries and for emergencies. The most popular outside sources of short term funds are trade credit, loans, factors, sales finance companies, and government sources.

 

About 85 percent of all US business transactions involve some form of trade credit. When a business orders goods and services, it doesn't normally pay for them. The supplier provides them with an invoice requesting payment within a settled time pe­riod, say thirty days. During this time the buyer uses goods and services without paying for them.

A company can use the trade credit as a source of savings. A typical trade arrangement is 2/10, net 30. If a buyer pays within 10 days instead of 30, he gets a 2 percent discount. The savings a buyer obtains can be used as a source of short term funds.

 

Commercial banks lend money to their customers by direct loans or by setting up lines of credit. A line of credit is the amount a customer can borrow without making a new request, simply by notifying the bank. If the business doesn't pledge collateral when it borrows, the loan is an unsecured loan. Only customers with an excellent credit rating can get an unsecured loan. They usually repay it within a year's time. When a company wants to borrow a large amount of money it pledges collateral to back up the loan. Such a loan is a secured one.

 

Sometimes a company might sell its accounts receivable to a special financial broker: a factoring company, a factor. The factor immediately pays the firm cash, usually 50 to 80 percent of the value of the accounts receivable. When customers make the pay­ments on their accounts, the money goes directly to the factor.

Some big firms obtain funds by selling commercial paper. Because commercial paper has no collateral behindit, only firms with a good financial reputation can sell it. In special cases, a business may obtain short term funds from the federal govern­ment.

Long-term financing. When a business needs funds to construct a new assembly line or to do extensive research and development which may not begin to bring in revenues for several years, short term fi­nancing wouldn't work. In this case, business will need long term sources of funds.

 

Firms may meet long term needs by increasing the company's debt either by getting loans or by selling bonds.

A long term loan is a loan that has a maturity of from one to tenyears. Within this period of time the firm pays interest on the debt. Sometimes the lender protects its financial position by re­quiring that the company obtain the lender's permission before taking on any additional long term debt. If the loan is particu­larly risky, the lender may even require the firm to limit or elimi­nate dividends to stockholders.

 

If the firm wants to be free of lender's restrictions, it may issue bonds. These are long term debts with a maturity date of 20 to 30 years in the future. Governments issue government bonds. Corporations issue corporate bonds which may be se­cured or unsecured.

 

If a company wants to sell bonds it can offer some collateral. Itis difficult, if not impossible, to find investors who are willing to buy bonds which are not backed up by collateral. Only huge corporations such as AT&T can successfully issue unsecured bonds, which are called debentures.

 

Most bonds carry a face value of $1000 and pay a predeter­mined interest rate (the coupon rate). The company pays this interest regularly according to the indenture agreement which specifies the terms of a bond issue. The company may retire bonds before they mature if the indenture agreement contains a call provision. In this case the firm pays the bondholders a redemption premium.

 

Another flexible feature in some agreements is the conver­sion privilege. It allows bondholders to convert their invest­ment into a stated number of shares of common stock. If the price of the company's common stock is going up, the investors can profit from conversion. Convertibility makes the bond issue more attractive to potential investors.

V. Milovidov «English for Financial

Management Experts»




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STEEL TANKS WITH FIXED ROOFS | STEEL TANKS WITH FLOATING ROOF | C) technological process | METHODS OF ERECTION OF CYLINDRICAL STEEL TANKS | APPENDIX 5 | REFERENCES | Exercise 4. Read the text, do the exercises. | THE ECONOMY AND ECONOMIC SYSTEMS | McConnell C.R., Brae S.L. Economics | FINANCIAL INSTITUTIONS |


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