6.4 Finance

Your Finance Department is primarily concerned with five issues:

• Acquiring the capital needed for company activities. Capital can be acquired through:
• Current Debt
• Stock Issues
• Bond Issues (Long Term Debt)
• Profits
• Establishing a dividend policy that maximizes the return to shareholders.
• Setting accounts payable and accounts receivable policies (which are entered on the Marketing spreadsheet).
• Driving the financial structure of the firm, its relationship between debt and equity.
• Selecting and monitoring performance measures that support your strategy.

Tip: Finance decisions should be made after the other departments have entered their decisions. When the management team decides what the company needs to be successful, the Finance Department can decide how to pay for it.

Tip: One of the Finance Department's fiduciary duties is to verify that sales forecasts and product prices are realistic. If prices and forecasts are too high, the cash flow they predict might not materialize. The department should challenge Marketing to defend their forecasts and pricing decisions.

6.4.1 Current Debt

Your bank issues current debt in one year notes. The Finance spreadsheet in Capstone.xls displays the amount of current debt due from the previous year. The company can “roll” that debt by simply borrowing the same amount again. There are no brokerage fees for current debt.

Bankers will loan current debt up to about 75% of your accounts receivable (found on last year's balance sheet) and 50% of this year's inventory. They estimate your inventory for the upcoming year by examining last year's income statement. Bankers assume your worst case will leave a three to four month inventory, and they will loan you up to 50% of that amount. This works out to be about 15% of the combined value of last year's total direct labor and total direct material, which display on the income statement. Because they know your industry is growing, as a final step bankers increase your borrowing limit by 20% to provide you with room for expansion in inventory and accounts receivable.

As a general rule, companies fund short term assets like accounts receivable and inventory with current debt offered by banks.