Financial Planning and External Financing

ACCOUNTANTS AND FINANCIAL MANAGERS

Accountants and Financial Managers

1. How do accountants and financial managers differ in their use of financial information? Why is cash flow more significant to a financial manager than it is to an accountant?

To a large extent, accountants make use of financial information to report financial transactions that have happened in the past. On the other hand, financial managers use financial information to make plans about future undertakings of relevance to the organization. Cash flow happens to be more relevant to a financial manager owing to the fact that as Moyer, McGuigan and Rao (2012) indicate, a cash flow statement could come in handy in budgeting efforts as it is instrumental in the prediction of future cash flow. As the authors further indicate, “a cash flow statement is a valuable measure of strength, profitability, and the long-term future outlook of a company” (Moyer, McGuigan and Rao, 2012, p. 216).

2. Explain how financial planning is used to determine a firm’s external financing requirements.

Financial planning is instrumental in the establishment of the optimal capital structure of a company. Considerations relating to risk and return as well as cost of capital happen to be in the purview of financial planning. Thus, for instance, when risk is low and cost of capital manageable, debt financing could be taken into consideration.

3. Explain how internally generated funds are used to reduce the need for external financing to fund asset investments.

To a large extent, in seeking to fund asset investments, a company could consider either external financing (i.e. debt) or internal financing (i.e. equity), or a mixture of the two. It is however important to note that there are some inherent advantages of internally generated funds that could make the approach ideal. For instance, in the case of internal financing, there is no associated interest payment which could be a financial burden for companies during depressions or downturns in economic activity. Thus, to fund asset investments, an organization could opt to offer for sale a portion of its equity.

4. What is the purpose of knowing the break-even point? What will happen to the break-even point if the contribution margin rises (falls)?

Knowledge about break-even point is crucial in long-term planning efforts. This is more so the case given that it helps in the establishment of that point at which an enterprise or new venture will turn a profit – i.e. the point at which the total cost of production will be covered by total revenue from sales (Brigham and Houston, 2012). A rise in the contribution margin would result in a decrease in the break-even point. On the other hand, a fall in the contribution margin would result in an increase in the break-even point.