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FINANCIAL MANAGEMENTINTRODUCTION TO FINANCE1Financial ManagementIntroduction to FinanceLearning OutcomesAt the end of this topic, YOU should be able to:

Explain what finance entails and why everyone should have an understanding of basic financial concepts.Understand the goals of the firm.Identify function of financial managers.Discuss the principles of finance.2Financial ManagementIntroduction to FinanceTopic & Structure of the LessonWhat is Finance?Goals of the FirmFinancial Management FunctionsThe Objectives of a Financial ManagerBasic Principles of FinanceCareer opportunities in Finance

Financial ManagementIntroduction to Finance3Key TermsProfit maximizationShareholders wealthCorporate financeInvestmentManagementFirm's goal

Financial ManagementIntroduction to Finance4What is Finance?Finance is concerned with decisions about money To make sound financial decisions, remember:More value is preferred to lessThe sooner cash is received the more value it hasLess risky assets are more valuable than risky assetsFinancial ManagementIntroduction to Finance5Why study Finance?You need RM1,000 in two years. Your bank pays 10% interest. How much do you need to save each year?

You want to buy a house to rent it out. How should you evaluate this decision?

How do you measure financial risk?Financial ManagementIntroduction to Finance6Importance of FinanceThe elixir that assists in the formation of new businesses and opportunities to grow

Supports other businesses; local, state, and federal government through remittance of income taxesFinancial ManagementIntroduction to Finance7How Finance Interacts with Other Business AreasFinance professionals work with other experts from a different range of disciplines to operate successful businesses.

Taking example from the business potential of iPad. Financial managers:Studied the opportunity and competition on the mobile media market and computing deviceEvaluated the cost of producing, marketing, and distributingAnalyzed potential demand for iPadUsing above information to develop pricing strategyMaking recommendations to top managementFinancial ManagementIntroduction to Finance8Four Major Areas of FinanceFinancial markets and institutions

Investments

Financial services

Managerial financeFinancial ManagementIntroduction to Finance9Financial InstitutionsBanks

Insurance companies

Savings and loans

Credit unionsFinancial ManagementIntroduction to Finance10InvestmentsMajor Functions:Determining the values, risks and returns of financial assetsDetermining the optimal mix of securities that should be held in a portfolioFinancial ManagementIntroduction to Finance11Financial ServicesDeal with the management of money.

Help individuals and companies determine how to invest money.

One of the largest industries in the world.Financial ManagementIntroduction to Finance12Managerial FinanceImportant in all areas of businessDecisions made by financial managers:The credit terms under which customers can buyHow much inventory the firm should carry?How much cash to keep on hand?Whether to acquire other firmsHow much earnings to reinvest in business and how much to pay out in dividends?Financial ManagementIntroduction to Finance13Goals of the FirmProfit MaximizationFocus on short term goal to be achieved within a year. It stresses on the efficient use of capital resources. In order to maximize profit, the financial manager will implement actions that would result in maximum profits without considering the consequence of his actions towards the company's future performance.

Drawbacks of Profit Maximization:Profit maximization is a short-term conceptProfit maximization does not consider the timing of returnsProfit maximization ignores riskFinancial ManagementIntroduction to Finance14Goals of the FirmMaximization of the Shareholders WealthIt being measured by the share price of the stock, which in turn is based on the timing of returns, the amount of the returns and the risk or uncertainty of the returns. Shareholders' wealth maximization can be achieved by considering the present and potential future earnings per share, timing of returns, dividend policy and other factors that affect the market price of the company's stock.Financial ManagementIntroduction to Finance15Financial Management FunctionsManaging firms internal cash flowsIts mix of debt and equity financingTo maximize the value of the debt and equity claims on firmsTo ensure that companies can pay off their obligations when they come dueInvolves obtaining seasonal financing, managing inventories, paying suppliers, collecting from customers, and investing surplus cashFinancial ManagementIntroduction to Finance16Financial Management FunctionsWhat is financial management?

Planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.Financial ManagementIntroduction to Finance17The Objectives of a Financial ManagerTo ensure regular and adequate supply of funds to the concern.

To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders.Financial ManagementIntroduction to Finance18The Objectives of a Financial ManagerTo ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost.

To ensure safety on investment, i.e., funds should be invested in safe ventures so that adequate rate of return can be achieved.

To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital.Financial ManagementIntroduction to Finance19Main Functions of a Financial ManagerRaising of Funds

In order to meet the obligation of the business it is important to have enough cash and liquidity. A firm can raise funds by the way of equity and debt. It is the responsibility of a financial manager to decide the ratio between debt and equity. It is important to maintain a good balance between equity and debt.Financial ManagementIntroduction to Finance20Main Functions of a Financial ManagerAllocation of Funds

Once fund raised, next is to allocate the fund in an optimal manner. Should consider:

Size of the firm and its growthStatus of assets; short-term or long-termMode by which the funds are raised.Financial ManagementIntroduction to Finance21Main Functions of a Financial ManagerProfit Planning

Profit earning is important for survival and sustenance of any organization. Profit planning refers to proper usage of the profit generated by the firm. Profit arises due to many factors such as pricing, industry competition, state of the economy, mechanism of demand and supply, cost and output.Financial ManagementIntroduction to Finance22Main Functions of a Financial ManagerUnderstanding Capital Markets

Shares of a company are traded on stock exchange and there is a continuous sale and purchase of securities. Hence a clear understanding of capital market is an important function of a financial manager.Financial ManagementIntroduction to Finance23Eight Principles of FinanceBuy assets that add value; avoid buying assets that dont add valueCash is kingThe time dimension of financial decisions is importantKnow how to compute the cost of financial alternativesMinimize the cost of financingFinancial ManagementIntroduction to Finance24Eight Principles of FinanceTake risk into accountMarkets are efficient and deal well with informationDiversification is importantFinancial ManagementIntroduction to Finance25Career Opportunities in FinanceFinancial ManagementIntroduction to Finance26Corporate FinanceBudgeting, financial forecasting, cash management, credit administration, investment analysis, fund procurementCommercial BankingConsumer bankingCorporate bankingInvestment BankingHigh income potentialVery competitive industryMoney ManagementOpportunities in investment advisory firms, mutual fund companies, pension funds, investment arms of financial departmentsConsultingAdvise on business practices and strategies of corporate clients Question and Answer SessionQ & AFinancial ManagementIntroduction to Finance27Next SessionUNDERSTANDING FINANCIAL STATEMENTS AND CASH FLOWSFinancial ManagementIntroduction to Finance28