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Lesson 1Module: Financial Management

Lesson 1

Introduction to Financial

Management


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Key Concepts and Skills

Know the basic types of financialmanagement decisions and the role of theFinancial Manager

Know the financial implications of thevarious forms of business organization

Know the goal of financial management

Understand the conflicts of interest that can

arise between owners and managersUnderstand the various types of financial

markets


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Career opportunities infnance

Finance consists of three interrelated

areas:

Money and capital marketsInvestments

Financial management (business

finance) actual management of thefirm.


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Balance Sheet Model o theFirm

Current Assets

Fixed Assets

1 Tangible

2 Intangible

Total Value of Assets:

Shareholder

s Equity

Current

iabilities

ong!Ter"#ebt

Total Fir" Value to In$estors:


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The Role o The Financial

Manager "apital #udgeting $ecision

% $ecision to invest in tangible or intangible

assets&

'also called the Investment $ecision


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Module: Financial Management

The Capital Budgeting Decision

Current Assets

Fixed Assets

1 Tangible

2 Intangible

Shareholder

s Equity

Current

iabilities

ong!Ter"#ebt

What long-terminvestments

should the firmchoose?


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The Role o The FinancialManager

Financing $ecision

% aising money that the firm needs for its

investments and operations&

"apital )tructure

% *he mi+ of long term debt and e,uity

financing&


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The Capital Structureecision

How should the

firm raise funds

for the selected

investments?

Current

Assets

Fied Assets

1 !angi"le

# $ntangi"le

%hareholders&

'(uit)

Current

Lia"ilities

Long-!erm*e"t


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Short!Term "ssetManagement

How should

short-term assets"e managed and

financed?

+et

Wor,ing

Caital

%hareholders&

'(uit)

Current

Lia"ilities

Long-!erm*e"t

Current

Assets

Fied Assets

1 !angi"le

# $ntangi"le


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Finan%ial

&anager

Fir"'s

o(erations In$estors

.1) Cash raised fro" in$estors

*1)

.#/ Cash in$ested in fir"

*2)

.0/ Cash generated by o(erations

*+)

.a) Cash rein$ested

*,a)

."/ Cash returned to in$estors

*,b)

The Role o The FinancialManager

-eal assets


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The fnancial manager#sresponsi$ilities

Forecasting and planning

Ma-or investment and financing

decisions

"oordination and control

$ealing with capital markets


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%hat is corporation&

It is a separate legal entity owned byshareholders

It is a ta!able entity

It has perpetual life It is able to combine the capital of

many shareholders

It has greater organi"ational andlegal costs


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%hat is a Corporation&

*ypes of "orporations

% .ublic "ompanies

% .rivate "orporations

% /imited /iability "orporations (//"


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Organizing a Business

*ypes of #usiness 0rganizations

% )ole .roprietorships

% .artnerships

% "orporations

% /imited /iability .artnerships


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Organizing a Business


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Corporate Structure

%ole 2rorietorshis

Cororations

2artnershis

Limited Lia"ilit)

Cororate ta on rofits 3

2ersonal ta on dividends

4nlimited Lia"ilit)

2ersonal ta on rofits


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The role of the nancialmanager

which assets the firm should ac,uire

how those assets should be financed

how the firm should manage its e+istingresources


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'ypothetical (rgani)ationChart

#hairman of the $oard and#hief %!ecutive &fficer (#%&)

'resident and #hief&perating &fficer (#&&)

ice 'resident and#hief Financial &fficer (#F&)

reasurer #ontroller

#ash Manager

#apital %!penditures

#redit Manager

Financial 'lanning

a! Manager

Financial *ccounting

#ost *ccounting

+ata 'rocessing

$oard of +irectors


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Who is The Financial Manager?

Chief Financial 5fficer

!reasurer Controller


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*oals o The Corporation

)hareholders desire wealthma+imization

$o managers ma+imize

shareholder wealth1 Mangers have many

constituencies 2stakeholders3

24gency .roblems3 representthe conflict of interest between

management and owners


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*oals o The Corporation

4gency .roblem )olutions

5 6 "ompensation plans

7 6 #oard of $irectors8 6 *akeovers

9 6 )pecialist Monitoring

: 6 4uditors


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Financial Markets

2rimar)

Mar,ets

%econdar)

Mar,ets

5!C

Mar,ets

Mone)


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Financial markets

.rimary market % the initial sale of

securities (also known as initial public

offering&

)ubse,uent sale of securities in

financial markets; between investors;

are in secondary market&


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Financial Markets

Financing $ecision

% )ource of Funds 2"apital3

% "apital )tructure

% Money Markets


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(ther fnancial markets

$ebt securities (contractual obligations

to pay are traded in the fixed-income

market or bond market

*he market for long6term debt and

e,uity securities is called the capital

market&

*he market for short6term; high ,uality;

li,uid debt securities is money market&


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Financial Markets

Coman)

$ssue *e"t

Cash$nvestors


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Financial Markets

Funds

Funds

6an,s

$nsurance Cos7

6ro,erage Firms

5"ligations

*eositors

2olic)holders

$nvestors

5"ligations

Coman)

$ntermediar)

$nvestor


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Financial Markets

6an,s

*eositors

8#79 mil

Cash

Loan

*eosits

Coman)

$ntermediar)

$nvestor


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Financial Markets

$nsurance

Coman)

2olic)holders

8#9 mil

Cash

Loan

%ell olicies

$ssue %toc,

Coman)

$ntermediar)

$nvestor


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Lesson 1

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