Strategic Finance for Technical Managers

Finance for Technical Managers - Chapter 1 1

An Overview of Financial

Management

Finance is the art and science of managing money.

The term finance may incorporate any of the following:◦ The study of money and other monetary assets ◦ The management of those assets ◦ Profiling and managing project risks

Finance for Technical Managers - Chapter 1

3


•Public Finance: Country, state, province, county, city or municipality finance is called pubic finance. It is the branch of finance that deals with managing the monetary resources of government.

•Public finance is concerned with:

•Identification of required expenditure of a public sector entity

•Source(s) of that entity's revenue

•The budgeting process

•Debt issuance (municipal bonds) for public works projects

•Business finance: It is the art and science of managing monetary resources of a business. Business finance, managerial finance or corporate finance is the task of providing the funds for the corporations' activities. It generally involves balancing risk and profitability.

The financial manager’s primary task is to plan for the acquisition and use of the funds so as to maximize the value of the firm.

The following are some specific activities that are involved:◦ Forecasting and Planning.◦ Investment and Financing Decisions.◦ Coordination and Control.◦ Interaction with Financial Markets.


Financial management is essentially a combination of Economics and Accounting.

Financial Management concerns the acquisition, financing and management of assets with some overall goal in mind.

It can also be defined as a process of obtaining, deploying and utilizing monetary resources in order to achieve organization’s goal.

The decision function of Financial Management can be broken down into three major areas; the investment, financing and asset management decisions.


Investment Decisions : Decisions about fixed assets e.g., Size of the firm i.e., total assets, Composition of Assets, Disinvestments.

Financing Decisions : Decisions about long term financing and Equity e.g., Type of Financing, Financing Mix, Dividend Policy.

Asset Management Decisions : Working Capital Management.



8

Assets Liability & Equity

Current Assets:Cash e.g.. Cash ManagementMarketable Securities- Portfolio ManagementAccounts Receivable – Credit PolicyInventory – Inventory Management Fixed Assets:Equipment, Plant and Machinery – Purchase of Equipment

Current Liability:Accounts Payable – Procurement PolicyLong Term Debt:Notes Payable – e.g. Bank Loan for a period of three yearsEquity:Share Capital – Issuance of SharesRetained Earnings – Source of Financing

Total Assets Total Liability and Equity

Balance Sheet : Assets = Liabilities + Owner’s Equity


Board of Directors(Representatives of

Shareholders)

Chief Executive Officer (CEO)

VP-HRM

VP-IT VP- R&D

VP-Marketing

VP- Production

Chief Financial

officer


Chief Financial Officer (CFO)

Cash Management

Credit Management

Financial planning

Cost Accounting

Financial Accounting

Treasurer

Information systems

Controller

In most business firms, the finance team is organized as follows:

Sole proprietorship

Partnership

Corporation


11

ADVANTAGES Owned by one person Easy formation Taxed only once


DISADVANTAGES Unlimited liability Difficulty raising

funds Lacks continuity

Many large corporations started as a sole proprietorship

Owned by two or more persons◦ Partners

Classified as general or limited Partnership agreement

◦ Type of partnership◦ Responsibilities◦ Share of profits

Disadvantage: Partnership dissolves when a general partner dies or leaves the business.


General Partner◦Has unlimited liability for all obligations of the business: disadvantage

Limited Partner◦Liability limited to the partnership agreement: advantage◦Limited partnership involves at least one general partner and one or more limited partners


Limited liability Permanency Ability to raise capital Has a board of directors Owners are stockholders Flexibility Legal entity Easy marketability of shares

of ownership Too Many Legal Requirements Double Taxation

Finance for Technical Managers - Chapter 1 15

All advantages

Disadvantages

Documents

Strategic Finance for Technical Managers