Slides-1. Financial Management. Lecture 1

Lesson 1 Module: Financial Management

Lesson 1Lesson 1

Introduction to Financial Management


Key Concepts and SkillsKey Concepts and SkillsKnow the basic types of financial

management decisions and the role of the Financial Manager

Know the financial implications of the various forms of business organization

Know the goal of financial managementUnderstand the conflicts of interest that

can arise between owners and managersUnderstand the various types of financial

markets


Career opportunities in finance

Career opportunities in finance

Finance consists of three interrelated areas:

Money and capital marketsInvestmentsFinancial management (business

finance) – actual management of the firm.


The role of the Financial Manager

The role of the Financial Manager

• raising cash in financial markets (the financing decision);

• investing cash (capital budgeting decision);

• generating cash from operation

• allocating cash flows


Balance Sheet Model of the Firm

Balance Sheet Model of the Firm

•Current Assets

•Fixed Assets

•1 Tangible

• 2 Intangible

Total Value of Assets:

•Shareholders’ Equity

•Current Liabilities

•Long-Term Debt

Total Firm Value to Investors:


The Role of The Financial Manager


• Capital Budgeting Decision– Decision to invest in tangible or intangible

assets.

• …also called the Investment Decision


The Capital Budgeting DecisionThe Capital Budgeting Decision

•Current Assets

•Fixed Assets

•1 Tangible

• 2 Intangible



•Long-Term Debt

What long-term investments

should the firm choose?




• Financing Decision– Raising money that the firm needs for its

investments and operations.

• Capital Structure– The mix of long term debt and equity

financing.


The Capital Structure Decision

The Capital Structure Decision

•How should the firm raise funds for the selected investments?

•Current Assets

•Fixed Assets

•1 Tangible

• 2 Intangible



•Long-Term Debt


Short-Term Asset Management

Short-Term Asset Management

How should short-term assets be managed and

financed?

•Net Working Capital



•Long-Term Debt

•Current Assets

•Fixed Assets

•1 Tangible

• 2 Intangible


Financial

Manager

Firm's

operations Investors

(1) Cash raised from investors

(1)

(2) Cash invested in firm

(2)

(3) Cash generated by operations

(3)

(4a) Cash reinvested

(4a)

(4b) Cash returned to investors

(4b)



Real assets


The financial manager’s responsibilities

The financial manager’s responsibilities

Forecasting and planningMajor investment and financing

decisionsCoordination and controlDealing with capital markets


What is corporation?What is corporation?• It is a separate legal entity owned by

shareholders;

• It is a taxable entity;

• It has perpetual life;

• It is able to combine the capital of many shareholders;

• It has greater organizational and legal costs;


What is a Corporation?What is a Corporation?

• Types of Corporations– Public Companies– Private Corporations– Limited Liability Corporations (LLC)


Organizing a BusinessOrganizing a Business

• Types of Business Organizations– Sole Proprietorships– Partnerships– Corporations– Limited Liability Partnerships


Sole Proprietorship

Partnership Corporation

Who owns the business?

The manager

Partners Shareholders

Are managers and owners separate?

No No Usually

What is the owner’s liability?

Unlimited Unlimited Limited

Are the owner & business taxed separately?

No No Yes

Organizing a BusinessOrganizing a Business


Corporate StructureCorporate Structure

Sole Proprietorships

Corporations

Partnerships

Limited Liability

Corporate tax on profits +

Personal tax on dividends

Unlimited Liability

Personal tax on profits


The role of the financial manager

The role of the financial manager

• which assets the firm should acquire

• how those assets should be financed

• how the firm should manage its existing resources


Hypothetical Organization Chart

Hypothetical Organization Chart

•Chairman of the Board and Chief Executive Officer (CEO)

•President and Chief Operating Officer (COO)

•Vice President and Chief Financial Officer (CFO)

•Treasurer •Controller

•Cash Manager

•Capital Expenditures

•Credit Manager

•Financial Planning

•Tax Manager

•Financial Accounting

•Cost Accounting

•Data Processing

•Board of Directors


Who is The Financial Manager?Who is The Financial Manager?

Chief Financial Officer

Treasurer Controller


Goals of The CorporationGoals of The Corporation• Shareholders desire wealth

maximization

• Do managers maximize shareholder wealth?

• Mangers have many constituencies “stakeholders”

• “Agency Problems” represent the conflict of interest between management and owners


Goals of The CorporationGoals of The Corporation

Agency Problem Solutions

1 - Compensation plans

2 - Board of Directors

3 - Takeovers

4 - Specialist Monitoring

5 - Auditors


Financial MarketsFinancial Markets

Primary

Markets

Secondary

Markets

OTC

Markets

Money


Financial marketsFinancial markets

• Primary market – the initial sale of securities (also known as initial public offering).

• Subsequent sale of securities in financial markets, between investors, are in secondary market.



• Financing Decision– Source of Funds “Capital”– Capital Structure– Money Markets


Other financial marketsOther financial markets

• Debt securities (contractual obligations to pay) are traded in the fixed-income market or bond market

• The market for long-term debt and equity securities is called the capital market.

• The market for short-term, high quality, liquid debt securities is money market.



Company

Issue Debt

CashInvestors



Funds

Funds

Banks

Insurance Cos.

Brokerage Firms

Obligations

Depositors

Policyholders

Investors

Obligations

Company

Intermediary

Investor



Banks

Depositors

$2.5 mil

Cash

Loan

Deposits

Company

Intermediary

Investor



Insurance Company

Policyholders

$250 mil

Cash

Loan

Sell policies Issue Stock

Company

Intermediary

Investor


Education

Slides-1. Financial Management. Lecture 1