Financial Management
Financial Management
Financial Management
Introduction to
Financial
Management
0
1-1 1-1
PPT 1-3
What is Finance?
2
1-3 1-3
Investments
• Work with financial assets such as
stocks and bonds
• Value of financial assets, risk versus
return, and asset allocation
• Job opportunities
– Stockbroker or financial advisor
– Portfolio manager
– Security analyst
3
1-4 1-4
Financial Institutions
• Companies that specialize in financial
matters
– Banks – commercial and investment, credit
unions, savings and loans
– Insurance companies
– Brokerage firms
• Job opportunities
4
1-5 1-5
International Finance
• This is an area of specialization within each of
the areas discussed so far
• It may allow you to work in other countries or
at least travel on a regular basis
• Need to be familiar with exchange rates and
political risk
• Need to understand the customs of other
countries; speaking a foreign language
fluently is also helpful
5
1-6 1-6
Financial Management
• Financial Management is the managerial
activity which is concerned with planning
and control of a firm’s financial resources
• Financial management can be described
using a balance sheet.
6
1-7 1-7
Business Finance
• Some important questions that are
answered using finance
– What long-term investments should the firm
take on?
– Where will we get the long-term financing to
pay for the investments?
– How will we manage the everyday financial
activities of the firm?
8
1-9 1-9
Financial Manager
• Financial managers try to answer some, or
all, of these questions
• The top financial manager within a firm is
usually the Chief Financial Officer (CFO)
– Treasurer – oversees cash management, credit
management, capital expenditures, and financial
planning
– Controller – oversees taxes, cost accounting,
financial accounting, and data processing
9
1-10
1-10
Financial Management
Decisions
• Capital budgeting
– What long-term investments or projects
should the business take on?
• Capital structure
– How should we pay for our assets?
– Should we use debt or equity?
• Working capital management
– How do we manage the day-to-day
finances of the firm?
10
1-11
1-11
11
1-12
1-12
Sole Proprietorship
• Advantages • Disadvantages
– Easiest to start – Limited to life of owner
– Least regulated – Equity capital limited to
– Single owner keeps owner’s personal
all of the profits wealth
– Taxed once as – Unlimited liability
personal income – Difficult to sell
ownership interest
12
1-13
1-13
Partnership
• Advantages • Disadvantages
– Two or more owners – Unlimited liability
– More capital available • General partnership
• Limited partnership
– Relatively easy to
start – Partnership dissolves
– Income taxed once as when one partner dies
personal income or wishes to sell
– Difficult to transfer
ownership
13
1-14
1-14
Corporation
• Advantages • Disadvantages
– Limited liability – Separation of
– Unlimited life ownership and
– Separation of management (agency
ownership and problem)
management – Double taxation
– Transfer of ownership (income taxed at the
is easy corporate rate and
then dividends taxed
– Easier to raise capital at personal rate, while
dividends paid are not
tax deductible)
14
1-15
1-15
15
1-16
1-16
17
1-18
1-18
Managing Managers
• Managerial compensation
– Incentives can be used to align management and
stockholder interests
– The incentives need to be structured carefully to
make sure that they achieve their goal
• Corporate control
– The threat of a takeover may result in better
management
• Other stakeholders
18
1-19
1-19
19
1-20
1-20
Figure 1.2
20
1-21
1-21
Financial Markets
• Cash flows to the firm
• Primary vs. secondary markets
– Dealer vs. auction markets
– Listed vs. over-the-counter securities
• NYSE
• NASDAQ
21
1-22
1-22
Quick Quiz
• What are the four basic areas of finance?
• What are the three types of financial
management decisions, and what questions
are they designed to answer?
• What are the three major forms of business
organization?
• What is the goal of financial management?
• What are agency problems, and why do they
exist within a corporation?
22