Scribd
Upload
58 views32 pages

Overview of Financial Management... MBA

The document provides an overview of financial management, including defining financial management, outlining the objectives of firms, describing important financial management decisions, and discussing the importance of financial management. It also covers forms of business organizations, agency problems that can arise in corporations, and how financial markets interact with corporations. The document aims to give a broad introduction to core concepts in financial management.

Uploaded by

biggykhair
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
58 views32 pages

Overview of Financial Management... MBA

The document provides an overview of financial management, including defining financial management, outlining the objectives of firms, describing important financial management decisions, and discussing the importance of financial management. It also covers forms of business organizations, agency problems that can arise in corporations, and how financial markets interact with corporations. The document aims to give a broad introduction to core concepts in financial management.

Uploaded by

biggykhair
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 32

Overview of Financial Management

LECTURER: DAVID MENSAH


Outline
• Business Finance
• Definition of Financial Management
• Objectives of the Firm
• Financial Management Decisions
• Importance of Financial Management
• Forms of Business Organizations
• Agency Problems and the Control of Corporations
• Financial Markets and Corporations
Business Activities
Generally , business activities are centered
around;
• Production
• Marketing
• Finance
Business Finance Functions
• The finance function is performed by the
Finance Manager.

• Business finance is that business activity which


concerns with the acquisition and
conversation of capital funds in meeting
financial needs and overall objectives of a
business
Types Finance
• Private Finance: which includes the individual,
firms, business or corporate

• Public Finance; concerns with revenue and


disbursement of Central Government, State
Government etc, funds
Definition of Financial Management

• It is concerned with the efficient use of an


important economic resource namely, capital
funds.
• Financial management is also concerned with
the acquisition, financing, and management of
assets with some overall goal in mind.
Definition of Financial Management Cont’d

• Financial Management deals with


procurement of funds and their effective
utilization in the business.
• It is the operational activity of a business that
is responsible for obtaining and effectively
utilizing the funds necessary for efficient
operations
Financial Management Decisions
• Investment Decisions
• Financing Decisions
• Dividend Policy decisions
• Working Capital Management Decisions
Financial Objectives of the Firm
• The shareholders’ view

• Other Stakeholders’ view


Financial Objectives of the Firm Cont’d

1. Shareholders’ View

• Profit Maximization

• Wealth Maximization
Financial Objectives of the Firm Cont’d

Profit Maximization
• Main aim of any kind of economic activity is
earning profit. A business concern is also
functioning mainly for the purpose of earning
profit. Profit is the measuring techniques to
understand the business efficiency of the
concern.
Financial Objectives of the Firm Cont’d
Profit Maximization
Drawbacks of Profit Maximization
• It is vague : profit is not defined precisely or
correctly
• It ignores the time value of money
• It ignores risk
• Creative accounting may influence profit
• Has no bearing on cash flows
• It assumes perfect competition
Financial Objectives of the Firm Cont’d

Wealth Maximization
• The term wealth means shareholder wealth or
the wealth of the persons those who are
involved in the business concern
• Wealth maximization is also known as value
maximization or net present worth
maximization. This objective is an universally
accepted concept in the field of business
Financial Objectives of the Firm Cont’d

2. Other Stakeholders’ View


• Employees
• Community
• Suppliers
• Government
• Customers
Non-Financial Objectives of the Firm Cont’d

1. Growth
2. Diversification
3. Survival
4. Maintaining contended workforce
5. Becoming research and development leader
6. Providing top quality service to customers
7. Maintaining respect for the environment
Scope of Financial Management
• Estimating Financial Requirement
• Deciding on Capital Structure
• Selecting a Source of Finance
• Selecting a Pattern of Investment
• Proper Cash Management
• Implementing Financial Controls
• Proper Use of Surpluses
Forms of Business Organisation

Sole Proprietorship
A sole proprietorship is an unincorporated business
owned by one individual. Going into business as a sole
proprietor is easy—one merely begins business
operations. However, even the smallest business
normally must be licensed by a governmental unit.
Advantages:
• It is easily and inexpensively
• it is subject to few government regulations, and
• the business avoids corporate income taxes.
Forms of Business Organisation
Limitations
• It is difficult for a proprietorship to obtain large sums
of capital;
• the proprietor has unlimited personal liability for the
business’s debts, which can result in losses that
exceed the money he or she invested in the
company; and
• the life of a business organized as a proprietorship is
limited to the life of the individual who created it.
Forms of Business Organisation
Partnership
A partnership exists whenever two or more persons
associate to conduct a non corporate business.
Partnerships may operate under different degrees of
formality, ranging from informal, oral understandings
to formal agreements filed with the secretary of the
state in which the partnership was formed.
Advantages
• low cost and
• ease of formation.
Forms of Business Organisation
Disadvantages
• unlimited liability,
• limited life of the organization,
• difficulty transferring ownership, and
• Difficulty raising large amounts of capital.

Corporation
A corporation is a legal entity created by a state, and it
is separate and distinct from its owners and managers.
Forms of Business Organisation
Advantages
• Unlimited life
• Easy transferability of ownership
• Limited liability.

Disadvantages
• Corporate earnings may be subject to double taxation
• Setting up a corporation, and filing the many required
state and federal reports, is more complex and time-
consuming
Agency Problems
• The thousands, or more, investors who own
public firms could not collectively make the
daily decisions needed to operate a business.
Therefore:
• The shareholders are owners of the firm
• The officers (or executives) control the firm
Agency Problems
• Agency relationship
– Principal hires an agent to represent its interests
– Stockholders (principals) hire managers (agents) to
run the company

Principal-Agent Problem
Principal-shareholders
Agent –managers
Agency Problems
• Agency problem
– Conflict of interest between principal and agent
• Management goals and agency costs
Principal –agent problem represents the conflict of
interest between management and owners.
For example if shareholders cannot effectively monitor
the managers’ behaviour, then managers may be
tempted to use the firm’s assets for their own ends,
all at the expense of shareholders.
Solving Agency Problems
1. Managerial Incentives
– 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
• Bonus
• Stock
• Stock options

2. Monitoring/ Corporate Control


• Inside the corporate structure – BOD
• Outside the structure- auditors, bankers, credit agencies and attorneys
• In government- SEC, IRS
Solving Agency Problems
3. Other Monitors
• Market forces
• Creditors
• Employees
• Society
• Government/Regulators
Financial Market and the Corporation
Financial market is a place where SPU and DSU interact. A
market is a method of exchanging one asset (usually cash)
for another asset.
• Physical assets vs. financial assets

Types
1. Money vs capital markets
2. Primary vs secondary markets
3. Foreign exchange markets
4. Derivative markets
5. Spot and Futures markets
Financial Market and the Corporation
What are some financial instruments?
 T-bills
 Banker’s acceptances
 Commercial paper
 Negotiable CDs
 T-notes and T-bonds
 Mortgages
 Municipal bonds
 Corporate bonds
 Preferred stocks
 Common stocks
Financial Market and the Corporation
Who are the providers (savers) and users (
borrowers) of capital?
• Households: Net savers
• Non-financial corporations: Net users
(borrowers)
• Governments: Net borrowers
• Financial corporations: Slightly net borrowers,
but almost breakeven
Financial Market and the Corporation
What are three ways that capital is transferred
between savers and borrowers?
• Direct transfer (e.g., corporation issues
commercial paper to insurance company)
• Through an investment banking house (e.g.,
IPO, seasoned equity offering, or debt
placement)
• Through a financial intermediary (e.g.,
individual deposits money in bank, bank
makes commercial loan to a company)
Financial Market and the Corporation
What are some financial intermediaries?

Deposit taking Institutions


• Commercial banks
• Savings & Loans and credit unions
• Credit Unions

Non-Deposit taking
• Finance companies
• Life insurance companies
• Mutual funds
• Pension funds
• Investment banks & Brokerage firms

You might also like