Professional Documents
Culture Documents
Introduction To Finance
Introduction To Finance
Financial Management
Outline
Definition of Finance
Areas of Finance
Career Opportunities in Finance
Finance as related to Accounting and Economics
The Goal of the Financial Manager
Agency issue as it relates to owner wealth
maximization
Stakeholder focus, and ethical behavior relate to firms
goal.
Activities of Financial Management
Forms of Organization
What is Finance?
Finance is the study of
financial planning, asset
management, and fund
raising for businesses and
financial institutions.
Financial management
can be described using a
balance sheet.
Areas of Finance
1. Financial Markets
- Markets of users and savers of funds.
- Money markets deal in short-term securities (<=1 year)
Ex.; Treasury Bills, commercial paper
- Capital markets deal in long-term securities
Ex.; common stock, preferred stock, corporate bonds, government bonds
2. Financial Services
- Design and delivery of financial advice and products to individuals, businesses,
government.
3. Managerial Finance
- Financial management of business firms.
- Financial management involves the efficient use of financial resources in the
production of goods
Financial Analyst prepares and analyze firms financial plans and budgets; other
duties include financial forecasting, financial ratio analysis.
Cash manager - maintain and control firms daily cash balances; manages cash
collection, short-term investment/borrowing, disbursement activities and banking
relationships.
Accounting View
(Accrual Basis)
Income Statement
XYZ Ltd
For year ended 31/03/2014
Financial View
(Cash Basis)
Cash Flow Statement
XYZ Ltd.
For year ended 31/03/2014
Cash inflow
Rs.
0
Less: Cash outflow 8000000
Net cash flow
(Rs. 8000000)
Profitability Risk
Profitability Risk
ex., investing in stocks vs. savings accounts
Stocks may be more profitable but are riskier
Savings accounts are less profitable and less risky (or safer)
Agency Theory:
The Principal-Agent Problem
Agency Theory is about the conflict that may arise
between management and owners whenever owners
are not also the managers.
Management may not always act in the best interest of
the owners because management has interest of its
own, like personal wealth, job security, lifestyle, and
benefits. Thus, these concerns may conflict with
shareholder interests.
The pursuit of socially or ethically acceptable goals may
have to come at the expense of shareholders wealth.
Stakeholders are those groups that have direct economic links to the firm.
Forms of Organization:
Sole Proprietorships
Advantages
Freedom
Disadvantages
Unlimited
Liability
Simplicity
Lack of Continuity
Low Start Up
Difficulty in
Costs
A business owned by Raising Money
one person
Tax Benefits
Reliance on One Person
Forms of Organization:
Partnerships
Disadvantages
Advantages
Unlimited Liability
Lack of Continuity
Ownership
Transfer
Difficult
Possibility of
Conflict
More Capital
Greater Talent Pool
Ease of Formation
Tax Benefits
Forms of Organization:
Corporations/Companies
Advantages
Disadvantages
Limited Liability
Potential Shareholder
Revolts
Continuity
Greater Likelihood
of Professional
Management
Easier Access to
Money
Higher StartStart-Up
Costs
Regulation
Double Taxation
A corporation
is a separate legal entity