Financial Management

Lesson 1
Definition of terms:

• Finance
– art and science of managing money

• Management
– the planning, leading, organizing, and controlling
of human and other resources to achieve
organizational goals effectively and efficiently
What is Financial Management:

• The management of the financial resources of the

company or simply the art and science of managing
the financial resources of the organization.
 Why Study Finance?
• 1. Marketing
– Budgets, marketing research, marketing financial products
• 2. Accounting
– Dual accounting and finance function, preparation of financial
statements
• 3. Management
– Strategic thinking, job performance and profitability
• 4. Personal finance
– Budgeting, retirement planning, college planning, day-to-day cash
flow issues
 Basic Areas Of Finance
• Corporate finance
• Investments
• Financial institutions
• International finance

1.5
 1) Profit Maximization?
Maximizing a firm’s earnings after taxes
this goal ignores:
a) TIMING of Returns
(Time Value of Money)
b) UNCERTAINTY of Returns
(Risk)
2) Shareholder Wealth
Maximization?
this is the same as:
a) Maximizing Firm Value
b) Maximizing Stock Price
Improve the life of the
community
 Financial Manager
• 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

1.9
 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?
1.10
 Legal Forms of Business

1) Sole Proprietorship
• A business owned by a single individual.
• Owner maintains title to the firm’s assets.
• Owner has unlimited liability.
 Sole Proprietorship
• Advantages • Disadvantages
– Easiest to start – Limited to life of owner
– Least regulated – Equity capital limited to
– Single owner keeps all the owner’s personal wealth
profits – Unlimited liability
– Taxed once as personal – Difficult to sell ownership
income interest

1.12
2) Partnership
Similar to a sole proprietorship,
except that there are two or more
owners.
2a) General Partnership
• All partners have unlimited liability.

2b) Limited Partnership

• Consists of one or more general partners, who
have unlimited liability.
• One or more limited partners (investors) whose
liability is limited to the amount of their
investment in the business.
 Partnership
• Disadvantages
• Advantages
– Unlimited liability
– Two or more owners
• General partnership
– More capital available • Limited partnership
– Relatively easy to start – Partnership dissolves when
– Income taxed once as one partner dies or wishes
personal income to sell
– Difficult to transfer
ownership
1.15
3) Corporation
• A business entity that legally functions separate
and apart from its owners.
• Owners’ liability is limited to the amount of their
investment in the firm.
• Owners hold common stock certificates, and
ownership can be transferred by selling the
certificates.
 Corporation
• Advantages
– Limited liability
– Unlimited life
– Separation of ownership and
management
– Transfer of ownership is easy
– Easier to raise capital
• Disadvantages
– Separation of ownership and
management
– Double taxation (income
taxed at the corporate rate
and then dividends taxed at
personal rate)

1.17