INTRODUCTION TO

FINANCE
Course Code: FIN201 1
Instructor: Tahmina Ahmed
Section: 7
Chapter: 1
THE GOALS AND ACTIVITIES OF FINANCIAL
MANAGEMENT
Learning objectives
▪ The field of finance integrates concepts from economics, accounting, and a
number of other areas.
▪ A firm can have many different forms of organization.
▪ The relationship of risk to return is a central focus of finance.
▪ The primary goal of financial managers is to maximize the wealth of the
shareholders.
▪ Financial managers attempt to achieve wealth maximization through daily
activities such as credit and inventory management and through longer-term
decisions related to raising funds.

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OBJECTIVES OF FINANCIAL
MANAGEMENT
Financial management usually involves:-

A. Procurement: generally the final purchasing of goods or services,

typically for business purposes.

B. Allocation: the proper distribution and investing the company's

financial resources to maximize the profits.

C. Financial Control: the company resources are monitored, directed

and measured.
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 OBJECTIVES OF FINANCIAL
MANAGEMENT
The following points are the main objectives of financial management:

1. Ensure consistent and sufficient flow of funds to the concern.

2. Ensure adequate returns to shareholders, which will be determined by earning capacity,

market price of the share, and shareholder expectations.

3. Ensure that funds are used to their full potential. Once the funds are obtained, they should
be used to the greatest extent possible while spending the least amount of money.

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 OBJECTIVES OF FINANCIAL
MANAGEMENT

The following points are the main objectives of financial management:

4. Investments must be made with safety in mind, i.e., funds should be invested in
safe projects to assure a sufficient rate of return.
5. To plan a sound capital structure-Capital should be composed in a sound and
equitable manner so that a balance between debt and equity capital is maintained.
6. Lowering the cost of capital.

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 FUNCTIONS OF FINANCIAL MANAGEMENT
1. Estimation of capital requirements:
▪ A financial manager must make assumptions about the company's capital requirements. This will be determined by a company's predicted
costs and profits, as well as its future programs and policies. Estimations must be made in a way that increases the enterprise's earning
ability.

2. Determination of capital composition:

▪ Following the estimation, the capital structure must be decided. This includes both short- and long-term debt equity analysis. This will be
determined by the amount of equity capital a company possesses as well as the amount of additional funds that must be raised from third
parties.

3. Choice of sources of funds:

▪ A company has several options for raising additional funds, like:
▪ - The issuance of shares and debentures.
▪ - Loans from banks and financial institutions
▪ - Deposits from the general public to be drawn in the form of bonds.
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 FUNCTIONS OF FINANCIAL MANAGEMENT

4. Investment of funds:
▪ The finance manager must select how to invest cash in profitable ventures in order to ensure that
the investment is safe and that regular returns are attainable.

5. Disposal of surplus:

▪ The finance manager is responsible for deciding on net earnings. This can be accomplished in
one of two ways:

▪ - Dividend declaration: include determining the dividend rate as well as other advantages such
as bonuses.

▪ - Retained profits: A volume must be determined, which will be determined by the company's
expansion, innovation, and diversification objectives.
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 FUNCTIONS OF FINANCIAL MANAGEMENT

6. Management of cash:

▪ Cash management decisions must be made by the finance manager. Wages and salaries must be paid,
electricity and water bills must be paid, creditors must be paid, current liabilities must be met, adequate
stock must be maintained, and raw materials must be purchased, among other things.

7. Financial controls:

▪ The finance manager is responsible for not just planning, procuring, and utilizing funds, but also for
maintaining financial management. Many strategies, such as ratio analysis, financial forecasting, cost and
profit control, and so on, can be used to accomplish this.

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ACTIVITIES OF FINANCIAL MANAGEMENT

▪ The key activities of financial manager includes:

▪ Financial planning
▪ Investment
▪ Financing (raising money)

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ACTIVITIES OF FINANCIAL MANAGEMENT
Financial managers must perform these following responsibilities:
• Allocate funds to current and fixed assets
• Obtain the best mix of financing alternatives
• Develop an appropriate dividend policy within the context of the firm’s objectives.

As indicated in Figure 1-1, all these functions are carried out while balancing the profitability and risk components
of the firm.

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RISK-RETURN TRADE-OFF
▪ The risk-return trade off states that with an
increase risk in business there is more potentiality
towards the rise in earnings return.

▪ This is major concept that is being used among

companies.

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CORPORATE GOVERNANCE

▪ Corporate Governance is the application of best management practices with rules and regulations placed
accurately. By which the company can be directed and controlled. For effective management through
corporate governance the company needs to comply with accurate law and show honesty towards the ethical
standards. Corporate governance mainly involve balancing the interests of stakeholders, so that the
management can deliver long-term success for the company.

❑ Stakeholders are those who has direct or

indirect interest in the company. They are
usually somehow connected and effected
by the business operations. The primary
stakeholders in a typical business are the
shareholders, investors, employees,
customers and suppliers.

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PRINCIPLES OF CORPORATE GOVERNANCE

1. To place rules and regulations accurately and provide truthful information to the stakeholders.
2. Application of best management practices.
3. The business should maximize wealth by confirming the basic rules of the society in presence of law and
local customs.
4. Corporate accountability is the key element of corporate governance. It is Responsible for sustainable
development for all stakeholders to ensure growth. It certifies ethical development of the business.
5. Effective management and distribution of wealth: this ensures that the organization should create maximum
wealth for its stakeholders and enhance wealth creation capabilities to maintain sustainability.
6. Discharge of social responsibility- this principle ensure that the organization is acceptable in the eye of
society.

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PILLARS OF CORPORATE GOVERNANCE

1. Accountability
2. Fairness
3. Transparency
4. Independence

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PILLARS OF CORPORATE GOVERNANCE

1. Accountability: It assures that the management is truthful to the board and so

does the broad of directors should be accountable to the shareholders.

2. Fairness: It states that the company needs to protect shareholders rights.

3. Transparency: To provide clear information to the shareholders and other

stakeholders of the company.

4. Independence: Procedures and structure should be precise to avoid or minimize

conflicts of interest.

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WHY CORPORATE GOVERNANCE IS IMPORTANT?

1. A good corporate governance ensure corporate success and economic growth. This creates a transparent
set of rules and controls.
2. A wise and strong corporate governance maintains investors’ confidence, for which the company can raise
capital efficiently and effectively.
3. Lowers the cost of capital (cost of capital is the required rate that the organization get backs when they
invest in a new project). This fulfils one of the objective of financial management.
4. There will be a positive impact on the share price.
5. It encourages the manager and the owners to achieve objectives that are desirable by the shareholders and
the organizations.
6. There will be less mismanagement of the resources, minimize wastages and corruption and decrease risk
of losing stakeholders.
7. Enhance development in production and influence brand formation.
8. The management of the organisation best fits in the interest of all stakeholders.
9. Overall it improves firm performance through strategic management.
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WHAT HAPPENS IN BAD CORPORATE GOVERNANCE
“During the stock market collapse of 2000–2002, many companies went bankrupt due to
mismanagement or, in some cases, financial statements that did not accurately reflect the
financial condition of the firm because of deception as well as outright fraud. Companies such as
WorldCom reported over $9 billion of incorrect or fraudulent financial entries on their income
statements. Enron also declared bankruptcy after it became known that its accountants kept many
financing transactions “off the books.” The company had more debt than most of its investors
and lenders knew about. Many of these accounting manipulations were too sophisticated for the
average analyst, banker, or board member to understand. In the Enron case, the U.S. government
accused its auditor, Arthur Andersen, and because of the accusation, the Andersen firm was
dissolved. Because of these accounting scandals, there was a public outcry for corporate
accountability, ethics reform, and an explanation of why the corporate governance system had
failed. The issues of corporate governance are known as agency problems.”

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WHAT HAPPENS IN BAD CORPORATE GOVERNANCE
Bad governance can create doubt on a company’s reliability, integrity and doubt on the
responsibilities of the shareholders. It is very important to appoint a good auditor who will not be
biased on the statements and will provide a fair evaluation. Mostly an external auditor should be
hired to avoid these deceptive.

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AGENCY PROBLEMS IN FINANCIAL
MANAGEMENT
▪ What is an agency problem?

▪ Agency problems are conflicts of interest between two or more parties, mainly between the
company's management, stakeholders and creditors.

A conflict of interest occurs, for example, when people in positions of authority and power
abuse their authority and power for personal gain.

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AGENCY PROBLEM: WHAT ARE SOME OF THE
CAUSES?
1. The failure of stockholders to meet employee expectations in terms of wage, incentives, working
hours, and other factors would be the cause in the case of employees.

2. The failure of stockholders to meet customer expectations, such as the sale of low-quality items,
insufficient supply, expensive price, and so on, would be the cause in the case of customers.

3. In the case of management, misalignment of goals, separation of ownership and management, and
other factors could contribute to agency issues.

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AGENCY THEORY

1. The agency theory explains how to best organize agency relationships. This
is to prevent conflicts and other issues that arise between agents and
principals. The owners of a company are usually the principals and the
employers are usually the agent.

2. It is a principle used to determine the issue and resolve it between the

principals and their agents.

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EXAMPLE BETWEEN STOCKHOLDERS AND
CUSTOMER
"ABC Limited sells gel toothpaste at $20. The stockholders of the company raised the selling
price of the toothpaste from $20 to $22 in order to maximize their wealth. This sudden
unnecessary rise in the price of the toothpaste disappointed the customers and they boycotted the
product sold by the company. Few customers who bought the product realized a fall in the
quality and were utterly disappointed. This resulted in the agency problems between the
stockholders and the loyal and regular customers of the company."

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EXAMPLE BETWEEN A HOME BUYER AND
REALTOR

"A young couple wants to find the perfect house as first-time home buyers. So, they hire a realtor
to find them their dream house.

What do the principals (buyers) care about? Finding the perfect home within their budget.

What does the agent (realtor) care about? The commission they get from selling the most
expensive home that the couple will say yes to as quickly as possible. "

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EXAMPLE BETWEEN SHAREHOLDERS AND
CEO
" The principals of a publicly-traded company are the shareholders. These shareholders hire a CEO to
run the business.

What do the principals care about? Boosting the stock price or getting a dividend check, so they make
more money.

What does the agent care about? Well, the agent is the one who must run the business. And it's much
easier to run a business when your employees, managers, and executive team are happy and working
hard.

So, the agent may decide that instead of a dividend payment to the shareholders, they will funnel profits
back into the business with bonus checks and pay raises to the managers and executives. This is the
principal-agent problem. "

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HOW TO MITIGATE AGENCY
PROBLEMS?
While it is impossible to completely eradicate the agency problem, principals can take steps to reduce
the risk associated with it, which is known as agency cost. Contracts or laws, in the case of fiduciary
ties, can and often are used to control principal-agent relationships. Another strategy is to pay an
agent to act in the principal's best interests.

For example, if an agent is paid by the completion of a project rather than by the hour, there is less
temptation to act against the principal's best interests.

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THANK YOU!!!
Tahmina Ahmed
Email: tahmina98ahmedsbe@iub.edu.bd

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