GOAL OF FINANCIAL MANAGEMENT

BRIEF OVERVIEW OF FINANCIAL MANAGEMENT

To maximize the wealth of the shareholders, to allocate funds to current and fixed assets, to obtain the
FINANCE best mix of financing alternatives, and to develop an appropriate dividend policy within the context of
● art and science of managing money. the firm’s objectives.
● the art and science of managing the financial resources of a business.
● study of how individuals, institutions, FINANCIAL MANAGEMENT IN DIFFERENT PERSPECTIVES:
● governments and businesses acquire, spend and ● GOVERNMENT FM – scary spending, no need to return excess
● manage money and other financial assets. ● PRIVATE COMPANY FM – conservative because it has responsibility to the shareholders to
give returns in a form of dividend (if corporation)
FUNCTIONS OF BUSINESS FINANCE ● PERSONAL FM – sustainability of financial resources
● allocation of financial resources
● procurement of funds 3 FORMS OF BUSINESS ORGANIZATIONS
● efficient and effective utilization of financial resources ● SOLE PROPRIETORSHIP
● PARTNERSHIP
1. ALLOCATION OF FUNDS ● CORPORATION
● Is the project necessary?
● What is its social relevance? SOLE PROPRIETORSHIP
● Are there other alternatives? ● A form of organization where there is only one owner/proprietor.
● How will the proposal affect our current operations? ● After operating for some time, he/she invites or gets invited to form a partnership or a
● What resources of the company can be used in the Project? corporation.
● How much is the estimated capital requirement?
● What is the economic life of the project? PARTNERSHIP
● How much are the estimated cash returns? ● An association of two or more persons who bind themselves to contribute money, property, or
● How long will it take to recover our investment or what is the payback period? industry to a common fund, with the intention of dividing profits among themselves.
● What is the rate of return on investment?
● Is the rate of return higher than the cost of capital to be used? CORPORATION
● What are the risks involved in the proposal? ● It is an artificial being created by operation of law, having the right of succession and the
powers, attributes and properties expressly authorized by law or incident to its existence.
2. PROCUREMENT OF FUNDS
● The process of obtaining RIGHT OF SUCCESSION
● Funds and the costs involved. ● A corporation has the right to continuous existence irrespective of death, withdrawal,
● Financing happens here. insolvency or incapacity of the individual members or shareholders and regardless of the
transfer of their interests or shares of stock.
FINANCING
● the process of providing funds for business activities, making purchases or investing.

3. EFFICIENT AND EFFECTIVE UTILIZATION OF FINANCIAL RESOURCES CHAPTER 1: AN OVERVIEW OF FINANCIAL MANAGEMENT
● EFFICIENT – financial resources are actually being used for what they have been intended.
● EFFECTIVE – refers to their use towards the attainment of predetermined objectives. CHARACTERISTICS OF SUCCESSFUL COMPANIES

WHAT IS MANAGEMENT? ● successful companies have skilled people

● IT IS THE PROCESS OF POSDCON ● successful companies have strong relationships
● successful companies have enough funding
P- PLANNING
O- ORGANIZING
S- STAFFING
D- DIRECTING / LEADING
CON- CONTROLLING
A Bird’s-eye View of Finance
FINANCIAL MANAGEMENT
● involves financial planning, asset management and fundraising decisions to enhance the
value of businesses.

The Corporate Life Cycle
1. Starting Up as a Proprietorship - an unincorporated business owned by on individual
Advantages:
● It is easily and inexpensively formed.
● It is subject to few government regulations.
● Its income is not subject to corporate taxation but is taxed as part of the proprietor’s
personal income.
Limitations:
● It may be difficult for a proprietorship to obtain the funding needed for growth.
● The proprietor has unlimited personal liability for the business’s debts, which can
result in losses that exceed the money invested in the company.
● The life of a proprietorship is limited to the life of its founder.
2. More Than One Owner: A Partnership - two or more persons or entities associate to
conduct a noncorporate business for profit.
General Partnership - a business arrangement by which two or more individuals agree to
share in all assets, profits, and financial and legal liabilities of a jointly-owned business.
Limited Partnership - certain partners are designated general partners and others limited
partners. Limited partners can lose only the amount of their investment in the partnership,
while the general partners have unlimited liability.
Limited partners typically have no control—it rests solely with the general partners—and their
returns are likewise limited.
Limited Liability Partnership (LLP) and a Limited Liability Company (LLC), all partners
(or members) enjoy limited liability with regard to the business’s liabilities, and their potential
losses are limited to their investment in the LLP.
3. Many Owners: A Corporation - a legal entity created under state laws, and it is separate
and distinct from its owners and managers.
Major Advantages:
● unlimited life
● easy transferability of ownership interest
● limited liability
Advantages over Partnership:
A. Corporate earnings may be subject to double taxation—the earnings of the corporation are
taxed at the corporate level, and then earnings paid out as dividends are taxed again as
income to the stockholders.
B. Setting up a corporation involves preparing a charter, writing a set of bylaws, and filing the
many required state and federal reports, which is more complex and time-consuming than
creating a proprietorship or a partnership.
Professional Corporation (PC) or a Professional Association (PA) - wherein professionals such
as doctors, lawyers, and accountants form a corporation.
S corporations - corporations that meets all the requirements but elect to be taxed as if a
proprietorship or partnership.
4. Growing a Corporation: Going Public
“Angel” or Venture Capitalists - individuals or businesses that provides funding for companies
that are too risky for banks
Securities and Exchange Commission (SEC) regulates stock trading, to sell shares in a
public stock market where a company applies to be a listed stock on an SEC-registered stock
exchange
Growing a Corporation: Going Public - also called initial public offering (IPO) because it
is the first time the company’s shares are sold to the general public.
IPOs are often aided by investment banks with brokerage firms that employs brokers who are
registered with the SEC to buy and sell stocks on behalf of clients.
Seasoned Equity Offering - when public company raises more funds by selling (i.e., issuing)
additional shares of stock.
5. Managing a Corporation’s Value
“What determines a corporation’s value?” - it’s a company’s ability to generate cash flows now
and in the future
Three (3) properties of its cash flows:
1. The size of the expected future cash flows is important—bigger is better.
2. The timing of cash flows counts—cash received sooner is more valuable than cash
that comes later.
3. The risk of the cash flows matters—safer cash flows are worth more than uncertain
cash flows.
Managers increase the firm’s value by increasing the size of the expected cash flows, by speeding up
their receipt, and by reducing their risk.
Free Cash Flows (FCF) - they are available (or free) for distribution to all of the company’s investors,
including creditors and stockholders
Weighted Average Cost of Capital (WACC) - the rate of return required by investors, a cost from the Sarbanes-Oxley (SOX) Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer
company’s point of view Protection Act of 2010 strengthened protection for whistleblowers who report financial wrongdoing.

Market Price - the price that we observe in the financial markets, should be equal to the intrinsic An Overview of Financial Markets
value.
The Net Providers and Users of Capital
Governing a Corporation
Net Savers
Agency Problem - a conflict of interest that exists in any relationship in which one party is expected
to act in the best interests of the other. ● Public / Individuals

Corporate Governance - a set of rules that control the company’s behavior toward its directors, Net Borrowers
managers, employees, shareholders, creditors, customers, competitors, and community.
● Nonfinancial corporations
Maximizing Stockholder Wealth ● Financial corporations
● Government
Maximizing Shareholder Wealth is a fiduciary duty for most corporations but this does not mean that
managers should break laws or violate ethical considerations, or that that managers should be The Capital Allocation Process
unmindful of employee welfare or community concerns.
Capital - an essential component of starting and maintaining a successful business. In the most basic
Benefit corporation (B-Corp) - a corporate form that expands directors’ fiduciary responsibilities to sense, it’s the money and assets needed by a business to produce the products or services it offers.
include interests other than shareholders’ interests.
Transfers of capital from savers to users:
Intrinsic Stock Value Maximization and Social Welfare
1. Direct Transfers
Illegal Actions: 2. Indirect Transfers through an
Investment Bank
● Fraudulent accounting 3. Indirect Transfers through a Financial
● Exploiting monopoly power Intermediary
● Violating safety codes
● Failing environmental standards

❖ ORDINARY CITIZENS AND THE STOCK MARKET

Households own mutual funds, directly or indirectly owns stocks through pension funds.
When managers increase intrinsic value of stocks, they improve people’s quality of life.
❖ CONSUMERS AND COMPETITIVE MARKETS
Value maximization requires efficient, low-cost businesses that produce high-quality goods There are three important features of the capital allocation process:
and services at the lowest possible cost. companies that maximize their stock price must
1. New financial securities are created.
generate growth in sales by creating value for customers in the form of efficient and courteous
2. Different types of financial institutions often act as intermediaries between providers and
service, adequate stocks of merchandise, and well-located business establishments.
users.
❖ EMPLOYEES AT VALUE-MAXIMIZING COMPANIES
3. The activities occur in a variety of financial markets.
In general, companies that successfully increase stock prices also grow and add more
employees, thus benefiting society. Moreover, studies show that newly privatized companies
tend to grow and thus require more employees when they are managed with the goal of stock
price maximization.

Ethics and Intrinsic Stock Value Maximization The Determinants of

Intrinsic Value
There are very few, if any, legal and ethical shortcuts making significant improvements in the stream
of future cash flows. Managers at some companies have taken illegal and unethical actions to make
estimated future cash flows appear better than truly warranted, which can drive the market stock price
up above its intrinsic value.