Chapter 1

Overview of
the Financial
Management
Arsalan Haneef
Finance in the
organizational
structure of
the firm
 • Works directly under or alongside the CEO and
board of directors.
Role of • Prime responsibilities include managing the
Chief company's finances.
Financial
• Advising the CEO/board of directors on
Officer
(CFO) strategic financial recommendations.

• Highest financial position at a company and

manages the whole financial division.
The Treasurer
• Primary responsibility  to oversee the management
of the financial affairs of the organization.
• Managing cash flow
• Managing risks
• Liquidity Risk
• Credit Risk
• Currency Risks (transaction/translation risk)
• Interest Rate Risk
• Operational Risk (internal treasury risk). E.g.,
Loans for business operations.
 The Controller

• Leading the accounting team

Controller • Maintain, manage, and analyze:
• Financial statements
• Payroll
• Budgets
Managerial Financial • Tax compliance issues
Tax Accountant
Accountant Accountant

Internal Auditor
Corporations
• HP and Microsoft began as partnerships or proprietorships.
• It was necessary for their founders to convert into a
corporation.
• A corporation is a legal entity created by state laws, and it is
separate and distinct from its owners and managers.
• unlimited life.
• easy transferability of ownership interest.
• limited liability losses are limited to the actual funds
invested.
• It is formed because young companies are considered as risky
by banks.
• Initial public offering (IPO) to angels (friends/ family, private
investors).
• After an IPO, corporations support their growth by borrowing
from banks, issuing debt, or selling additional shares of stock.
The Primary Objective of the
Corporation

• Stockholder wealth maximization.

• Shareholders purchase stocks:
• To earn a good return on their investment.
• Without undue risk exposure.
• Stock market price reflects all relevant information
 fundamental or intrinsic price.
• Information may not always be available to
investors.
• Withhold critical information to prevent competitors
from gaining strategic advantages.
Agency Issues/Problems

• The firm’s owners are also its managers in small businesses.

• In large organizations, owners/shareholders, face a very serious problem.

• Is there anything to stop managers from acting in their own interest, rather than the
owners’?

• Agency problem is addressed in corporate governance (CG).

• CG is a set of rules that govern a company's behaviour towards its directors, managers,
employees, shareholders, creditors, customers, competitors, and the community at large.
Value Maximization And Agency Problem

• To push the current market price above its fundamental price in the short term:
• Window dressing of financial statements.
• Sometimes these actions are illegal. E.g., Enron.
• Consider a hypothetical scenario. Due to deception by company managers, the price rose
to $52 when it would have fallen to $45 otherwise.

• Of course, firms, managers and employees have their objectives.

• For most corporations, maximization of the fundamental stock price is the most
important objective.
Value Maximization and Ethical Behaviour

• Ethical Dilemmas: When conflicts arise between profits and ethics.

• E.g., According to Merck's own research, Vioxx may cause heart attacks, but the
evidence is not overwhelmingly strong, and some patients appear to benefit from the
product.
• Ethical Responsibility: The US Justice Department concluded that Aurthur Anderson
was guilty of fostering an environment conducive to unethical behaviour and built an
incentive system that made it profitable to both the perpetrators and the firm.
• Protecting Ethical Employees. Protection of whistleblowers.
Ethical Behaviour: Apart from Illegal Actions

• Fraudulent accounting.

• Exploiting monopoly power.

• Violating safety codes.

• Failing to meet environmental standards.

Maximize Fundamental Stock Prices Also Benefit Society

• To a large extent, the owners of stock are society.

• Consumers benefit:
• High-quality goods and services at the lowest possible cost.

• Growth in sales by creating value for customers.

• A competitive economy prohibits companies from overcharging their customers.

• Employees benefit:
• In general, companies that successfully increase stock prices also grow and add more
employees, thus benefiting society.