Yr 2 Computing Financial

Management
Topic 1:
Nature and Scope of Financial
Management:
Financial Environment

Reading:

Ch:1, Financial Management An Irish

Text (2nd or 3rd Ed), Power,T., Walsh,S. and
OMeara, P. Gill & MacMillan, 2009

Business Entities
1.SOLE TRADER
Sole proprietorship is the most prevalent
form of business organisation in Ireland
and around the world
This is a business formed and owned by
one individual

2. PARTNERSHIP
Two to twenty persons carry on a business
with the view of making a profit.
It can easily be formed and is relatively
inexpensive.
The liability of the partners is unlimited.
Profits are taxed at an appropriate tax
rates.

Partnership

General partnership is where each

partner contributes an agreed amount.

Limited partnership is where some of the

partners are liable for all the debts of the
firm and other partners are liable only for
their financial contribution to the firm.

3. Corporations (Companies)

Business organised as a separate legal

entity owned by stockholders
Limited

liability for the business

Ownership
Unlimited

easily transferred

life for the business

Corporation / Company
The

formation of a limited liability company

takes the following form:

The

articles of association: the rules

governing the internal workings of the
organisation

Memorandum

of association: the document

governing the relationship between the company
and others.

Corporation / Company

Why incorporate?
Limited

liability
Raising finance
Number of shareholders widening ownership
Ease of expansion
Owning assets
Tax advantages

Types of companies
Unlimited

company
Private Limited Company
Public Limited Company (PLC)
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Corporation / Company

Costs of incorporation
Formation

costs
Compliance costs

Preparation of financial accounts

Annual return
Audit

Directors

responsibilities

Preparation of accounts and annual return

Proper governance of company

More

difficult to get funds out dividends

Some tax disadvantages

What is Financial Management?

Fin Mgt is concerned with the efficient management of

the finances of an organisation in order to achieve the
objectives of that organisation.

This involves:

Planning and controlling the provision of resources

(where funds are raised from)
The allocation of resources (where funds are deployed
to)
The control of resources (whether funds are being used
effectively or not)

Aims and Objectives

The fundamental aim of the financial manager is

the optimal allocation of the resources available to
them.
The most common objective assumed for a
financial manager is the maximisation of
shareholder wealth. HOW??
Sometimes, shareholder is replaced by
stakeholder
Financial managers do need a firm understanding
of both management accounting and financial
accounting

How is Financial Management different from

Financial & Management Accounting?

Fin Mgt is forward-looking and is based on cash flows

VS financial accounting is historic in nature and focuses
on profit rather than cash
Fin Mgt is concerned with raising funds and providing the
return to investors VS management accounting is
concerned with providing information to assist managers
in making decision within the company
Key focus on Fin Mgt is
The

relationship between risk and return

The time value of money

Financial markets

Introduction
Financial markets and institutions are the
firms financial environment
Stock and bond markets
Mutual and pension funds

The flow of savings to corporations

The money that corporations invest in real

assets comes mainly from savings by investors
The savings can pass through financial markets,
financial intermediaries or both.
Cash retained and reinvested in the firms
operations is cash saved and invested on behalf
of firms stockholders

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Some terms..
The stock markets

A financial market is a market where securities are

issued and traded.
Traded security is a financial asset (shares of stock).
The stock market is the most important financial market
for corporations.
Primary market is a market for the sale of new
securities by corporation.- IPO and Seasoned
Secondary Market - Purchase and sales of existing securities
are known as secondary transactions and they take place in the
secondary market

Stock exchange

Most trading in shares of large corporations takes

place on stock exchanges such as NYSE LSE & ISE
Trades in each stock are handled by a specialist, who
act as an auctioneer
the specialist ensures that stocks are traded at best
prices (sell high, buy cheap)
NYSE, LSE & ISE are the examples of an auction
markets
www.ise.ie

OTC

The OTC market is not a centralised

exchange like NYSE, but a network of
security dealers who use an electronic
system known as NASDAQ to quote
prices at which they will buy and sell
shares.

NASDAQ

Nasdaq

Created in 1971, the Nasdaq was the world's first electronic stock market.
The Nasdaq is a computerized system that facilitates trading and provides
price quotations on some 5,000 of the more actively traded over-the-counter
stocks.

The term "Nasdaq" used to be capitalized "NASDAQ" as an acronym for

National Association of Securities Dealers Automated Quotation. In recent
times, the acronym was dropped, and Nasdaq is now used as a proper
noun.

The Nasdaq is traditionally home to many high-tech stocks. The big ones
include Microsoft, Intel, Dell and Cisco.

STOCK MARKET INDEX

A stock market index is a listing of stock and a statistic

reflecting the composite value of its components. The
stocks selected bear some commonality such as trading
on the same

Stock Market
belonging to the same industry
having similar market capitalisations size!

Many indices compiled by news or financial services firms are used

to benchmark the performance of portfolios such as mutual
funds

Other financial markets

Fixed-income market is a market for debt securities

Capital market is a market for long-term financing
Money market is a market for short-term financing
(less than 1 year)
Foreign-exchange markets (OTC through a network of
the largest international banks)
Commodities markets
Derivatives markets

Financial intermediary
An organisation that rises money from
investors and provides financing for
individuals, corporations, or other
organisations
A mutual fund is a professionally-managed
form of collective investments in a portfolio of
securities-diversification and professional
management

Pension fund
Investment plan set up by an employer to
provide for employees' retirement.
Designed for long-run investment.
They provide professional management
and diversification
Tax advantage

Functions of financial markets and

intermediaries
Channel savings to real investment
Transporting cash across time.
Liquidity (ability to turn an investment into
cash when needed).
Reducing risk.

Diversification

Financial markets and intermediaries allow

investors and businesses to reduce and
reallocate risk
Strategy designed to reduce risk by spreading
the portfolio across many investments.
Portfolio diversification works because prices of
different stocks do not move exactly together.
Diversification works best when the returns are
negatively correlated.

Business Ethics
Socially

responsible investing, also known as

sustainable investing or ethical investing, describes
an investment strategy which seeks to maximize both
financial return and social good
In general, socially responsible investors favour
corporate best practices that promote environmental
stewardship, consumer protection, human rights, and
diversity.
Some (but not all) avoid businesses involved in
alcohol, tobacco, gambling, the military.