THE ROLE OF

FINANCIAL
MANAGEMENT
ROLE OF FINANCIAL MANAGEMENT

• What is financial management?

• The goal of the firm
• Corporate governance
• Organization of financial management function
WHAT IS FINANCIAL MANAGEMENT?

• Concerns the acquisition, financing and management of assets with some overall goal in
mind.
INVESTMENT DECISION

• Three most important decision:

• What is the optimal firm size?
• What specific assets should be acquired?
• What assets (if any) should be reduced or eliminated?
FINANCING DECISION

• Determine how assets will be financed?

• What is best type of financing?
• What is the best financing mix?
• What is best dividend policy?
• How will the funds be physically acquired?
ASSET MANAGEMENT DECISIONS

• How do we manage existing assets efficiently?

• Financial manager has varying degrees of operating responsibility over assets.
• Greater emphasis on current asset management and fixed asset management
WHAT IS GOAL OF FIRM?

• Maximization of shareholders wealth?

Value creation occurs when we maximize the share price for current shareholders.
• Impact of CSR and sustainability on goal of firm
• Corporate social responsibility: A business outlook that acknowledges a firm
responsibilities to its stakeholders and natural environment.
• Sustainability: Meeting the needs of present without compromising the ability of future
generation to meet their own needs.
MODERN CORPORATION

• There exists a separation between owners(shareholders) and management.

• Agency theory: Principal must provide incentives so that management acts in the
principals best interest and then monitor results.
• Incentives: Stock options and bonuses
CORPORATE GOVERNANCE

• Represents the system by which the corporations are managed and controlled.
• Include shareholders, board of directors and senior management.
• The shareholder wealth maximization remains the appropriate goal in governing the firm.
ROLE OF BOARD OF DIRECTORS

• Set company wide policy

• Advise CEO and other senior executives
• Hire , fire and set compensation of CEO
• Review and approve strategy, significant investments, and acquisition
• Oversee operating plans, capital budgets and financial reports to common shareholders
ORGANIZATION OF FINANCIAL MANAGEMENT
FUNCTIONS
• Hierarchy
• Directors
• CEO
• Executive vice president( e.g. Chief financial officer)
FORMS OF BUSINESS ORGANIZATION

• Sole proprietor
• Partnership
• Corporation
SOLE PROPRIETOR

• Single ownership
• No sharing of profit and loss
• One mans capital
• Small scale
• Unlimited liability
• Less legal formalities
• One man control
PARTNERSHIP

• Partnership Act 1932

• Two or more person, maximum 20
• Agreement
• Lawful business
• Sharing of profit
• Unlimited liability
• Voluntary registration
PARTNERSHIP (Continued)

• No separate legal existence

• Principal agent relationship
• Restriction on transfer of interest
• Continuity of business(death, insolvency, insanity)
CORPORATION

• Companies Act 2017

• Separate legal existence
• Continuous life
• Ability to acquire capital
• Transfer of shares
• Limited liability
• Government regulation/ less flexible
CORPORATION (continued)

• Double taxation
• Democratic management
• Large scale business
DIFFERENT TYPES OF COMPANY

• Based on number of members( Public, private, SMC)

• Based on liability( limited by shares, limited by guarantee, unlimited liability)
• Based on incorporation (Chartered company, Registered company)
• Other (foreign company, holding company, subsidiary company, associate company,
listed company, unlisted company)