AN OVERVIEW OF FINANCIAL

MANAGEMENT
Introduction to Business Finance (Fall 2016)
 What is Finance?

“The activity concerned with planning,

developing, managing, administering and
increasing of the capital used for business
purposes is known as finance”.

The overall assessment, acquisition, and

conversation of capital funds to accomplish
important objectives of a business enterprise
including the financial requirement is called
business finance”
Introduction to Business Finance (Fall 2016)
 Areas of Finance

Financial Management (Corporate Finance)

• How much to invest
• Where to invest, etc

Capital Markets

Investments
• Security analysis
• Portfolio theory
•IntroductionMarket
to Businessanalysis
Finance (Fall 2016)
 Finance v/s Accounting
• Finance refers to the ways in which a person or
organization generates and uses capital—in other words,
how a given party manages their money. This often
encompasses activities such as investing, borrowing,
lending, budgeting, and forecasting.
• Accounting, on the other hand, refers to the process
of reporting and communicating financial information
about an individual, business, or organization. Rather than
making strategic financial decisions, accounting captures
an accurate snapshot of a party’s financial position at a
specific point in time.
Introduction to Business Finance (Fall 2016)
Forms of Business Organizations…

• The Sole Proprietorship

• The Partnership
– General Partnership
– Limited Liability Partnership
• The Corporation
– Limited Liability Corporation
– S Corporation
– C corporation

Introduction to Business Finance (Fall 2016)

 Comparison Chart

Introduction to Business Finance (Fall 2016)

 Sole Proprietorships
The Original Form of Business
Advantages Disadvantages
Simple Unlimited Liability
Single Taxation Limited Growth
Attracting Capital

• This form of business happens “automatically” when a person does

business of his or her own and does not have some other type of business
organization.

Introduction to Business Finance (Fall 2016)

 Partnerships
The Other Common Law Form of Business
Advantages Disadvantages
Still Simple Unlimited Liability*
Single Taxation Limited Growth Potential
More human and capital Limited avenues for
resources Attracting Capital

Introduction to Business Finance (Fall 2016)

 Partnerships- Basic Concepts
Partners in a business are like spouses, they
depend greatly upon each other, must cooperate,
can create liability for each other, and often end
up with irreconcilable differences
• Forming a partnership- no formality required!!!

• Characteristics of partnership – no limited liability

•Advantages/disadvantages

Introduction to Business Finance (Fall 2016)

• Limited Partnership
Limited partnerships have only one general partner with
unlimited liability, and all other partners have limited liability.
The partners with limited liability also tend to have limited
control over the company, which is documented in a partnership
agreement.
• Limited Liability Partnership
Limited liability partnerships are similar to limited partnerships,
but give limited liability to every owner. An LLP protects each
partner from debts against the partnership, they won't be
responsible for the actions of other partners.
Introduction to Business Finance (Fall 2016)
 Corporations
A statutory form of business, heavily regulated and
complex in creation and operation

Advantages Disadvantages
Limited Liability Double Taxation
Growth potential Complexity
Greater access to talent
Ease to access financial
resources
Continuity of existence
Separate legal entity

Introduction to Business Finance (Fall 2016)

 Limited Liability Company (LLC)
A very new creation that merges the basic sought
after benefits of Limited Liability and Single Taxation
with little administrative complexity. It is a US
concept mostly)
Advantages Disadvantages
Limited Liability
Single Taxation Legal Uncertainty
People Resources
Ease of Creation
Flexibility

Introduction to Business Finance (Fall 2016)

 LLC- Basic Concepts
• Owners are called “Members”
• Usually created by filing “Articles of
Organization” with state.
• Many states allow single owner LLC’s
• Often an “operating agreement” is created
between members to govern their
relationship, obligations and rights.

Introduction to Business Finance (Fall 2016)

 Corporations

The corporate entity is the most complex,

the most administratively burdensome type
of all business organizations.
It also has the greatest variance, coming in
small, medium, and large, and from one to
one million owners.

Introduction to Business Finance (Fall 2016)

 Corporations
• Shareholder/Board Member/ Officer/ Employee

• Corporations must comply with specific laws

(often Corporate Code) of the state incorporated
in.
• Corps must also comply with own Articles of
Incorporation and Bylaws (if any).
• Securities Laws apply to publicly traded
corporations and sometimes other corps and other
business organizations

Introduction to Business Finance (Fall 2016)

 Types of Corporations

• Small or “S’ Corporation

Single taxation, but limited to 75 shareholders who are United States
citizens or residents.

• Public Corporation
Defined more by securities laws than anything else. “Publicly traded”
More restricted than other corporations..

Introduction to Business Finance (Fall 2016)

 Goal of a Corporation

“Creating Value”

Introduction to Business Finance (Fall 2016)

Introduction to Business Finance (Fall 2016)
 Intrinsic Value

Management’s goal should be to maximize

intrinsic value and not current market price.

Introduction to Business Finance (Fall 2016)

 Stockholder Manager Conflicts
• Principal agent relationship

• Agency problem

Introduction to Business Finance (Fall 2016)

 How to resolve:

• Compensation packages

• Direct Stock Holder Intervention

• Corporate Raiders – Hostile Takovers

Introduction to Business Finance (Fall 2016)

There can be various possible goals of a
corporation at different points in time …

• Survival
• Avoid financial distress and bankruptcy
• Beat the competition
• Maximize sales or market share
• Minimize costs
• Maximize profits
• Maintain steady earnings growth

Introduction to Business Finance (Fall 2016)

 The goal of financial
management is to maximize
shareholders’ wealth.

Introduction to Business Finance (Fall 2016)

 In a Corporation, the owners are
different from service providers…

Board of Directors

Shareholders
Debtholders
Management

Debt
Assets
Equity
Introduction to Business Finance (Fall 2016)
 Financial Management involves
the investment, the financing
and the management of a
company’s assets with an
objective of value creation.

Introduction to Business Finance (Fall 2016)

 Higher profits do not necessarily
mean higher firm value !!!

Agree or Disagree???

Introduction to Business Finance (Fall 2016)

 The agency relationship is the relationship between the
shareholders and the management of a firm. The agency
problem is the possibility of conflict of interests between
these two parties.

Introduction to Business Finance (Fall 2016)

Managers will not work in the interest
of shareholders unless it is in their
own best interest…

• Management compensation schemes

– Stock options

• Monitoring of management
– Voting rights of the shareholders
– Proxy votes????

• The threat of hostile takeover

Introduction to Business Finance (Fall 2016)
• Research about any one hostile takeover in
detail.
• Name of the companies
• Reason of takeover
SIZE OF THE TAKEOVER
Mode of takeover
Result of the takeover (Successful or not)

Introduction to Business Finance (Fall 2016)

 http://study.com/academy/lesson/the-role-
and-responsibilities-of-financial-managers.html

Introduction to Business Finance (Fall 2016)