Financial management

A Quick review of fundamentals

What are the functions of
financial management?
 Five functions of financial
management
• Working capital Management
• Capital budgeting function
• Capital structure Management
• Corporate governance function
• Risk management function
What is financing function?
 Financing function

• The key word is raising capital

• It relates with raising capital for supporting
the operations and investment programs
of the business.
What is capital budgeting?
 capital budgeting
• Choosing the best project
• Investing the firms resources
• Considering risks and returns
What is financial management?
• Managing internal cash flows
• Capital structure (mix of debt and equity
financing)
• Managing cash to meet the obligations of
payments and ensuring receivables on
time
What is corporate governance?
 Corporate governance
• Ensuring the ethical behavior of
management in the best interest of
stakeholders
What is a Risk management
function?
 risk management function
• Managing all types of risks the firm is
exposed to
 Financial managers – role
• All five functions of the management, are
performed by financial managers
• and they take into account
– The risk and returns
– Tax considerations
 Agency cost
• It is the cost incurred by the owners of the
company on financial managers because
financial managers of the agents of the
company
• financial managers manage the affairs of
the company on behalf of the
stakeholders.
 Owners of the company
• Share holders
• They are the owners of the company but
they are different from the management of
the company.
• They are not involved in the management
of daily affairs.
What is the ultimate goal of
management of a firm?
 Goal of management
• Maximization of wealth for its owners
• Owners are share holders
on which factor is the value of
stock prices are based on?
• Expected future cash flows of the firm
 exceptions to the above principle
• High risk investments
• Imperfection in measurement of profit,
profit may increase due to decrease of
costs too.
• Political and social responsibilities
What are the personal goals of
managers?
 personal goals of managers
• Personal wealth
• Job security
• Prestige
• Perquisites
How to control agency costs?
Shareholders control agency costs
• Rely on market forces to constrain
management behavior
• Appoint supervision over management,
e.g.. independent internal audit
department
• Structure executive compensation
packages e.g.. Stock option plans
What kind of taxes can the firm
face?
• State taxes
• Federal taxes