FM 100 FINANCIAL MANAGEMENT

INTRODUCTION TO

FINANCIAL MANAGEMENT
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What is Finance?
Finance can be defined as the art and science of managing money. What does the Bible say about money?

Legal Forms of Business

1. 2. 3. 4. 5.

Sole Proprietorship Partnership Corporation Cooperative Other legal forms:

a. Joint venture b. Joint stock

Legal Forms of Business

1. Sole Proprietorship - A business

owned by single person, assumes all the risk derives all profits. The entrepreneur makes the financial decision.

Legal Forms of Business

2. Partnership - A contract between two

or more persons binding themselves to contribute money, property or industry to a common fund with the intentions of dividing the profits and losses among themselves.

Legal Forms of Business

3. Corporation - An artificial being

created by operations of law having the rights of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.

Legal Forms of Business

A voluntary organization composed of small producers and consumers join together to form business enterprise. 4. Other legal forms:
3. Cooperative
a. Joint venture

b. Joint stock

Key Terms:
1. Unlimited liability The condition of a sole proprietorship (or a general partnership) allowing the owners total wealth to be taken to satisfy creditors. Articles of Partnership The written contract used to formally establish a business partnership.

2.

Key Terms:
3. Stockholders The owners of a corporation, whose ownership, or equity, is evidenced by either common stock or preferred stock. 4. Common Stock The purest and most basic form of corporate ownership. 5. Dividends Periodic distribution of earnings to the stockholders of a firm.

Key Terms:
6. Board of Directors Group elected by the firms stockholders and typically responsible for developing strategic goals and plans, setting general policy, guiding corporate affairs, approving major expenditures, and hiring/firing, compensating, and monitoring key officers and executives.

Key Terms:
7. President or Chief Executive Officer (CEO) Corporate official responsible for managing the firms day-to-day operations and carrying out the policies established by the board of directors.

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HOMEWORK sheet, c.w., handwritten

What are the career opportunities in Managerial Finance. Enumerate the positions and the corresponding job description for each position.

Look for the answer in the book Principles of Managerial Finance by Gitman, 12th ed. Table 1.3

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Areas of Specialization in Finance

Financial Markets
Markets of users and savers of funds.

Financial Services
Design and delivery of financial advice and products to individuals, businesses, government.

Managerial Finance
Financial management of business firms.

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Areas of Employment in Finance

Financial Analyst Capital budgeting analyst/manager Project finance manager Cash manager Credit analyst/manager Pension fund manager

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The Managerial Finance Function Role in the Organization Relationship to economics Relationship to accounting Primary activities of the financial manager

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The Managerial Finance Function Role in the Organization a) Treasurer: Financial planning, fund raising, capital expenditure decisions, cash and credit management. b) Controller: Corporate accounting, cost accounting, and tax management.

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The Managerial Finance Function Relationship to economics a) Foreign exchange manager: Monitoring and managing the firms exposure to loss form currency fluctuations. b) Marginal cost-benefit analysis: Financial decisions should be made and actions taken only when the added benefits exceed the added costs.

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The Managerial Finance Function Relationship to accounting a) Emphasis on Cash flows:

Accrual Basis recognizes sales revenue and expenses incurred to make sale at time of sale. Cash Basis: recognizes sales revenue and expenses only with respect o actual inflows and outflows of cash. b) Decision Making*

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Accounting vs. Financial Views

Accounting View (Accrual Basis) Income Statement XYZ Co. For year ended 12/31 Financial View (Cash Basis) Cash Flow Statement XYZ Co. For year ended 12/31

Sales revenue Less: Costs Net Profit

P100,000 80,000 P 20,000

Cash inflow P 0 Less: Cash outflow 80,000 Net cash flow (P80,000)

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The Managerial Finance Function Primary activities of the financial manager

Technically, financial managers make recommendations with regard to decisions that are ultimately made by the CEO and/or corporate board of directors.

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The Primary activities of the financial manager

Financial Analysis & Planning
Balance Sheet

Making Investment Decisions

Current Assets _______________ Fixed Assets

Current Liabilities _______________ Long-Term Funds (Debt & Equity)

Making Financing Decisions

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The Goal of the Firm: Should Firms Maximize Profit or Should Firms Maximize Shareholders Wealth?

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Should Firms Maximize Profit?

Corporations commonly define Earnings per Share (EPS). profit as

The amount earned during the period on behalf of each outstanding share of common stock, calculated by diving the periods total earnings available for common stockholders by the number shares of common stock outstanding.

EPS ignores critical factors of

the timing of the returns. cash flows available to common shareholders. risk factors facing the firm.

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Timing of the returns The receipt of funds sooner rather than later is preferred.
Which Investment is Preferred? Earnings Per Share (EPS)
Investment Year 1
PHP 1.40 0.60

Year 2
PHP 1.00 1.00

Year 3
PHP 0.40 1.40

Total for Years 1, 2 and 3

Rotor Valve

PHP 2.80 3.00

Profit maximization fails to account for differences in the level of cash flows (as opposed to profits), the timing of these cash flows, and the risk of these cash flows.

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Cash flows available to stockholders Profit do not necessarily result in cash flows available to stockholders. High EPS do not necessarily translate into a higher stock price.
Risk factors facing the firm Profit maximization also disregard risk. Risk and return are the key determinants of share price, which represents the wealth of the owners in the firm. Cash flow and risk affect share price differently: Cash flow, tends to generate share price Risk, tends to result in share price

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The Goal of the Firm: Should Firms Maximize Shareholders Wealth?

Evaluating Shareholder Wealth addresses factors of timing, cash flows and risk ignored by the EPS. Therefore, Maximizing Shareholder Wealth is a more comprehensive goal for the firm, its managers and employees. This can be explored through economic valued added and a focus on stakeholders.

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The Goal of the Firm: Maximize Wealth?

The process of shareholder wealth maximization can be described using the following flow chart: Illustration: Share Price Maximization