JOY C.

CHAVEZ
Ph.D Student

Dr. Virginia C. Reyes

HDM 305A-1
Professor

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OBJECTIVES
1. Define Financial Management
2. Explain the basic types of financial
management decisions and the
role of the financial manager.

3. Identify
the
key
differences
between three major legal forms
of business.
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4.Identify the scope and elements

of financial management.
5. Know the functions of financial
management.
6. Explain the Basic Principles of
Finance.
7. Explain the goal of financial
management.
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What is Financial
Management?

planning,
organizing,
directing and controlling the
financial activities such as
procurement and utilization of
funds of the enterprise. It
means
applying
general
management principles to
financial resources of the
enterprise.
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Scope and Elements

1. Investment decisions includes

investment in fixed assets
(called as capital budgeting).
Investment in current assets
are also a part of investment
decisions called as working
capital decisions.
2.
Financial decisions - They
relate to the raising of finance from
various
resources
which
will
depend upon decision on type of
source, period of financing, cost of
financing and the returns thereby.1-5

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3. Dividend decision - The

finance manager has to take
decision with regards to the
net profit distribution. Net
profits are generally divided
into two:
Dividend
for
shareholdersDividend and the rate of it has to
be decided.
Retained profits- Amount of
retained profits has to be finalized
which will depend upon expansion
and diversification plans of the
enterprise.
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The Four Basic

Areas of Finance
1. Corporate finance or business
finance
2. Investments
3. Financial institutions
4. International finance

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Investments
Working with financial assets
such as shares and bonds
Value of financial assets, risk
versus return and asset
allocation
Job opportunities

Stockbroker
Financial advisor
Portfolio manager
Security analyst

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Financial Institutions
Companies that specialize in
financial matters
Bank commercial and
investment, credit unions,
savings and loans
Insurance companies
Brokerage firms

Job opportunities

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International Finance
This is an area of specialization
within one of the areas discussed so
far.
Involves international aspects of
corporate finance or investments or
financial institutions.
It may allow you to work in other
countries or at least travel on a
regular basis.
Need to be familiar with exchange
rates and political risk.
Need to understand the customs of
other countries and you would
benefit from fluency in a foreign
language.
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Why study finance?

Marketing
Budgets, marketing research, marketing
financial products

Accounting
Dual accounting and finance function,
preparation of financial statements

Management
Strategic thinking, job performance and
profitability

Personal finance
Budgeting, retirement planning, university
planning, day-to-day cash flow
management
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Business Finance
o Some important questions that
are answered using finance:
What long-term investments
should the firm take on?
Where will we get the long-term
financing to pay for the
investment?
How will we manage the
everyday financial activities of
the firm?

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Financial Manager
o Financial managers try to answer
some or all of these questions.
o The top financial manager within
a firm is usually the chief
financial officer (CFO).
Treasurer: oversees cash
management, credit management,
capital expenditure and financial
planning
Accountant: oversees taxes, cost
accounting, financial accounting
and data processing
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A Simplified Organizational Chart

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Financial Management
Decisions
Capital budgeting
What long-term investments or
projects should the business take
on?

Capital structure
How should we pay for our assets?
Should we use debt or equity?

Working capital management

How do we manage the day-today finances of the firm?

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Forms of Business
Organizations
1. Sole proprietorship
2. Partnership
General
Limited

3. Corporation

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Sole proprietorship

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Partnership

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Corporation

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International Corporate Forms

Joint stock companies
Public limited companies
Limited liability companies
All share:
public ownership
limited liability

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Goal of Financial Management

What should be the goal of a
corporation?
Maximize profit?
Minimize costs?
Maximize market share?
Maximize the current value per share
of the companys existing stock?
Maximize the market value of the
existing owners equity?
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Functions of Financial
Management
Estimation
of
capital
requirements:
A
finance manager has to make
estimation with regards to capital
requirements of the company.
Determination
of
capital
composition:
Once the
estimation has been made, the
Investment
of tofunds:
The
capital
structure have
be decided.
finance manager has to decide to
allocate
funds
into
profitable
ventures so that there is safety on
investment and regular returns is
possible.
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Choice of sources of funds: For

additional funds to be procured, a
company has many choices like1.Issue of shares and debentures
2.Loans to be taken from banks and
financial institutions
3.Public deposits to be drawn like in
Disposal
surplus: The net profits
formofof bonds.
decision have to be made by the finance
manager.
1.Dividend
declaration
It
includes
identifying the rate of dividends and other
benefits like bonus.
2.Retained profits - The volume has to be
decided which will depend upon expansion,
innovational, diversification plans of 1-23
the

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Management of cash: Finance

manager has to make decisions with
regards to cash management. Cash is
required for many purposes like
payment of wages and salaries,
payment of electricity and water bills,
payment to creditors, meeting current
liabilities, maintenance of enough
stock,
purchase
of raw materials,
etc.
Financial
controls:
The finance
manager has not only to plan, procure
and utilize the funds but he also has to
exercise control over finances. This
can be done through many techniques
like
ratio
analysis,
financial
forecasting, cost and profit control,
etc.
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THE FOUR
BASIC
PRINCIPLES
OF FINANCE

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PRINCIPLE 1:
Money Has a Time Value.
o A dollar received today is
more
valuable
than
a
dollar
received
in
the
future.
We can invest the dollar received
today to earn interest. Thus, in
the future, you will have more
than one dollar, as you will
receive the interest on your
investment plus your initial
invested dollar.
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PRINCIPLE 2:
There is a Risk-Return
Trade-off.
o We only take risk when we
expect to be compensated for
the extra risk with additional
return.
o Higher the risk, higher will be
the expected return.
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PRINCIPLE 3:
Cash Flows Are The
Source
of Value.
o Profit
is an accounting concept

designed
to
measure
a
businesss performance over
an interval of time.

o Cash flow is the amount of

cash that can actually be
taken out of the business over
this same interval.
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PRINCIPLE 4:
Market Prices Reflect
Information.

o Investors respond to new information by

buying and selling their investments.
o The speed with which investors act and the
way that prices respond to new information
determines the efficiency of the market. In
efficient markets like United States, this
process occurs very quickly. As a result, it is
hard to profit from trading investments on
publicly released information.

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