2/4/2015

Introduction to
Financial Management
Chapter 1

Dr. Joseph Berlin P. Juanzon CE, MSCM

 Have a good understanding of the:

◦ basic types of financial management decisions
and the role of the financial manager
◦ goal of financial management
◦ financial implications of the different forms of
business organisation
◦ conflicts of interest that can arise between
managers and owners

Key concepts and skills

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 Finance: A quick look

 Business finance and the financial
manager
 Forms of business organisation
 The goal of financial management
 The agency problem and control of the
corporation
 Financial markets and the corporation

Chapter outline

1. Corporate finance or business

finance
2. Investments
3. Financial institutions
4. International finance

The four basic areas of finance

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 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

Investments

 Companies that specialise in financial

matters
◦ Banks─commercial and investment, credit
unions, savings and loans
◦ Insurance companies
◦ Brokerage firms
 Job opportunities

Financial institutions

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 This is an area of specialisation 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.

International 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

Why study finance?

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 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?

Business finance

 Financial managers try to answer some or

all of these questions.
 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

Financial Manager

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A simplified organisational chart

 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-to-day finances of
the firm?

Financial management decisions

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 Three major forms in Philippines

1. Sole proprietorship
2. Partnership
 General
 Limited
3. Corporation

Forms of business organisations

Advantages Disadvantages

• Easiest to start • Limited to life of

• Least regulated owner
• Single owner • Equity capital
keeps all the limited to owner’s
profits personal wealth
• Taxed once as • Unlimited liability
personal income • Difficult to sell
ownership interest

Sole proprietorship

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Advantages Disadvantages

• Two or more owners • Unlimited liability

• More capital • General
available partnership
• Relatively easy to • Limited partnership
start • Partnership dissolves
• Income taxed once when one partner
as personal income dies or wishes to sell
• Difficult to transfer
ownership

Partnership

Advantages Disadvantages

• Limited liability • Separation of

• Unlimited life ownership and
• Separation of management
ownership and • Taxation of
management company profits
• Transfer of can be an issue
ownership is easy
• Easier to raise
capital

Corporation

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 Joint stock companies

 Public limited companies
 Limited liability companies

 All share:
◦ public ownership
◦ limited liability

International corporate forms

 What should be the goal of a

corporation?
◦ Maximise profit?
◦ Minimise costs?
◦ Maximise market share?
◦ Maximise the current value per share
of the company’s existing stock?
◦ Maximise the market value of the
existing owners’ equity?

Goal of financial management

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 Agency relationship
◦ Principal hires an agent to represent their
interests.
◦ Shareholders (principals) hire managers
(agents) to run the company.
 Agency problem
◦ Conflict of interest between principal and agent
 Management goals and agency costs

The agency problem

 Managerial compensation
◦ Incentives can be used to align management
and shareholder interests.
◦ The incentives need to be structured carefully
to make sure that they achieve their goals.
 Corporate control
◦ The threat of a takeover may result in better
management.
 Other stakeholders

Do managers act in shareholders’

interests?

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 What are the four basic areas of finance?

 What are the three types of financial
management decisions and what
questions are they designed to answer?
 What are the three major forms of
business organisation?
 What is the goal of financial management?
 What are agency problems and why do
they occur within a corporation?

Quick quiz

Chapter 1

END

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