FINANCIAL MANAGEMENT

Master in Public and Business Administration Major in Business Administration F.L. Vargas College S.Y. 2013-2014

INTRODUCTION TO FINANCIAL MANAGEMENT

Learning Objectives

After the lecture, the students should be able to:

1. Identify the different forms of organizations and their advantages and disadvantages; 2. Define financial management and discuss it features; 3. Discuss its objectives; 4. Explain briefly the three major types of decisions Finance Manager makes; 5. Discuss the significance of financial management.

Introduction to Financial Management

FORMS OF BUSINESS ORGANIZATION
The key aspects of financial management are the same for all businesses, large or small, regardless of how they are organized. Still, its legal structure does affect some aspects of a firms operations and thus must be recognized. There are three main forms of business organization: (1) Sole proprietorships (2) Partnerships (3) Corporations.

Introduction to Financial Management

FORMS OF BUSINESS ORGANIZATION
1.SOLE PROPRIETORSHIP - an unincorporated business owned by one individual. Going into business as a sole proprietor is easymerely begin business operations. Proprietorships have three important advantages: (1) they are easily and inexpensively formed, (2) they are subject to few government regulations, and (3) they are subject to lower income taxes than corporations.

Introduction to Financial Management

FORMS OF BUSINESS ORGANIZATION
However, proprietorships also have three important limitations: (1)Proprietors have unlimited personal liability for the businesss debts, which can result in losses that exceed the money they have invested in the company; (2) it is difficult for proprietorships to obtain large sums of capital; and (3) the life of a business organized as a proprietorship is limited to the life of the individual who created it.

Introduction to Financial Management

FORMS OF BUSINESS ORGANIZATION
2. PARTNERSHIP - a legal arrangement between two or more people who decide to do business together. Partnerships are similar to proprietorships in that they can be established easily and inexpensively, and they are not subject to the corporate income tax. They also have the disadvantages associated with proprietorships -unlimited personal liability, difficulty raising capital, and limited lives. The liability issue is especially important, because under partnership law, each partner is liable for the businesss debts. Therefore, if any partner is unable to meet his or her pro rata liability and the partnership goes bankrupt, then the remaining partners are personally responsible for making good on the unsatisfied claims.

Introduction to Financial Management

FORMS OF BUSINESS ORGANIZATION
3. CORPORATION - a legal entity created by a state, and it is separate and distinct from its owners and managers. Corporations have unlimited lives, their owners are not subject to losses beyond the amount they have invested in the business, and it is easier to transfer ones ownership interest (stock) in a corporation than ones interest in a non-incorporated business. These three factors make it much easier for corporations to raise the capital necessary to operate large businesses. Thus, growth companies such as Jollibee and San Miguel Brewery generally begin life as proprietorships or partnerships, but at some point find it advantageous to convert to the corporate form.

Introduction to Financial Management

FORMS OF BUSINESS ORGANIZATION
The biggest drawback to incorporation is TAXES: Corporate earnings are generally subject to double taxationthe earnings of the corporation are taxed at the corporate level, and then, when after-tax earnings are paid out as dividends, those earnings are taxed again as personal income to the stockholders.

Introduction to Financial Management

Definition of Financial Management
Financial Management means 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. It refers to that managerial activity which is concerned with the planning of the firms financial resources. Refers to the operational activity of a business that is responsible for obtaining and effectively, utilizing the funds necessary for efficient operations. -Joseph and Massie.

Introduction
FINANCIAL MANAGEMENT AND RELATED DISCIPLINES
1. FINANCIAL MANAGEMENT AND ECONOMICS The relevance of economics to Financial Management can be described in the lights of the two broad areas of economics, -macro economics, and micro economics. Macro economics is concerned with the over all institutional environment in which the Company operates. It looks at the Economy as a whole. It is concerned with the institutional structure of the banking system, money and capital markets, financial intermediaries, monetary credit, and fiscal policies. Since the business operates in the macro economic environment, it is important for financial managers to understand the broad economic environment. Micro economics deals with the economic decisions of individuals and organizations. It concerns itself with the determination of optimal operating strategies. A financial manger uses these to run the firm efficiently and effectively.

Introduction
FINANCIAL MANAGEMENT AND RELATED DISCIPLINES
2. FINANCIAL MANAGEMENT AND ACCOUNTING Accounting function is a necessary input in to the finance function. ie. accounting is a sub function of finance. Accounting generates information about a firm. The end products of accounting constitute financial statements such as Balance Sheet, P&L Account and the statement of changes in financial position. The information contained in this reports and statements assist financial managers in assessing the past performance and taking future decisions of the firm and in meeting the legal obligations such as payment of Taxes and so on. Thus accounting and finance are functionally closely related.

Introduction
FINANCIAL MANAGEMENT AND RELATED DISCIPLINES
2. FINANCE AND OTHER RELATED DISCIPLINES Apart from economics and accounting, finance also draws considerably for its key day today decisions- on supportive disciplines such as Marketing, Production, and Quantitative methods. For instance financial managers should consider the impact of new product development and promotion plans made in the marketing area since their plans will require Capital or Fund out flows and have an impact on the projected cash flows. Similarly changes in the production process may necessitate capital expenditure which the financial managers must evaluate and finance. And finally the tools of analysis developed in the quantitative techniques are helpful in analyzing complex financial management problems. Thus the marketing, production and quantitative techniques are only indirectly related to day to day decision making by financial managers and are supportive in nature , while Economics and Accounting are primary disciplines on which the financial managers draws substantially.

Introduction
SCOPE OF FINANCIAL MANAGEMENT
The approach to the scope and functions of financial management is divided in to two broad categories. Traditional Approach and Modem Approach.

Introduction
SCOPE OF FINANCIAL MANAGEMENT
TRADITIONAL APPROACH The traditional approach to the scope of financial management refers to the subject matter, in academic literature in the initial stages of its development, as a separate branch of academic study. The term 'Corporation Finance' was used to describe what is known as Financial management. As the name suggests, the concern of 'Corporation Finance' was with the financing of Corporate enterprises. In other words the scope of finance function was treated by the traditional approach in the narrow sense of procurement of fund by corporate enterprises to meet their financing needs. So the field of study included, 1. Institutional arrangements in the form of financial institutions which comprise the organization of Capital Market. 2. Financial instruments through which Funds are raised from the capital market & 3. The Legal and Accounting relationship between a firm and its sources of funds.

Introduction
SCOPE OF FINANCIAL MANAGEMENT
TRADITIONAL APPROACH The traditional approach was criticized in the following grounds. 1. The approach equated finance function with raising and administering of funds only. The limitation was that internal decision-making was completely ignored. 2. The focus was on financing problems of Corporate enterprises (i.e. Companies). Non corporate organizations lay outside its scope. 3. The approach laid over emphasis on the problems of long term financing. Hence day to day financial problems and working capital management of a business did not receive any attention.

Introduction
SCOPE OF FINANCIAL MANAGEMENT
MODERN APPROACH. The modern approach views the term 'Financial management' in a broad sense and provides a conceptual and analytical frame work for financial decision making. According to it Finance function covers both acquisitions of funds as well as their allocations. Thus the Financial Management, in the modern sense of the term, can be broken down in to 3 major decisions as functions of Finance. 1. The investment Decision 2. The Financing Decision 3. The Dividend Policy Decision.

Introduction
Types of Financial Decisions
Investment Decision
Those which determine how scarce or limited resources in terms of funds of the business firms are committed to projects.

Financing Decisions
Assert that mix of debt and equity chosen to finance investment should maximize the value of investments made.

Dividend Decisions
Concerned with the determination of quantum of profits to be distributed to the owners, the frequency of such payments and the amounts to be retained by the firm.

Introduction
Main Features of Financial Management
Analytical Thinking Continuous Process Basis of Managerial Decisions Balance between Risk and Profitability Coordination between Processes Centralized Nature

Introduction
Objectives of Financial Management
The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can beTo ensure regular and adequate supply of funds to the concern. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost.
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Introduction
Objectives of Financial Management
The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can beTo ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved. To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital.

Introduction
Significance of Financial Management
Helps Set Clear Goal
Clarity of the goal is important for any firm. Financial management defines the goal of the firm in clear terms (maximization of the shareholders wealth). Setting goal helps to judge whether the decisions taken are in the best interest of the shareholders or not. Financial management also direct the efforts of all functional areas of business towards achieving the goal and facilitates among the functional areas of the firm.

Introduction
Significance of Financial Management
Helps Efficient Utilization Of Resources
The application of financial management techniques (such as capital budgeting techniques) helps to answer the questions like which asset to buy, when to buy and whether to replace the existing asset with new one or not.

Introduction
Significance of Financial Management
Helps in Deciding Sources Of Financing
Firms collect long-term funds mainly for purchasing permanent assets. The sources of long term finance may be equity shares, preference shares, bond, term loan etc. The firm needs to decide the appropriate mix of these sources and amount of long-term funds; otherwise the firm will have to bear higher cost and expose to higher risk. Financial management (capital structure theories) guides in selecting these sources of financing.

Introduction
Significance of Financial Management
Helps in Making Dividend Decision

Dividend is the return to the shareholders. The firm is not legally obliged to pay dividend to the shareholders. However, how much to pay out of the earning is a vital issue. Financial management (dividend policies and theories) helps a firm to decide how much to pay as dividend and how much to retain in the firm. It also suggests answering questions such as when and in what form (cash dividend or stock dividend) should the dividend be paid?

Thank you for listening. have a nice day!