Financial Management - Part 1

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