Financial Management Chapter 1

Chapter 1: Introduction to Financial Management

• Definition of Finance: The science and art of managing money and allocating capital over time. It's the study of how individuals and businesses evaluate investments and raise funds.
• Finance's Focus: Choices between current spending and future gains.
• Levels of Finance:
  • Individual Level: Managing personal finances, including spending, saving, and investment.
  • Business Level: Planning and managing long-term investments, capital structure (debt vs. equity), and working capital (managing short-term assets and liabilities).

Balance Sheet Model

• Assets: Current assets (tangible & intangible) and fixed assets (tangible & intangible).
• Liabilities: Current liabilities (e.g., short-term debt) and long-term liabilities (e.g., long-term debt, shareholders' equity.)
• Net Working Capital: Difference between current assets and current liabilities
• Capital Structure: Mix of debt and equity financing a firm uses.

Financial Management and Services

• Financial Management: Tasks and duties of financial managers in a business; managing capital, making financial decisions.
• Financial Services: Design and delivery of financial advice and products for individuals and businesses.

Organizational Level of Finance Function

• Small Firms: Finance function may be performed by the owner, president, or accounting department.
• Large Firms: Finance function usually dedicated a department led by a Chief Financial Officer (CFO) who manages activities through the treasurer and controller roles.

Objectives of Financial Management

• Profit Maximization: Goal of maximizing profits. Limited in its ability to consider short-term goals, accounting methods, time value of money, or risk-adjusted returns.
• Shareholder Wealth Maximization: Goal of increasing the wealth of shareholders. This accounts for risk, time value of money, and expected future cash flows to shareholders.

Financial Activities

• Investment Decisions: Deals with allocating resources to assets (short-term or long-term investments)
• Financing Decisions: About raising capital (short-term or long-term financing)
• Operating/Tactical Financial Decisions: Deal with working capital (short term assets and liabilities)
• Strategic Financial Decisions: Long-term investments and financing.

Principles of Finance

• Time Value of Money: A dollar today is worth more than a dollar in the future.
• Risk and Return: Higher risk often leads to higher potential return.
• Cash Flow: The actual flow of cash in and out of a firm is the most important part of financial analysis.
• Market Prices Reflect Information: Efficient markets where prices incorporate information about the firm and relevant aspects of the market.

Ethical and Agency Considerations

• Ethical Considerations: Companies acting ethically are more successful and trusted by the market.
• Agency Problem: Conflict of interest between managers and shareholders if managers don't operate with shareholders' best interest in mind. This is addressed by corporate governance and ownership structures.

Explore the foundational concepts of finance in this quiz focusing on Chapter 1 of Financial Management. Understand the definitions, levels of finance, and the balance sheet model including assets, liabilities, and capital structure. Test your knowledge on how individuals and businesses make financial decisions.