Financial Management Overview

Overview of Financial Management

• Financial management is concerned with making financial decisions that affect the worth of a firm and creating economic value.
• The goal is to create wealth and economic value of the firm, including its sustenance.

Importance of Financial Management

• Financial management knowledge is important to a firm to answer questions such as what fixed assets to invest in, how to raise funds, and how to manage short-term operating cash flows.

Role of Treasurer/Finance Manager

• Undertake capital budgeting and make capital expenditure decisions using techniques such as payback, internal rate of return, and net present value.
• Perform financial planning, contributing to corporate planning and development of financial policy for the firm.
• Source and raise funds, planning and raising financing via money markets and capital markets (debt and equity capital) from various financial market participants.
• Perform cash and credit management, looking after the firm's cash needs, banking, and maintenance of security systems.
• Manage foreign currency flows into and out of the firm.
• Perform risk management exercises, undertaking appropriate risk management in the firm.

Role of Accounts Manager

• Produce regular financial statements (statement of financial position, income statement, and statement of cash flows).
• Perform cost and management accounting roles, providing regular management accounting information for planning and monitoring daily and monthly activities.
• Comply with taxation requirements, completing tax returns, collecting indirect taxes, and remitting tax revenues to the Inland Revenue Board.

Goal of the Firm

• The goal of the firm is to maximize shareholder wealth.
• Other possible goals, such as limiting working hours, achieving high reputation, good employer-employee relations, being environmentally friendly, and being ethical, have problems, such as being difficult to quantify and prioritize.

Shareholder Wealth

• Shareholder wealth is the primary goal of the firm.

Agency Problem

• The agency problem arises when there is a separation of ownership and control in a firm, leading to a principal-agent relationship.
• The agency problem occurs when managers (agents) do not act in the best interests of shareholders (principals).
• Agency costs are incurred when managers do not attempt to maximize firm value, and shareholders incur costs to monitor and influence managerial actions.

Agency Costs

• Agency costs include the costs of monitoring management's behavior, such as using audit committees, management audit procedures, and reporting requirements.
• Agency costs also include the costs of revamping the firm to keep management on their toes, such as through stock market quotation.

Satisficing Principle

• The satisficing principle suggests that management will do just sufficient to keep shareholders satisfied while pursuing their own objectives.