Financial Management Overview

Study Notes

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.

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.

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.

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.

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.

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 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.