Financial Management Session 1: Introduction to Finance and Markets

Focus of Financial Management

• Emphasizes efficient and effective management of finances to achieve financial objectives.
• Involves planning, organizing, directing, and controlling financial activities.

Related Activities of Finance

• Investment: Involves decisions on acquiring assets and allocating funds to projects.
• Financing: Entails raising capital and managing obligations.

Scope of Investment Decisions

• Covers both long-term investments in fixed assets and short-term investments in current assets.
• Focuses on assessing risk, return, and the impact on the organization’s financial performance.

Term for Investment in Current Assets

• Working Capital Management: Refers to investments in current assets to ensure liquidity.

Subcategories of Finance

• Personal Finance: Management of individual or household financial resources.
• Corporate Finance: Deals with funding sources, capital structure, and investment decisions of corporations.
• Public Finance: Involves the management of government revenue and expenditure.

Primary Goal of Financial Management

• Maximization of shareholder wealth: Achieving the highest possible value for equity holders.

Primary Function of Profit

• Serves as a measure of success and sustainability, facilitating reinvestment and distribution among stakeholders.

Limitation of Profit Maximization Objective

• Ignores the timing of returns and risks associated with income, which may mislead decision-making.

Advantage of Earning Maximum Profits

• Provides a strong financial foundation for business growth, expansion, and investment opportunities.

Ambiguity of Profit Maximization

• Lacks clarity as it doesn’t specify which profits (short-term vs. long-term) or how they should be achieved.

'Bigger is Better' Concept

• Economies of Scale: The idea that increasing the size of operations leads to lower costs per unit.

Fulfilling Social Responsibility Obligations

• Corporate Social Responsibility (CSR): Businesses can engage in community development and environmental sustainability as part of their mandate.

Negative Consequence of Prioritizing Profit

• May lead to unethical practices or neglect of stakeholder interests, ultimately harming the business reputation.

Determinant of Shareholder's Wealth

• Stock Price: Represents overall market valuation and performance of the company.

Benefit of Wealth Maximization

• Focuses on long-term growth and value creation, leading to beneficial outcomes for shareholders.

Investments Maximizing Net Present Value

• Result in greater overall returns by considering the time value of money in financial decision-making.

Superiority of Wealth Maximization

• Takes into account risks, returns, and time frames, providing a more comprehensive measure compared to profit maximization.

Treatment of Cash Inflows in Net Present Value

• Cash inflows at different times are discounted to present value, ensuring accurate financial appraisal.

Purpose of Compensation Packages for Managers

• Aligns managers' interests with those of shareholders, incentivizing performance and effective decision-making.

Monitoring Performance of Managers

• Board of Directors: Responsible for overseeing management and ensuring alignment with organizational goals.

Key Factor in Finance Function Structure

• Organizational Size: Influences the complexity and specialization within the finance function.

Responsibility of the Treasurer

• Manages the organization's cash flow, investments, and financial risk management activities.

Role of the Controller

• Oversees accounting, budgeting, and financial reporting functions within the organization.

Primary Responsibility of Financial Planning Manager

• Develops and implements financial plans to ensure that corporate strategies are aligned with financial goals.

Primary Function of Financial Markets

• Facilitate the buying and selling of financial instruments, aiding capital allocation in the economy.

Financing Involving Retained Earnings

• Internal Financing: Utilizing profits generated by the firm for reinvestment rather than outside funding sources.

Market for Directly Selling Financial Instruments

• Primary Market: Where new securities are issued and sold directly to investors.

Primary Difference Between Primary and Secondary Markets

• Primary Market: Involves new issue securities; Secondary Market: Deals with resale of previously issued securities.

Example of External Source of Funds

• Bank loans: Financial institutions providing financing based on creditworthiness and collateral.

Main Function of Financial Intermediaries

• Act as facilitators between savers and borrowers, streamlining the flow of funds in the economy through indirect financing.

Test your understanding of the nature of financial management, financial markets, objectives of financial management, and the cost of money. This quiz covers the basics of finance and is suitable for students of Financial Management BI 1223.