Financial Planning PDF

FINANCIAL PLANNING By Dr. M.Abd Elnaby Principles of Finance  Slide Contents Learning Objectives Introduction 1.Finance: An Overview 2.Three Types of Business Organizations Key Terms Learning Objectives 1. Understand the importance of finance in your...

FINANCIAL PLANNING By Dr. M.Abd Elnaby Principles of Finance  Slide Contents Learning Objectives Introduction 1.Finance: An Overview 2.Three Types of Business Organizations Key Terms Learning Objectives 1. Understand the importance of finance in your personal and professional lives and identify the three primary business decisions that financial managers make. 2. Identify the key differences between three major legal forms of business. Learning Objectives (cont.) Understand the role of the financial manager within the firm and the goal for making financial choices. Explain the four principles of finance that form the basis of financial management for both businesses and individuals.  Introduction Give examples of financial decisions faced by corporations and individuals.  What is Finance? "Finance is the study of how people and businesses evaluate investments and raise capital to fund them." Three Questions Addressed by the Study of Finance: 1. What long-term investments should the firm undertake? (capital budgeting decisions) 2. How should the firm fund these investments? (capital structure decisions) 3. How can the firm best manage its cash flows as they arise in its day-to-day operations? (working capital management decisions)  Why Study Finance? Knowledge of financial tools is critical to making good decisions in both professional world and personal lives. Finance is an integral part of corporate world - How will GM’s strategic decision to invest $740 million to produce the Chevy Volt require the expertise of different disciplines within the business school such as marketing, management, accounting, operations management, and finance?  Why Study Finance? (cont.) Many personal decisions require financial knowledge (for example: buying a house, planning for retirement, leasing a car) Business Organizational Forms THREE TYPES OF BUSINESS ORGANIZATIONS: Business Forms Sole Partnerships Corporations Hybrids Proprietorships Sole Proprietorship It is a business owned by a single individual that is entitled to all the firm’s profits and is responsible for all the firm’s debt. There is no separation between the business and the owner when it comes to debts or being sued. Sole proprietorships are generally financed by personal loans from family and friends and business loans from banks. Sole Proprietorship (cont.) Advantages: – Easy to start – No need to consult others while making decisions – Taxed at the personal tax rate Disadvantages: – Personally liable for the business debts – Ceases on the death of the Proprietor Partnership A general partnership is an association of two or more persons who come together as co-owners for the purpose of operating a business for profit. There is no separation between the partnership and the owners with respect to debts or being sued. Partnership (cont.) Advantages: – Relatively easy to start – Taxed at the personal tax rate – Access to funds from multiple sources or partners Disadvantages: – Partners jointly share unlimited liability Partnership (cont.) In limited partnerships, there are two classes of partners: general and limited. The general partners runs the business and face unlimited liability for the firm’s debts, while the limited partners are only liable on the amount invested. One of the drawback of this form is that it is difficult to transfer the ownership of the general partner. Corporation Corporation is “an artificial being, invisible, intangible, and existing only in the contemplation of the law.” Corporation (cont.) Corporation can individually sue and be sued, purchase, sell or own property, and its personnel are subject to criminal punishment for crimes committed in the name of the corporation. Corporation (cont.) Corporation is legally owned by its current stockholders. The Board of directors are elected by the firm’s shareholders. One responsibility of the board of directors is to appoint the senior management of the firm. Corporation (cont.) Advantages – Liability of owners limited to invested funds – Life of corporation is not tied to the owner – Easier to transfer ownership – Easier to raise Capital Disadvantages – Greater regulation – Double taxation of dividends Hybrid Organizations These organizational forms provide a cross between a partnership and a corporation. Limited liability company (LLC) combines the tax benefits of a partnership (no double taxation of earnings) and limited liability benefit of corporation (the owner’s liability is limited to what they invest). Hybrid Organizations (cont.) S-type corporation provides limited liability while allowing the business owners to be taxed as if they were a partnership – that is, distributions back to the owners are not taxed twice as is the case with dividends in the standard corporate form. How Does Finance Fit into the Firm’s Organizational Structure? In a corporation, the Chief Financial Officer (CFO) is responsible for managing the firm’s financial affairs. Figure 1-2 shows how the finance function fits into a firm’s organizational chart. THANK YOU