Chapter 1 Nature of Financial Management PDF

Mohamed Abd Elhamed, CMA 01096444824 FM ‫فرقه‬ Chapter 1 Nature of Financial Management Topic 1 How to classify managers in organization? 1. lowest Level of Management First-line mana...

Mohamed Abd Elhamed, CMA 01096444824 FM ‫فرقه‬ Chapter 1 Nature of Financial Management Topic 1 How to classify managers in organization? 1. lowest Level of Management First-line managers: manage the work of nonmanagerial employees who typically are involved with producing the organization’s products or servicing the organization’s customer. They are often called ((supervisor, shift manager, district manager, department manager, office manager)) ‫ مدٌر المكتب‬،‫ مدٌر المسم‬،‫ مدٌر المنطمة‬،‫ مدٌر المناوبة‬،‫ المشرف‬:‫ٌُطلك علٌهم غالبًا‬ 2. Middle Level of Management Middle managers: manage work of first line managers. They are often called ((regional manager, project leader, store manager, division manager)) ‫ مدٌر‬،‫ لائد المشروع‬، ً‫ المدٌر االللٌم‬:‫ٌُطلك علٌهم غالبًا‬ ‫ مدٌر المسم‬،‫المتجر‬ 3. Upper Level of Management Top managers: are responsible for making organization wide decisions and establishing the plans and goals that affect the entire organization. They are often called ((executive vice president, president, managing director, chief operating officer, chief executive officer)) ‫ نائب‬:‫ٌُطلك علٌهم غالبًا‬ ‫ الرئٌس التنفٌذي‬،‫ الرئٌس التنفٌذي للعملٌات‬،‫ المدٌر االداري‬،‫ الرئٌس‬،‫الرئٌس التنفٌذي‬ Topic 2 What is Management? Management involves coordinating and overseeing the work activities of others so that their activities are completed efficiently and effectively. In briefly Management is the art of getting work done through others ‫االداره هً فن إنجاز العمل من خالل االخرٌٌن‬ Faculty of Sadat city Mohamed Abd Elhamed, CMA 01096444824 FM ‫فرقه‬ Topic 3 Management Functions 1. Planning 2. Organizing Setting goals and plans (how to achieve them) Arrange tasks and other resources to accomplish organization’s goals  Define goals  Establish strategies for achieving those  Determine what tasks are to be done? goals  Determine who is to do them?  Develop plans to integrate and  Determine how tasks are to be coordinate activities grouped?  Determine who reports to whom?  Determine where decisions are to be made? 3. Leading 4. Controlling Hire, train, motivate(lead) people Ensure all activities are accomplished as Planned  Motivate subordinates (lower positions)  Help resolve group conflicts  Monitor activities’ performance  Influence individuals or teams as they  Compare actual performance with the work set goals  Select the most effective communication  Evaluate activities’ performance channel whether things are going as planed  Deal with employee behavior issues  Correct any disturbance to get work back on track and achieve the set goals Faculty of Sadat city Mohamed Abd Elhamed, CMA 01096444824 FM ‫فرقه‬ Topic 4 What is Financial Management? Finance is a link between accounting, economics, and other related fields of study. So the relationship of risk to return is a central focus of finance Financial management is the business function that deals with investing the available financial resources in a way that greater business success and return-on investment (ROI) is achieved. Financial management is the art and science of money management. ‫االداره المالية هي فن وعلم إدارة االموال‬. From the foregoing, it is clear that the financial function is distinguished from other functions in the project by the following: (1) Infiltration in all aspects of the activity of the enterprise, where it is difficult to imagine any activity in the organization performing its tasks or achieving its objectives in isolation from financial needs. ‫التغلغل فً جمٌع جوانب نشاط المؤسسة حٌث ٌصعب تصور أي نشاط فً المنظمة ٌؤدي مهامه أو ٌحمك‬ ‫أهدافه بمعزل عن االحتٌاجات المالٌة‬ (2) Financial decisions are binding decisions of the enterprise in most cases, which requires extreme care when making these types of decisions. ‫تعتبر المرارات المالٌة لرارات ملزمة للمؤسسة فً معظم‬ ‫ االمر الذي ٌتطلب الحذر الشدٌد عند اتخاذ هذا النوع من المرارات‬،‫ الحاالت‬. (3) Some financial decisions are fateful decisions that may affect the success of the institution or its ability to continue in the market such as merger, debt utilization or investment decisions. ‫تعتبر بعض المرارات المالٌة لرارات مصٌرٌة لد تؤثر على نجاح المؤسسة أو لدرتها على االستمرار فً السوق مثل لرارات‬ ‫االندماج أو استغالل الدٌون أو االستثمار‬ (4) The results of financial decisions take a relatively long time to be recognized, which can lead to difficulty in fixing the defect or the possibility of remedying it, which reflects the need for special skills and high analytical abilities to make this type of decision. ‫ٌستغرق التعرف على نتائج المرارات المالٌة‬ ‫ مما ٌعكس الحاجة إلى مهارات خاصة ولدرات تحلٌلٌة‬،‫ولتا طوٌال نسبٌا مما لد ٌؤدي إلى صعوبة إصالح الخلل أو إمكانٌة عالجه‬ ‫ عالٌة التخاذ هذا النوع من المرارات‬. Topic 5 The Role of the Financial Manager The top financial manager within a firm is usually the Chief Financial Officer (CFO) Treasurer – oversees cash management, credit management, capital expenditures, and financial planning ً‫ ٌشرف على إدارة النمد وإدارة االئتمان والنفمات الرأسمالٌة والتخطٌط المال‬- ‫أمٌن الخزانة‬ Controller – oversees taxes, cost accounting, financial accounting, and data processing ‫ ٌشرف على الضرائب ومحاسبة التكالٌف والمحاسبة المالٌة ومعالجة البٌانات‬- ً‫المرالب المال‬ Faculty of Sadat city Mohamed Abd Elhamed, CMA 01096444824 FM ‫فرقه‬ The tasks or responsibilities of the CFO can be classified into the following six aspects: 1) Forecasting and planning. ‫التنبؤ والتخطٌط‬ 2) Management of the structure of the assets of the enterprise. ‫إدارة هٌكل أصول المؤسسة‬ 3) Management of the financing structure. ‫إدارة هٌكل التموٌل‬. 4) Coordination and control. ‫التنسٌك والمرالبة‬ 5) Dealing with financial markets.‫ التعامل مع األسواق المالٌة‬. 6) Risk Management. ‫إدارة المخاطر‬ Topic 6 Financial Management Decisions 1. Capital budgeting – What long-term investments or projects should the business take on? 2. Capital structure – How should we pay for our assets? – Should we use debt or equity? 3. Working capital management – How do we manage the day-to-day finances of the firm? Topic 7 Importance of financial management (1) Financial Planning. ً‫التخطٌط المال‬ (2) Safeguarding / Protecting Funds. ‫حماٌة‬ ‫االموال‬. (3) Allocation of Funds. ‫تخصٌص االموال‬. (4) Investment Opportunities. ‫الفرص‬ ‫االستثمارٌه‬. (5) Financial Decision. ً‫المرار المال‬ (6) Economic Growth and Stability. ‫النمو‬ ‫االلتصادي واالستمرار‬ (7) Improve Standard of Living. ‫تحسٌن مستوى‬ ‫المعٌشة‬ (8) Valuation of a Company. ‫تمٌٌم الشركة‬ (9) Tax Planning. ً‫التخطٌط الضرٌب‬. (10) Capital Reserves.‫احتٌاطٌات رأس المال‬ Topic 8 Objectives of Financial planning / Financial Management Objectives of Financial planning Objectives of Financial Management 1) Determining current financial status 1) Assessing Capital Needs. - ً‫تحدٌد الوضع المالً الحال‬ ‫تمٌٌم االحتٌاجات الرأسمالٌة‬ 2) Determining capital Requirement 2) Determination of Capital Structure. - ‫تحدٌد متطلبات رأس المال‬ ‫تحدٌد هٌكل رأس المال‬ 3) Framing Financial Policies 3) Creation of Effective Financial Policies. ‫وضع السٌاسات المالٌة‬ ‫وضع سٌاسات مالٌة فعالة‬ 4) Risk Management ‫إدارة المخاطر‬ 4) Resource Optimization. 5) Determining portfolio structure - ‫تحدٌد‬ ‫تحسٌن الموارد‬. ‫هٌكل المحفظة‬ 5) Profit Maximization‫تعظٌم الربح‬ 6) Maximum Utilization of scarce Resources Where π (Q) is profit, R (Q) is revenue, C(Q) ‫االستفاده المصوى من الموارد الشحٌحة‬ are costs, and Q are the units of output sold Maximize π (Q) Where π (Q) =R (Q)-C (Q) Faculty of Sadat city Mohamed Abd Elhamed, CMA 01096444824 FM ‫فرقه‬ Topic 9 Functions of Financial Management Functions in the implementation of financial management (1) Capital adequacy estimate. ‫تمدٌر كفاٌة رأس المال‬. (2) Assess the capital composition. ‫تمٌٌم تكوٌن رأس المال‬. (3) Choose the right funding source option. ‫اختر خٌار مصدر التموٌل المناسب‬. (4) Cash Management. ‫إدارة النمد‬ (5) Financial Control.‫الرلابة المالٌة‬ Competencies of Financial Manager (1) Business Competencies. ‫كفاءات االعمال‬. (2) Financial Competencies. ‫الكفاءات المالٌة‬. (3) Change Competencies. ‫تغٌٌر الكفاءات‬. (4) Personal Credibility.‫ المصدالٌة الشخصٌة‬. Topic 10 Difference between profit & profitability Profit profitability Profit is an absolute number Profitability is closely related to profit – but with one key determined by the amount of difference. While profit is an absolute amount, profitability is a income or revenue above relative one. It is the metric used to determine the scope of a and beyond the costs or company's profit in relation to the size of the business. expenses a company incurs. Profitability is a measurement of efficiency – and ultimately its It is calculated as total success or failure. revenue minus total ‫ فً حٌن أن الربح‬.‫ ولكن مع فارق رئٌسً واحد‬،‫ترتبط الربحٌه ارتباطا وثٌما بالربح‬ expenses and appears on a ‫ إنه الممٌاس المستخدم لتحدٌد نطاق ربح الشركة‬.‫ فإن الربحٌة نسبٌة‬،‫هو مبلغ مطلك‬ company's income ‫ وفً نهاٌة المطاف نجاحها أو‬- ‫ الربحٌة هً ممٌاس للكفاءة‬.‫فٌما ٌتعلك بحجم العمل‬ statement. No matter ‫بغض‬ ‫فشلها‬ ‫ النظر‬the size or scope of the A further definition of profitability is a business's ability to business or the industry in produce a return on an investment based on its resources in which it operates, a comparison with an alternative investment. Although a company's objective is company can realize a profit, this does not necessarily mean always to make a profit. that the company is profitable ‫التعرٌف االخر للربحٌه هو لدرة الشركة على تحمٌك عائد على االستثمار بنا ًء على‬ ،‫ على الرغم من أن الشركة ٌمكن أن تحمك ربحا‬.‫مواردها ممارنة باالستثمار البدٌل‬.‫اال أن هذا ال ٌعنً بالضرورة أن الشركة مربحة‬ The most popular profitability ratios that are used for this purpose are: 1) Profit Margin ratio = (Revenue – Expenses) / Revenue 2) Gross Margin Ratio = (Revenue – Cost of Goods Sold) / Revenue 3) ROI = (Gain from Investment – Cost of Investment) / Cost of Investment Faculty of Sadat city Mohamed Abd Elhamed, CMA 01096444824 FM ‫فرقه‬ True or false 1) Recently, the emphasis of financial management has been on the relationship between risk and return 2) Top managers are responsible for making organization wide decisions and establishing the plans and goals that affect the entire organization. 3) Financial management is one of the main functions of management functions 4) Management of the financing structure is one of the main tasks or responsibilities of the financial manager. 5) Creation of Effective Financial Policies is the only Objective of Financial Management. 6) How investors handle risk is an important topic that usually only economists observe. 7) Dividends paid to corporate stockholders have already been taxed once as corporate income. 8) Institutional investors have had increasing influence over corporations with their ability to vote with large blocks of stock and replace poorly performing boards of directors. 9) Timing is not a particularly important consideration in financial decisions. 10) The higher the profit of a firm, the higher the value the firm is in the market. 11) Financial management is the art and science of money management. 12) Financial decisions are binding decisions 13) Capital budgeting focuses on How should we pay for our assets. 14) There are some serious problems with the financial goal of maximizing the earnings of the firm. 15) Maximizing Shareholder wealth can be difficult due to daily fluctuations in stock value in combination with changing investor expectations. 16) Maximizing the earnings of the firm is the main goal of financial management. 17) The ultimate measure of performance is not what the firm profits, but how the profits are valued by the investor. 18) Social responsibility and profit maximization are the same concept. 19) Financial markets exist as a vast global network of individuals and financial institutions that may be lenders, borrowers, or owners of public companies worldwide. 20) Higher return means that the public company has lower risk. 21) Social responsibility is an expense and thus should be avoided by financial managers because it will lead to loss of income. 22) Financial management requires both short-term activities as well as long-term planning such as raising funds. 23) As finance emerged as a new field, much emphasis was placed on mergers and acquisitions. 24) Inflation is assumed to be a temporary problem that does not affect financial decisions. 25) Profit Maximization is one of the Objectives of Financial Management 26) Cash management is the only Function of Financial Management Faculty of Sadat city Mohamed Abd Elhamed, CMA 01096444824 FM ‫فرقه‬ Choice the correct answer 1) What should be the primary goal of financial management? A) Increased earnings B) Maximizing cash flow C) Maximizing shareholder wealth D) Minimizing risk of the firm 2) Proper risk-return management means that A) The firm should take as few risks as possible. B) The firm must determine an appropriate trade-off between risk and return. C) The firm should earn the highest return possible. D) The firm should value future profits more highly than current profits 3) A financial manager's goal of maximizing current or short-term earnings may not be appropriate because A) it fails to consider the timing when shareholders want increased earnings and may instead consider the manager's own goals. B) Increased earnings may be accompanied by unacceptably higher levels of risk. C) Earnings are subjective; they can be defined in various ways such as accounting or economic earnings. D) All of the options are true. 4) Companies that have higher risk than a competitor in the same industry will generally have A) to pay a higher interest rate than its competitors. B) a lower relative stock price than its competitors. C) a higher cost of funds than its competitors. D) All of the options 5) Regarding risk levels, financial managers should A) Pursue higher-risk projects because they increase value. B) Avoid higher-risk projects because they destroy value. C) Focus primarily on market fluctuations. D) Evaluate investors' desire for risk 6) Behavioral finance is the study of A) How investors react to accounting-based profit fluctuations. B) How investors react to interest rates and foreign currency fluctuations. C) How investors react to certain ways to diversify a portfolio. D) How investors react to the amount of risk versus the amount of return in securities. 7) Agency theory examines the relationship between the A) Shareholders of the firm and the firm's investment banker. B) Owners of the firm and the managers of the firm. C) Board of directors and large institutional investors. D) Shareholders and the firm's transfer agent. 8) Agency theory deals with the issue of A) When to hire an agent to represent the firm in negotiations. B) The legal liabilities of a firm if an employee, acting as the firm's agent, injures someone. C) The limitations placed on an employee acting as the firm's agent to obligate or bind the firm. Faculty of Sadat city Mohamed Abd Elhamed, CMA 01096444824 FM ‫فرقه‬ D) The conflicts that can arise between the viewpoints and motivations of a firm's owners and managers. 9) Maximization of shareholder wealth is a concept in which A) Increased earnings is of primary importance. B) Profits are maximized on an annual basis. C) Virtually all earnings are paid as dividends to common stockholders. D) Optimally increasing the long-term value of the firm is emphasized. 10) Which of the following is not a true statement about the goal of maximizing shareholder wealth? A) It takes into account the timing of cash-flows. B) It is a short-run point of view. C) It considers risk as a factor. D) None of the options is a false statement. 11) What is the major difference between money markets and capital markets? A) One is more domestic while the other is more international. B) One includes stock while the other includes loans. C) The size of the profit or return on the market. D) The timing of how long the security will be held onto. 12) When a corporation uses the financial markets to raise new funds, the sale of securities is made in the A) Primary market. B) Secondary market. C) Online market. D) Third market. 13) A corporate restructuring can result in A) Changes in the capital structure. B) Selling of low-profit margin divisions. C) The board of directors exercising control of the company's major decisions. D) All of the options are true. 14) Future financial managers will need to understand A) International cash flows. B) Computerized funds transfer. C) International currency hedging strategies. D) All of the options are true. 15) The internationalization of the financial markets has A) Allowed firms such as McDonald's to raise capital around the world. B) Raised the cost of capital. C) Forced companies to price everything in U.S. dollars. D) All of the options are true. 16) The Internet has affected the financial markets by A) Creating more competition between markets. B) Pushing the cost of trading down. C) Forcing brokerage companies to consolidate. D) All of the options are true. 17) The entity that is responsible for establishing the allocation and cost of capital is/are A) The corporation. B) The economy. C) Investors. D) Customers. Faculty of Sadat city Mohamed Abd Elhamed, CMA 01096444824 FM ‫فرقه‬ 18) The benefits of social responsibility often include A) a better reputation. B) Higher short-term earnings. C) Lower expenses. D) None of the options 19) Who is accountable for social responsibility within a firm? A) The board of directors B) Management C) Investors D) The financial market 20) In the past, the study of finance has included A) Mergers and acquisitions. B) Raising capital. C) Bankruptcy. D) All of the options 21) Corporate governance is the A) Relationship and exercise of oversight by the board of directors of the company. B) Relationship between the chief financial officer (CFO) and institutional investors. C) Operation of a company by the chief executive officer (CEO) and other senior executives on the management team. D) Governance of the company by the board of directors with a focus on pleasing management. 22) Institutional investors are important in today's business world because A) As large investors, they have more say in how businesses are managed. B) They have a fiduciary responsibility to the workers and investors that they represent to see that the firms they own are managed in an ethical way. C) As a group they can vote large blocks of stock for the election of board members. D) All of the options 23) All of the following are Competencies of Financial Manager except: A) Business Competencies. B) Financial Competencies C) Personal Credibility D) Marketing competencies Faculty of Sadat city