Introduction in Financial Management

FIN131, TUA Prof. Jephte O. Munez, CPA, CPV, PREB, MBA, MSF

FINANCIAL MANAGEMENT
It

is the process of planning, organizing, leading and controlling decisions in order to maximize owners/ owners wealth.

GOALS OF CORPORATE FINANCE

Shareholder

Wealth Maximization Profit Maximization Managerial reward maximization Behavioral goals Social Responsibility

Profit Maximization versus Shareholders Wealth Maximization

Goal
Profit maximization

Objective
Large profits

Advantages
Easy to calculate profits Easy to determine the link between financial decisions and profits

Disadvantages
Emphasizes the short term Ignores the risk or uncertainty

Ignores the timing of returns Requires immediate resources

Profit Maximization versus Shareholder Wealth Maximization

Goal
Stockholder Wealth Maximization

Objective
Highest market value of common stock

Advantages
Emphasizes the long term

Disadvantages
Offers no clear relationship between financial decisions and stock price Can lead to management anxiety and frustration Can promote aggressive and creative accounting practices

Recognizes risk or uncertainty

Recognizes the timing of returns

Considers shareholders return

Risk
The

variability of expected returns (sales, earnings and cash flow) and is the probability that a financial problem will affect the companys operational performance or financial position.

Forms of Risk
Economic

risk Political uncertainties Industry problems

Risk Analysis
Is

the process of measuring and analyzing the risk associated with financial and investment decisions. The rate of return in relation to the degree of risk involved.

Return is the reward for investing, consists of current income, in the form of either periodic cash payments or capital gain (or loss) from appreciation (or depreciation) in market value.

Time Value of Money

Todays dollar (peso) is not the same as tomorrows dollar (peso) A dollar (peso today is worth more than a dollar (pesos to be received later because you can invest that dollar (peso) for a return and have more than a dollar (peso) at the specified later date. Furthermore, receiving a dollar (peso) in the future has uncertainty attached to it; inflation might make the dollar (peso) received at a later time worth less in buying power.

Time Value of Money

Compounding

determining the future value of a projected cash inflows. Discounting determining the present value of future cash flows associated with long-term projects; the discounted value of receiving future cash flows from a proposal is an important consideration.

Importance of Finance

Financial knowledge aids in planning, problemsolving and decision is making. Financial and accounting knowledge is important in order to understand the financial reports prepared by other segments of the organization. Finance allows better communication among departments. Knowledge of forecasting and capital budgeting (selecting the most profitable project among longterm alternatives) is essential. Financial knowledge is critical in a wide number of areas, such as, financing, financial statement analysis, capital investment decisions.

Scope and Role of Finance

Language

finance Responsibilities of Financial Managers Relationship between accounting and finance

and decision making of

Finance involves interrelated functions

Obtaining funds Using funds Monitoring performance Solving current and prospective problems Product pricing and planning Variance analysis (comparing actual to budget figures) Asset management Optimize rate of return Financial strengths and weaknesses of businesses

What do Financial Managers Do?

Financial

analysis and planning Making investment decisions Making financing and capital structure decisions Managing financial resources Managing risks

Financial Manager affects Shareholders Wealth Maximization

Current

(EPS) Timing, duration and risk of earnings Dividend policy Manner of Financing

and future Earnings Per Share

FUNCTIONS OF FINANCIAL MANAGER

Planning Provision of Capital Administration of Funds Accounting and Control Protection of Assets Tax Administration Investor Relations Evaluation and Consulting Management Information Systems
Source: Financial Executives Institute

FUNCTIONS OF FINANCIAL MANAGER - Planning

Long

and short-range financial and corporate planning Budgeting for operations and capital expenditures Evaluating performance Pricing policies and sales forecasting Analyzing economic factors Appraising acquisitions and divestment
Source: Financial Executives Institute

FUNCTIONS OF FINANCIAL MANAGER Provision of Capital

Short-term

sources: cost and arrangement Long-term sources: cost and arrangements Internal generation

Source: Financial Executives Institute

FUNCTIONS OF FINANCIAL MANAGER Administration of Funds

Cash

Management Banking arrangements Receipt, custody and disbursement of companys securities and monies Credit and collection Management Pension monies Management Investment portfolio Management
Source: Financial Executives Institute

FUNCTIONS OF FINANCIAL MANAGER Accounting and Control

Establishing accounting policies Developing and reporting accounting data Cost accounting Internal Auditing System and procedures Government reporting Reporting and interpreting results of operations to management Comparing performance with operating plans and standards
Source: Financial Executives Institute

FUNCTIONS OF FINANCIAL MANAGER Protection of Assets

Providing

for Insurance Establishing sound internal controls

Source: Financial Executives Institute

FUNCTIONS OF FINANCIAL MANAGER Tax Administration

Establishing

tax policies and procedures Preparing tax reports Tax planning

Source: Financial Executives Institute

FUNCTIONS OF FINANCIAL MANAGER Investor Relations

Maintaining

community Counselling with analyst public financial information

liaison with the investment

Source: Financial Executives Institute

FUNCTIONS OF FINANCIAL MANAGER Evaluation and Consulting

Consulting

with and advising other corporate executives on company policies, operations and objectives and their effectiveness.

Source: Financial Executives Institute

FUNCTIONS OF FINANCIAL MANAGER Management Information Systems

Development

facilities Development and use of management information systems Development and use of systems and procedures

and use of computerized

Source: Financial Executives Institute

Responsibilities
Controller

Treasurer

Accounting Reporting financial information Custody of records Interpreting financial data Budgeting Controlling operations Appraising results and making recommendations Preparing taxes Managing assets Internal auditing Protecting assets Reporting to government bodies Payroll

Obtaining financing Maintaining banking relationship Investing funds Investor relations Managing cash Insuring assets Fostering relationships with creditors and investors Appraising credit and collecting funds Deciding on the financing mix Disbursing dividends Managing pension funds