Financial Management I BBPW 3103

Chapter 1 Introduction

Finance

Is money transfer process trough individuals of organization Financial decision are made based on basic concepts, principles and financial theories that can divided into 3 categories

Investment decision related to assets Financial decision related to liabilities and equity Management decision related to operating decision and daily financial decision of the company

Finance (cont.)

Financial decision involves a few aspects of financial analysis as follow: Should the company carry out the project? Will the investment be successful? How to fund the investment? Which the best funding decision? Does the company have enough cash for daily operation? What the level of inventory to be kept? To which customer should the company offer credit? What is the optimal dividend policy? Should the takeover be continued?

Roles of Finance Manager

Making Investment and Financing Decision

Identify the quantity of assets to be bought in short-term and longterm Identify how to finance the assets

Making Financial Planning and Forecasts

Make plans for the company future to ensure that the company is operating efficiently.

Roles of Finance Manager (cont.)

Control and Coordination

Cooperate with the other managers

Dealing With Financial Market

Dealing with money market and capital market Money Market : Deal a short-term instrument such as T-Bills, Certificate of Deposits Capital Market : Deal a long-term instruments

Objective of Financial Management

Maximising Profit
Main company objective is to maximising company profit Company profit is measured by the Earning Per Share that is = Net Profit Ordinary Share Issued (Unit)

Objective of Financial Management (cont.)

This objective is not accurate and is rarely used as a company objective due to these 3 reasons

Cash Inflow & Outflow : Non-cash item must be added to the profit Timing Return : This refer to time the company will received return from project. For example Project Year1 Year2 A RM100K B RM100K Risks : The hire risk of the investment, the higher return will be get by the company

Objective of Financial Management (cont.)

Maximising Shareholders Wealth

Finance manager need to increase value of company that will directly increase in value of shareholder When the price of the share increase, the value of the company also increase and return to the shareholders will be increase.

Agency Problems

Relationship of the agency occurs when one @ more individuals (principal) hire another individuals (agent) to perform service behalf of the principal. Agent will make any decision that related to the company In financing, relationship agency involved shareholders (principal) and manager (agent)

Agency Problems (cont.)

Manager must maximising shareholders wealth. In real situation, many decision made by the manager are related to the personal interest and not to maximise shareholders wealth. Different objectives between manager and shareholder make Agency Problems The shareholder must control and coordinate any decision made by the manager

Types of Business Organisation

Sales Proprietor

Owned by 1 individual Easy to establish No need to have high capital resources Business not governed by several regular Profit is not taxable. Only income subject to personal tax Financial status can be kept confidential Disadvantages

Difficult to get higher capital Unlimited liabilities

Types of Business Organisation (cont.)

Partnership
Owned by 2-20 partners Types of partnership

General : Have unlimited liabilities Limited : Have limited liabilities

In generally, all partnership have unlimited liabilities. If the company fail to pay the creditors, the partner must settle the company debts using their own property

Types of Business Organisation (cont.)

Partnership (cont.)

Advantages
Easily formed and low formation cost More capital can be acquired Only company profit subject to tax not partner income Partner have variety of expertise and skills Business risk and liabilities can be shared among the partners

Types of Business Organisation (cont.)

Partnership (cont.)

Disadvantages
Company can be dissolved upon the death, withdrawal @ bankruptcy of one of the partners Decision making more difficult compare to sole proprietor Partner have unlimited liabilities Company risk must be borne by all partners. A mistake made by one partner will bind the other partners

Financial Market

Financial market is a medium that connects the capital depositor and borrower. There are 2 main financial market:Money market Capital market

Financial Market (cont.)

Money Market
Is a market that traded short-term instrument Have a low default risk and easy to redeemed For Example : T-Bills, Commercial Notes, Certificate of Deposit and Banker Accpetance

Financial Market (cont.)

Capital Market
Is a market that traded long-term instrument Higher risk than money market For examples : Bond, Preference Share and Ordinary Share Traded in 2 types of market

Main Market : Market that sell new instrument to acquire capital Secondary Market : Market for instrument that have been issued and traded among investors