Overview of Finance

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 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.
 Key Concepts and Skills:
• Know the basic types of financial management
decisions and the role of the financial manager.

• Know the financial implications of the different forms

of business organization.

• Know the goal of financial management.

• Understand the conflicts of interest that can arise

between owners and managers.
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 What is Finance?

• Finance is the study of how people and businesses

evaluate investments and raise capital to fund them.

• Finance is the art and science of managing wealth.

– It is about making decisions regarding what assets

to buy/sell and when to buy/sell these assets.

– Its main objective is to make individuals and their

businesses better off.
Field of Finance: An Overview

Economics Accounting

Finance

Financial Financial Investments

Management Markets
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)
 Basic Areas Of Finance:

• Financial Management and Corporate Finance.

• Investments

• Financial institutions

• International finance

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 Finance Career Opportunities
Corporate • Budgeting, financial forecasting, cash
management, credit administration, investment
Finance analysis, fund procurement

Commercial • Consumer banking

• Corporate banking
Banking
Investment • High income potential
• Very competitive industry
Banking
• Opportunities in investment advisory firms,
Money mutual fund companies, pension funds,
Management investment arms of financial departments

• Advise on business practices and strategies of

Consulting corporate
1-11 clients
Corporate Finance Functions

External Financing

Capital Budgeting

Corporate
Finance Financial Management

Functions
Risk Management

Corporate Governance
1-12
What is Financial Management?

Concerns the acquisition,

financing, and management of
assets with some overall goal
in mind.
 Financial Management

• Financial management is planning, directing,

monitoring, organizing, and controlling of the
monetary resources of an organization.

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 The Financial Management Function

Managing daily cash inflows and outflows

Forecasting cash balances

Building long-term financial plans

Choosing the right mix of debt and equity

1-15
 What Should Managers Maximize?
• Profit maximization as goal:
– Does not account for timing of returns
– Profits - not necessarily cash flows
– Ignores risk

Maximize shareholder wealth

• Maximize stock price, not profits
• Accounts for risk
• As “residual claimants,” shareholders have better
incentives to force management to maximize firm
value than do other stakeholders.
1-16
 Financing Decisions
Determine how the assets (LHS of balance
sheet) will be financed (RHS of balance
sheet).
• What is the best type of financing?

• What is the best financing mix?

• What is the best dividend policy (e.g., dividend-payout

ratio)?

• How will the funds be physically acquired?

 Financial Institutions:
• Companies that specialize in financial matters

– Banks – commercial and investment, credit

unions, savings and loans

– Insurance companies

– Brokerage firms
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 International Finance:
• It may allow you to work in other countries or at least
travel on a regular basis.

• Need to be familiar with exchange rates and political

risk.

• Need to understand the customs of other countries.

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 Business Finance:
• Some important questions that are answered using
finance

– What long-term investments should the firm take on?

– Where will we get the long-term financing to pay for

the investments?

– How will we manage the everyday financial activities

of the firm?

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 Financial Manager:
• Financial managers try to answer some, or all, of these
questions

• 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

– Controller – oversees taxes, cost accounting, financial

accounting, and data processing
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 Role of Finance in a Typical Business
Organization:

Board of Directors

President

VP: Sales VP: Finance VP: Operations

Treasurer Controller

Credit Manager Cost Accounting

Inventory Manager Financial Accounting

Capital Budgeting Director Tax Department

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 Responsibility of the Financial Staff:
• Maximize stock value by:
– Forecasting and planning
– Investment and financing decisions
– Coordination and control
– Transactions in the financial markets
– Managing risk
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 Financial Management Decisions:
• Capital budgeting:
– What long-term investments or projects should the
business take on?
• Capital structure:
– How should we pay for our assets?
– Should we use debt or equity?
• Working capital management:
– How do we manage the day-to-day finances of the
firm?
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 End of Chapter 1:

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