[AMFINANCE] L1 | INTRODUCTION TO FINANCIAL MANAGEMENT

Investments

The second area of business finance is ________ or the investment decision, which also involves the financial markets and financial institutions. This type of marketplace and company, respectively, makes easy transfer of money possible when _______ are made.

Bonds

[examples of investments that a small business may make]

Businesses can invest in the _____, or debt securities, issued by other companies. The return will include the return of the principal at maturity and interest payments.

Marketable Securities

[examples of investments that a small business may make]

These are short-term, liquid investments, usually made at a bank or other financial institution, that have a maturity of one year or less.

Commodities

[examples of investments that a small business may make]

are products with relatively volatile price swings, like pork bellies or coffee. Their prices rise and fall rapidly.

Stocks

[examples of investments that a small business may make]

Businesses can invest in the _____, or equity securities, of other businesses. The return may include dividends and capital gains.

Derivatives

[examples of investments that a small business may make]

are products from adjacent markets. The trade is conducted in the form of a contract between two parties, and the value of the _______ is based on the value of the original investment.

Financial institutions (FI)

is a company engaged in the business of dealing with financial and monetary transactions such as deposits, loans, investments, and currency exchange. This encompass a broad range of business operations within the financial services sector including banks, trust companies, insurance companies, brokerage firms, and investment dealers

Commercial Banks

[Types of Financial Institutions] is a type of financial institution that accepts deposits, offers checking account services, makes business, personal, and mortgage loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses.

Investment Banks

[Types of Financial Institutions] specialize in providing services designed to facilitate business operations, such as capital expenditure financing and equity offerings, including initial public offerings (IPOs).

Insurance Companies

[Types of Financial Institutions]

Among the most familiar non-bank financial institutions are ___________. Providing insurance, whether for individuals or corporations, is one of the oldest financial services.

Brokerage Firms

[Types of Financial Institutions] Investment companies and brokerages, such as mutual fund and exchange-traded fund (ETF) provider Fidelity Investments, specialize in providing investment services that include wealth management and financial advisory services. They also provide access to investment products that may range from stocks and bonds all the way to lesser-known alternative investments, such as hedge funds and private equity investments.

International finance

sometimes known as international macroeconomics, is the study of monetary interactions between two or more countries, focusing on areas such as foreign direct investment and currency exchange rates. international finance deals with the economic interactions between multiple countries, rather than narrowly focusing on individual markets.

Corporate finance

is a broad description of the planning, management, and control of a company's money. This includes working capital management, financial statement analysis, cash budgeting, capital budgeting, and more. In a small business, the owner/manager conducts the daily financial operations of the company. In larger businesses, daily finance decisions may be made by the owner/manager, along with a finance committee. Larger financial transactions may need to be approved by the Board of Directors of the firm.

Board of Directors of the firm

Corporate finance is a broad description of the planning, management, and control of a company's money. This includes working capital management, financial statement analysis, cash budgeting, capital budgeting, and more. In a small business, the owner/manager conducts the daily financial operations of the company. In larger businesses, daily finance decisions may be made by the owner/manager, along with a finance committee. Larger financial transactions may need to be approved by the ________________.

Corporate finance

This includes the management of the following areas of the finance function:

o Working Capital Management

o Cash Budgeting

o Financial Analysis

o Financial Statement Development

o Capital Budgeting

o Dividend Policy

1. Marketing

2. Management

3. Accounting

4. YOU

Why Study Finance? (4)

Marketing

a. Financial Management Provides Funds for the Right Campaign at the Right Time

- By keeping a check on various marketing spends, a financial manager can save

funds on marketing investments that matter.

b. Financial Management Helps Keep Marketers on a Budget - Financial managers

can help forecast the marketing spends and plan for various marketing elements.

They also help the marketing team in compliance of the best practices in

accounting.

c. Financial Management Adds Financial Acumen to Creativity - Financial

management enables marketing and advertising function to stay on track, manage

the financial aspects of business accurately and avoid any financial blunders that

may cost the company.

Management

a. Financial implications in business plans – Management need to know the

financial needs for business planning.

b. Management roles should be aware of their effect is profitability – The financial

implications or costs of business plans affects the profitability of the entity.

Accounting

a. Implications of many of the newer types of financial contracts on financial statements.

b. Understand what is valuable and how accounting knowledge is used.

YOU

a. Personal finance

b. Everyday Financial decisions

Financial Manager

They are the ones that try to answer some or all the corporate finance questions. The top ____________ within a firm is usually the Chief Financial Officer (CFO). The treasurer oversees cash management, credit management, capital expenditures, and financial planning. And the controller oversees taxes, cost accounting, financial accounting, and data processing.

treasurer, controller

[Financial Manager]

Financial managers try to answer some or all the corporate finance questions. The top financial manager within a firm is usually the Chief Financial Officer (CFO). The ________ oversees cash management, credit management, capital expenditures, and financial planning. And the _________ oversees taxes, cost accounting, financial accounting, and data processing.

 Capital budgeting

 Capital structure

 Working capital management

Financial Management Decisions (3)

1. Sole proprietorship

2. Partnerships

3. Corporations

Forms of Business Organization (3)

Sole proprietorship

Most small businesses start out as this. These businesses are owned by one person, usually, the individual who has day-to-day responsibility for running the business. ___________ can be independent contractors, freelancers, or home-based businesses.

Sole proprietorship

[Forms of Business Organization]

o Advantages

 Owner receives all the profits.

 Profits are taxed only once.

 Owner makes all decisions and is in complete control of the company

(could also be a disadvantage)

 Easiest and least expensive form of ownership to organize.

o Disadvantages

 Unlimited liability if anything happens in the business. Your personal assets are at risk.

 Limited in raising funds and may have to acquire consumer loans.

 No separate legal status

Partnerships

two or more people share ownership of a single business. Like ________, the law does not distinguish between the business and its owners. The partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out or what steps will be taken to dissolve the partnership when needed.

Corporations

is considered by law to be a unique entity, separate from those who own it. This can be taxed, sued, and enter into contractual agreements. The ________ has a life of its own and does not dissolve when ownership changes.

Partnerships

[Forms of Business Organization]

o Advantages

 Easy to establish (with the exception of developing a partnership agreement)

 Separate legal status to give liability protection.

 Profits taxed only once.

 Partners may have complementary skills.

o Disadvantages

 Partners are jointly and individually liable for the actions of the other partners.

 Profits must be shared with the partners.

 Divided decision making

 Business can suffer if the detailed partnership agreement is not in place.

C-corporation

[Three types of Corporation]

is a corporation that is taxed separately from its owners. It gives the owners limited liability encouraging more risk-taking and potential investment.

C-corporation

[Three types of Corporation]

Advantages

o Limited liability

o Transfer of ownership, shareholders can sell their shares.

o Capital is easier to raise through the sale of stock.

o Company paid fringe benefits.

o Tax benefits

Disadvantages

o Double taxation (corporation and shareholder earnings taxed)

o Can be costly to form

o More administrative duties - required by law to have annual meetings, notify stockholders of the meeting, must keep minutes of meetings, and turn in.

o Pay corporate taxes at a different time than other forms of business.

S-Corporation

[Three types of Corporation]

An s corporation also known as subchapter _________ offers limited liability to the owners. This corporation do not pay income taxes rather the earnings and profits are treated as distributions. The shareholders must report their income on their individual income tax returns.

S-Corporation

[Three types of Corporation]

Advantages

o Limited liability

o Avoids double taxation.

o Profits taxed only once.

o Capital is easier to raise through the sale of stock.

o Transfer of ownership.

Disadvantages

o Can be costly to form.

o Stockholders limited to individuals, estates, or trustees.

o Required administrative duties.

o Cannot provide company paid fringe benefits.

o Stockholders are limited to citizens or resident aliens of the United States.

Limited Liability Company (LLC)

[Three types of Corporation]

is a hybrid business structure that provides the limited legal liability of a corporation and the operational flexibility of a partnership or sole proprietorship. However, the formation is more complex and formal than that of a general partnership. Forming this requires the business owner to file legal paperwork.

Limited Liability Company (LLC)

[Three types of Corporation]

Advantages

o Most common business structure and specifically created for small businesses.

o Must have insurance in case of a suit.

o Separate legal entity.

o Usually taxed as a sole proprietorship.

o Unlimited number of owners.

Disadvantages

o Can be costly to form.

o Yearly administrative costs.

o Personal tax liability.

o Legal and accounting assistance is recommended.

Financial Management

For any business, it is important that the finance it procures is invested in a manner that the returns from the investment are higher than the cost of finance. In a nutshell, ______________ –

 Endeavors to reduce the cost of finance.

 Ensures sufficient availability of funds.

 Deals with the planning, organizing, and controlling of financial activities like the procurement and utilization of funds.

Agency Theory

is a principle that is used to explain and resolve issues in the relationship between business principals and their agents. Most commonly, that relationship is the one between shareholders, as principals, and company executives, as agents.

Agency

is any relationship between two parties in which one, represents the agent, the other, the principal, in day-to-day transactions. The principal or principals have hired the agent to perform a service on their behalf.

principal-agent problem

Principals delegate decision-making authority to agents. Because many decisions that affect the principal financially are made by the agent, differences of opinion, and even differences in priorities and interests, can arise. Agency theory assumes that the interests of a principal and an agent are not always in alignment. This is sometimes referred to as the ____________.

Primary Markets

[Financial Markets] is where securities are created. It is in this market that firms sell (float) new stocks and bonds to the public for the first time. An initial public offering, or IPO. These trades provide an opportunity for investors to buy securities from the bank that did the initial underwriting for a particular stock.

initial public offering, or IPO

[Financial Markets: Primary Markets] This occurs when a private company issues stock to the public for the first time.

Secondary Markets

[Financial Markets] For buying equities, this is commonly referred to as the "stock market."

Auction Markets

[Secondary Markets]

all individuals and institutions that want to trade securities congregate in one area and announce the prices at which they are willing to buy and sell. These are referred to as bid and ask prices. The idea is that an efficient market should prevail by bringing together all parties and having them publicly declare their prices

Dealer Markets

[Secondary Markets]

does not require parties to converge in a central location. Rather, participants in the market are joined through electronic networks. The dealers hold an inventory of security, then stand ready to buy or sell with market participants. These dealers earn profits through the spread between the prices at which they buy and sell securities.

Over-the-counter Market

[Secondary Markets]

generally refers to stocks that are not trading on a stock exchange