LECTURE 1 Introduction to Financial Management
Page 1: Introduction to Financial Management
Overview of financial management and its significance in achieving organizational objectives.
Page 2: Learning Outcomes
Upon completion of this lecture, students should be able to:
Explain the nature of financial management.
Understand the purposes of financial management:
Raising finance.
Allocation of financial resources.
Maintaining control over resources.
Define and distinguish between:
Financial management.
Financial accounting.
Management accounting.
Explain the relationship between financial management and accounting fields.
Page 3: Financial Objectives
Features of financial objectives:
Shareholder wealth maximization.
Profit maximization.
Understanding agency relationships and strategies to minimize associated problems.
Page 4: Key Responsibilities of Financial Managers
Efficient acquisition and use of short- and long-term financial resources.
Achieving organizational objectives through strategic financial management.
Page 5: Focus Areas for Financial Managers
Key areas of decision-making for financial managers include:
Setting corporate financial objectives.
Financial decisions in:
Investment (assessing potential projects).
Finance (sources of funds).
Dividends (distribution to shareholders).
Resource control for effective utilization.
Page 6: Economic Environment and Risk Management
Financial managers must consider the broader economic context and potential risks related to financial decisions.
Page 7: Investment Appraisal
Investment appraisal focuses on:
Long-term planning.
Identifying and selecting appropriate projects to meet financial objectives.
Initial investments in non-current assets.
Page 8: Working Capital Management
Essential for daily operations:
Management of liquidity by ensuring timely collection of debts and maintaining minimal inventory.
Proper investment of cash balances and timely payments to creditors.
Page 9: Sources of Finance
Importance of identifying suitable financing sources, considering:
Company requirements.
Investor demands.
Available funding amounts.
Page 10: Distinction of Financial Management
Financial management differs from:
Financial Accounting: Focuses on historical results of past decisions.
Management Accounting: Involves control and decision-making for day-to-day operations.
Page 11: Long-term vs Short-term Focus
Financial management emphasizes long-term finance and resource allocation.
Management accounting typically operates within a 12-month time frame.
Page 12: Functions of Management Accounting
Aids in:
Budgeting.
Cost accounting.
Variance analysis.
Evaluating short-term resource allocation options.
Page 13: Importance of Financial Accounting
Provides historical data on past decisions for stakeholders.
Maintains transparency about the overall financial position without involving intricate internal management details.
Page 14: Role of Financial Manager
Key personnel include:
Treasurer: oversees cash management and financial planning.
Controller: manages financial statements and taxes.
Page 15: Business Organization Types
Various legal forms include:
Sole Proprietorship.
Partnership (general and limited).
Corporation.
Page 16: Sole Proprietorship Features
Owned by a single individual.
Advantages:
Simple formation process, minimal costs, full owner control of profits.
Disadvantages:
Unlimited liability, limited equity, business ends with owner's death.
Page 17: General Partnership Characteristics
Involves two or more owners with:
Unlimited liability.
Advantages:
Simple organization, minimal regulations.
Disadvantages:
Unlimited liability for partners, difficulty in capital raising.
Page 18: Limited Partnership
Comprises:
General partners (unlimited liability).
Limited partners (liability limited to investment).
Advantages:
Improved capital raising, continuity despite limited partner changes.
Page 19: Disadvantages of Limited Partnership
Limitations include:
Mandatory general partner.
Limited partners cannot manage business or be named in the firm title.
Higher establishment costs due to necessary documentation.
Page 20: Corporate Structure
Corporations are distinct entities from owners, providing:
Ability to sue, acquire property, and transfer ownership through shares.
Governed by shareholders through a board of directors.
Advantages:
Limited liability, easier ownership transfer, sustained longevity, capacity for capital raising.
Page 21: Challenges of Corporations
Noted difficulties include:
Complexity and costs in establishment and termination.
Tax burdens and legal restrictions.
Page 22: Financial Objectives Overview
Companies are created for shareholder profit maximization:
The core aim is to maximize shareholder wealth, a key part of financial management.
Page 23: Alternatives to Wealth Maximization
Profit maximization, while an alternative, presents issues like:
Short-term focus.
Ignoring cash flows and time value of money.
Risk factors neglected.
Page 24: Short-Term Nature of Profit Maximization
Case study of ABC Co.'s choice to boost earnings:
Risks affecting investments in long-term growth like R&D and repairs.
Page 25: Project Return Timing
Comparison of two investment projects:
Importance of timing in returns influences choices and perceived value.
Page 26: Evaluating Projects
Profit understanding indicates that earnings need adjustments for timing:
Preference for earlier cash flows due to reinvestment potential.
Page 27: Time Value of Money
Early earnings yield better value:
Project A's advantages over Project B are highlighted through financial calculations.
Page 28: Further Illustration on Returns
Comparison of Project X and Project Y earnings over three years and reinvestment rates.
Page 29: Total Returns Analysis
Financial comparison shows:
Project X demonstrates higher return potential due to earlier earnings.
Page 30: Conclusion on Project Evaluation
Despite equal nominal earnings, Project X provides superior financial outcomes when properly analyzed for timing and reinvestment.
Page 31: Risk Characteristics of Profit Maximization
Risk defined by potential deviations from expected results with examples of product performance forecasting.
Page 32: Earnings Comparison between Products
Analysis indicates projected earnings need risk considerations beyond surface totals.
Page 33: Evaluating Risk vs Return
Higher earnings from risky products need compensation through higher expected returns for stakeholders.
Page 34: Risk Evaluation Using Two Projects
Examination of economic conditions against profitability for Projects A and B, underlining risk considerations.
Page 35: Average Earnings Misconception
Profits perceived as equal without assessing risks associated with economic variability.
Page 36: Project Equivalence Misjudgment
Interpretation error in risk assessment of potential returns from differing projects under varying economic conditions.
Page 37: Agency Theory Overview
Explanation of principal-agent dynamics in corporate governance:
Conflicts between shareholders (principals) and management (agents).
Page 38: Principal-Agent Relationship
Visual representation of how agents undertake tasks on behalf of principals.
Page 39: Agency Theory and Management Actions
Managers viewed as agents with possible conflicts of interest regarding shareholder objectives.
Structure pivotal to aligning management decisions with principal objectives.
Page 40: Aligning Managerial Interests
Strategies to ensure managerial actions align with shareholder goals:
Clear compensation structures, linking rewards to shareholder wealth, and synchronizing timelines and risk perceptions.