Topic 1 – objectives and scope of financial management  Anticipation-the financial needs of the company are being estimated.

It
finds out how much finance is required by the company.
What is Finance?
 Acquisition- it collects finance for the company from different sources.
 Finance can be defined as the science and art of managing money.
 Allocating Funds- it uses this collected or acquired finance to
 Science – because it provides knowledge / sets of rules on how to purchase fixed and current assets for the company.
come up with the best financial decision.
 Appropriation-it distributes part of the company profits among the
 Art – because it involves creativity, customization, and individuals shareholders, debenture holders, and some are kept as reserves
relationship with money.
 Assessment-it also controls all financial activities of the company
Financial management is about preparing. directing, and managing the what can be done about it.
money activities of a company such as buying, selling, and using money to its
best results to maximize wealth or produce best value for money. Basically , it Career Opportunities in Finance: Managerial Finance
means applying general management concepts to the cash of the company.
• Managerial finance is concerned with the duties of the financial manager
Taking a commercial business as the most common organizational structure, working in a business.
the key objectives of financial management would be to create wealth for the
business generate cash and provide an adequate return on investment bearing • Financial managers administer the financial affairs of all types of
in mind the risks that the business is taking, and the resources invested. businesses—private and public, large and small, profit- seeking and not-for-
profit.
Personal finance deals with an individual’s decisions concerning the spending
and investing of income. It includes the answers as to how much of their • They perform such varied tasks as developing a financial plan or budget,
earnings should they spend, how much should they save, and how should they extending credit to customers, evaluating proposed large expenditures, and
invest their savings. raising money to fund the firm’s operations.

Business finance involves same type of decisions focusing on how the firms Career Opportunities in Finance: Managerial Finance (cont.)
raise money from investors, how to invest money to earn a profit, and how to
reinvest profits in the business or distribute them back to investors.  The recent global financial crisis and subsequent responses by
governmental regulators, increased global competition, and rapid
Finance in a Business context technological change also increase the importance and complexity of
the financial manager’s duties.
  Increasing globalization has increased demand for financial experts Firm’s Goal
who can manage cash flows in different currencies and protect against
the risks that naturally arise from international transactions.  The generally accepted goal of the firm is to maximize the wealth of
the stockholders through the value of its common stock.
Certifications
 Maximize firm’s value – creating a good name in terms of
Professional Certifications in Finance: profitability, liquidity, effectiveness of management, and sustainability
of the operations.
– Chartered Financial Analyst (CFA) – Offered by the CFA Institute, the CFA
program is a graduate-level course of study focused primarily on the Accounting vs Finance
investments side of finance.
 Accounting people are more involved in the preparation of financial
 – Certified Treasury Professional (CTP) – The CTP program requires reports
students to pass a single exam that is focused on the knowledge and
skills needed for those working in a corporate treasury department.  Finance people are more on the application of tools and techniques that
would make the financial reports useful for decision making.
 – Certified Financial Planner (CFP) – To obtain CFP status, students
must pass a ten-hour exam covering a wide range of topics related to  Accounting people tend to say that the primary objective of conducting
personal financial planning a business is to maximize profits.

 – American Academy of Financial Management (AAFM) – The  Finance people tend to say that the primary objective of conducting a
AAFM administers a host of certification programs for financial business is to maximize stockholder’s wealth.
professionals in a wide range of fields. Their certifications include the
Charter Portfolio Manager, Chartered Asset Manager, Certified Risk
Analyst, Certified Cost Accountant, Certified Credit Analyst, and
many other programs.

 – Professional Certifications in Accounting – Most professionals in the Some of the arguments that oppose profit maximization as the main objective
field of managerial finance need to know a great deal about accounting in financial management are as follows:
to succeed in their jobs. Professional certifications in accounting
include the Certified Public Accountant (CPA), Certified Management 1. A change in profit is also a change in risk.
Accountant (CMA), Certified Internal Auditor (CIA), and many
programs.
Example: Company wants to increase its sales by 20%, therefore decided to  It is only by that time that the company may determine if its entire
prolong its credit terms from 30 days to 45 days. operation is successful or not.

- Risk  That’s why financial management is more concerned with cash inflows
- Cashflows rather than the accounting profits. Profit does not generate cash if sales
- Cost/Benefit analysis is on credit.

2. It fails to determine the timing of benefits Roles of Financial Managers

1. Investment decision

* Accept or reject an investment proposal?

Illustration: Timing of benefits * Capital budgeting that considers time value of money: Discounted payback
period, Internal rate of return, Net present value, Profitability index. Or one
that does not: Payback period and Accounting rate of return

2. Financing decision

* The main idea is to look for resources that will give the company the lowest
weighted average cost of capital.

3. Dividend policy decision

Accounting profits cannot be measured accurately.
* A company’s dividend policy dictates the amount of dividends paid out by
 The reported accounting profits are mere estimates of how much net
the company to its shareholders and the frequency with which the dividends
income is generated for a particular period of time.
are paid out. When a company makes a profit, they need to make a decision on
what to do with it. They can either retain the profits in the company, or they
 The real accounting profits are only measured at the end of the life of
can distribute the money to shareholders in the form of dividends.
the company.
* Dividend declaration reflects profitability status  Agency theory is a principle that is used to explain and resolve issues
in the relationship between business principals and their agents. Most
* Earnings retention provides company more funds for investments; hence, commonly, that relationship is the one between shareholders, as
indicates potential growth by the company. principals, and company executives, as agents.

Typical corporate business organization:  Shareholders and Managers

 Shareholders and Creditors

 A principal-agent relationship is an arrangement in which an agent

acts on the behalf of a principal. For example, shareholders of a
company (principals) elect management (agents) to act on their behalf.

• Agency problems arise when managers place personal goals ahead of

the goals of shareholders.

• Agency costs arise from agency problems that are borne by shareholders
and represent a loss of shareholder wealth.

Financial Decisions and Risk-Return Trade-off How does the company avoid agency problems?

 Financial decision made will not immediately favor the firm • Incentive plans are management compensation plans that tie management
compensation to share price; one example involves the granting of stock
 Finance manager’s obligation is to ascertain that such risk present is options.
tolerable
• Performance plans tie management compensation to measures such as EPS
 Risk could be credit, financial, political, interest, social or growth in EPS. Performance shares and/or cash bonuses are used as
compensation under these plans.
 Always recognize risk in making financial decision.
Misconceptions about Financial Management
 Keep in mind that the higher the return, the higher the risk
• Financial management is accounting.
Agency Theory
• Financial management is a review of mathematics.

• Financial management is branch of statistics.

Social responsibility means that businesses, in addition to maximizing

shareholder value, must act in a manner that benefits society.