Finance 101: Introduction to Financial Management
Instructor: Prof. John Doe
Date: November 9, 2024
Course: Introduction to Financial Management
1. What is Financial Management?
Financial management refers to the efficient and effective management of
money (funds) in such a way as to accomplish the objectives of the
organization. It involves planning, organizing, directing, and controlling
financial activities such as procurement and utilization of funds.
Key objectives of Financial Management:
Profit maximization
Wealth maximization
Liquidity management
2. Basic Financial Statements
2.1 Income Statement
Definition: Also known as the profit and loss statement, it shows
the company's revenue, expenses, and profits over a specific period.
Formula:
Net Income=Revenue−Expenses\text{Net Income} = \
text{Revenue} - \text{Expenses}Net Income=Revenue−Expenses
2.2 Balance Sheet
Definition: A snapshot of the company’s financial position at a
specific point in time. It consists of assets, liabilities, and
shareholder equity.
Formula:
Assets=Liabilities+Equity\text{Assets} = \text{Liabilities} + \
text{Equity}Assets=Liabilities+Equity
2.3 Cash Flow Statement
Definition: A summary of the cash inflows and outflows from
operating, investing, and financing activities.
Categories:
o Operating Activities
o Investing Activities
o Financing Activities
3. Time Value of Money (TVM)
TVM is the concept that a sum of money has different values at different
points in time due to its potential earning ability. The principle states that
money available today is worth more than the same amount in the future
because of its potential earning capacity.
Key Concepts:
Present Value (PV): The current value of a future sum of money.
Future Value (FV): The value of a sum of money at a specific point
in the future.
Formula for Present Value (PV):
PV=FV(1+r)nPV = \frac{FV}{(1 + r)^n}PV=(1+r)nFV
Where:
rrr = interest rate per period
nnn = number of periods
4. Capital Budgeting
Capital budgeting is the process of planning and managing a company’s
long-term investments. It involves determining which investment projects
a company should undertake.
Steps in Capital Budgeting:
1. Identifying potential investments
2. Estimating cash flows from the investments
3. Evaluating the investments using techniques like NPV (Net Present
Value), IRR (Internal Rate of Return), and Payback Period
Net Present Value (NPV) Formula: NPV=∑Ct(1+r)t−I0NPV = \sum \
frac{C_t}{(1 + r)^t} - I_0NPV=∑(1+r)tCt−I0
Where:
CtC_tCt = Cash inflows at time ttt
rrr = Discount rate
I0I_0I0 = Initial investment
5. Risk and Return
Risk and return are fundamental concepts in finance. Generally, higher
returns are expected from higher risk investments.
Key Types of Risk:
Systematic Risk: Risk that affects the entire market.
Unsystematic Risk: Risk that is specific to an individual company
or industry.
Return on Investment (ROI) Formula:
ROI=ProfitCostofInvestment×100ROI = \frac{Profit}{Cost of
Investment} \times 100ROI=CostofInvestmentProfit×100
6. Conclusion and Key Takeaways
Financial management is crucial for organizational success.
Understanding and analyzing financial statements is essential for
making informed business decisions.
The time value of money highlights the importance of considering
future cash flows when making investment decisions.
Capital budgeting helps companies evaluate investment
opportunities.
Managing risk and understanding return on investment are
fundamental to financial decision-making.
