Business Finance Lesson 1

Business Finance Lesson 1

• 1.
  Lesson 1.1 Flow ofFunds within an Organization through and from Enterprise and the Role of the Financial Manager
• 2.
  The Role of Financial Manager
• 3.
   Financial managersperform data analysis and advise senior managers on profit maximizing ideas.  Financial managers are responsible for the financial health of an organization.  Financial managers produce financial reports, direct investment activities, and develop strategies and plans for the long-term financial goals of their organization.
• 4.
  Financial Managers typically: Prepare financial statements, business activity reports, and forecasts,  Monitor financial details to ensure that legal requirements are met,  Supervise employees who do financial reporting and budgeting,  Review company financial reports and seek ways to reduce costs,  Analyze market trends to find opportunities for expansion or for acquiring other companies,  Help management make financial decisions
• 5.
  This is anexample of a financial statement that financial managers are responsible for preparing and interpreting.
• 6.
  Financial managers dotasks that are specific to their organization or industry.
• 7.
  What are thefour functions of a VP for finance or CFO? Financing 01 Operating 03 Dividend Policies 04 02 Investing
• 8.
  Financing decisions This includemaking decisions on how to fund long term investments and working capital which deals with the day to day operations of the company.
• 9.
  Capital structure refersto how much of your total assets is financed by debt and how much is financed by equity.
• 10.
  Assets = Liabilities+ Owner’s Equity To be able to acquire assets, our funds must have come somewhere. Two kinds of funds:  Funds financed by equity  Funds financed by debt
• 11.
  Try to analyze! Arethere ideal mixture of debt and equity across corporations? The answer is None. The mix of debt and equity, varies in different corporations depending on management’s strategies. It is the responsibility of the Financial Manager to determine which type of financing (debt or equity) is best for the company.
• 12.
  Investments Short term investment -decisions are needed when the company is in an excess cash position. Long term investment - should be supported by a capital budgeting analysis which is among the responsibilities of a finance manager. Capital budgeting analysis is a tool to assess whether the investment will be profitable in the long run.
• 13.
  Operating Decision It dealwith the daily operations of the company. The role of the VP for finance is determining how to finance working capital accounts such as accounts receivable and inventories. The company has a choice on whether to finance working capital needs by long term or short term sources.
• 14.
  Sources that canbe use in financing a company: Short term sources - are those that will be payable in at most 12 months. Long term sources - mature in longer periods. Since this will be paid much later, the lenders expect more risk and place a higher interest rate which makes the cost of long term sources higher than short term sources.
• 15.
  Dividend Policies - cashdividends are paid by corporations to existing shareholders based on their shareholdings in the company as a return on their investment. Some investors buy stocks because of the dividends they expect to receive from the company. Non-declaration of dividends may disappoint these investors. Hence, it is the role of a financial manager to determine when the company should declare cash dividends.
• 16.
  Two conditions thatmust exist before a company may be able to declare cash dividends: 2. The company must have cash. 1. The company must have enough retained earnings (accumulated profits) to support cash dividend declaration.
• 17.
  Summary: Capital investment decisionsare long-term corporate finance decisions relating to fixed assets and capital structure. Decisions are based on several inter- related criteria. Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value when valued using an appropriate discount rate in consideration of risk. These projects must also be financed appropriately. If no such opportunities exist, maximizing shareholder value dictates that management must return excess cash to shareholders (i.e., distribution via dividends). Capital investment decisions thus comprise an investment decision, a financing decision, and a dividend decision. Management must allocate limited resources between competing opportunities (projects) in a process known as capital budgeting. Making this investment decision requires estimating the value of each opportunity or project, which is a function of the size, timing and predictability of future cash flows. Achieving the goals of corporate finance requires that any corporate investment be financed appropriately. The sources of financing are, generically, capital self generated by the firm and capital from external funders, obtained by issuing new debt or equity.
• 18.
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