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Topc
1
Introduction
to Financial
Management
X
LEAkNl NC DUTCDMES
By llo ond of llis lopic, you slould bo ablo lo:
1. Differentiate between accounting and nance;
2. Explain the importance of nancial management;
3. Identify the objectives of a rm;
4. Discuss the roles of nancial managers in a rm;
5. Elaborate the characteristics, the advantages and the weaknesses of
each type of business; and
6. Discuss the challenges of nancial management in the future.
X lNTkDDUCTlDN
We always relate the word nance with money. This is because both are closely
related. For a rm or a business organisation, whatever money spent for business
purposes or production is regarded as cost. A business organisation gets prot from
its production or business activities.
A business organisation may not have sufcient funds for expenses purposes. For
example, a business rm wishes to invest but it does not have sufcient funds. A
government wants to do an infrastructure project but its funds are insufcient.
Where do the business organisation and the government get funds to pay for the
expenses? The answer lies in the existence of money market and capital market in
the eld of nance.
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Another issue related to nance is the making of investment decisions. If a rm is
given several proposals for investment projects, which project will it choose?
Research regarding nance is divided into three elds, which are:
(a) Money market and capital market;
(b) Investment; and
(c) Financial management.
In this topic, we will have an overview of nancial management which involves the
differences between nance and accounting, the meaning of nancial management,
forms of business organisation and the challenge of nancial management. These
matters are important to provide a whole description to anyone who wishes to be
involved in the eld of nance.
ACTlVlTY 1.1
Based on your understanding, explain the differences between
accounting and nance.
1.1 THE DlFFEkENCE BETWEEN ACCDUNTlNC
AND FlNANCE
Accounting is a record-keeping system, which has been invented to reect the
nancial operation of a rm. This involves the process of identifying, measuring
and organising the information in such a way that it can be used in the process
of decision-making. This record can be used periodically to produce nancial
statements such as Balance Sheet, Income Statement and Cash Flow Statement.

These statements reect the rms standing and performance. The management,
investors and banks can use the information attained from these statements to help
them in making decisions.
Finance consists of three important aspects, which are money market and capital
market, investment and nancial management. Although accounting and nance
do not involve the same aspects, they are closely related. To have good nancial
management, a lot of accounting information is required such as nancial statement
and nancial ratio analysis. These will be reviewed in Topic 3.

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1.2 FlNANClAL MANACEMENT
Financial management refers to how we manage money to get maximum return
from investments. This encompasses activities such as nancial analysis, nancial
planning and capital budgeting. Financial planning and nancial management
are important for all organisations, big and small, as well as private rms and
government bodies. Good nancial planning and management will increase the
value of a rm. Hence, the important task of a nancial manager is to utilise
methods of collecting and using funds, to maximise the wealth of the rm and
uplift the standards and welfare of its workers as well as increase consumers
satisfaction.
1.3 THE DB]ECTlVES DF THE FlkM
ACTlVlTY 1.2
In your opinion, describe the main objective of a rm.
To measure whether a rm is being managed well, we will have to establish the
goals or objectives that we want to achieve so that we know which direction that we
wish to go. To make an effective nancial decision, we have to understand the goals
of a rm, that is, what are the objectives of a rm which can be used as a guide in
the decision-making process.
The objectives of a rm are shown in Figure 1.1:
Figure 1.1: The objectives of a rm
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1.3.1 Maxmse Pro!t
In economic theory, the objective of a rm is to maximise prot. This objective
can be achieved by producing goods where marginal cost is the same as marginal
revenue. In practice, the objective of maximising prot is not easy to be used as a
guideline in making decisions. Lack of information in making decisions and the
condition of the environment such as changes in demand, supply and technology,
will make it difcult to make use of this objective in making the rms decisions.
Nevertheless, amongst economists, maximising prot is still regarded as the main
objective in the theory concerning the rm.
In nancial management, we need to establish the rms objective so that we
know which direction we want to go and also understand the implications of a
nancial decision based on the objective which has been underlined. In nancial
management, the main objective of a rm is to maximise the value of a company
or the wealth of its shareholders.
1.3.2 Maxmse the WeaIth o! a FrmISharehoIders
Ownership and management are two different groups in a limited company. The
company owners are shareholders who hope to get nancial returns from share
investments they own. Shareholders have the right to vote and choose a board of
directors to oversee the companys management. The management of the company
is done by a manager who is an employee of the company. Thus, managers follow
the policies which have been underlined by the shareholders. These shareholders
are the owners of the company who are interested in maximising the wealth of the
company and with that, increase its stock value. The wealth of a company can be
measured by its stock market price.
The goal of maximising the wealth of shareholders necessitates the management
of a rm to maximise the present value of a future return which is expected by
shareholders. This objective of maximising wealth is a rational objective because it
takes into account the different risks and times in terms of the acceptance of returns
and expenditure cost. Since the wealth of a shareholder is measured in terms of the
value of a stock, this objective gives a detailed performance measure.
1.3.3 Maxmse the Manager's UtIty
Since ownership and management are separated, a manager also has an additional
objective, such as maximising his or her own personal utility. As a manager who
receives salary for the job done, he or she also needs to have additional benet to
maximise his or her utility, such as better working conditions, higher prestige etc.
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A manager also has personal interest apart from attaining satisfactory prot for the
shareholders.
1.3.4 UpI!t the Standards and WeI!are o! Workers
Workers are important assets to a rm. To give encouragement to workers, a
company should give due emphasis to its salary scheme, additional benets and
suitable training programmes which would increase the workers skills. A rm
should give motivation to workers to increase workers productivity.
1.3.5 SocaI kesponsbIty
Although a company may have prime responsibilities to its shareholders, it cannot
neglect its workers as well as the society. As noted before, a company does not
consist of shareholders only. A company is a combination of shareholders, workers
and clients. Hence, apart from its responsibility to shareholders and workers, a
company also needs to be responsible to its clients and the society as a whole.
Social responsibility can be in the form of giving donations to welfare society
organisations, taking steps to clean and beautify the environment, etc. The purpose
of social responsibility is to enact relations between the company and society, which
will in turn increase the image of the company amongst the people.
1.3.6 Contnuous Exstence
Although a firm has several objectives, it is important that it continues to
exist. Other objectives are useless if the rm cannot continue to exist. For the
purpose of continuous existence, a rm should be able to position itself within
an environment which encompasses related issues such as competition, client,
workers, management, technology, etc.
In the study of economics, the objective of the maximisation of prot is emphasised,
whereas in the study of nance, the objective given emphasis is maximising the
wealth of the company or increasing the price of shares. In the following topics, the
objective of maximising the wealth of a company is the main objective in nancial
management and is used as a guide to make nancial decision by a nancial
manager.
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1.4 THE kDLE DF THE FlNANClAL MANACEk
SELF-CHECK 1.1
Essay Question
Even though maximising the wealth of a company is the main guide in
making the rms nancial decision, there are other objectives which are
determined by the rm. List four additional objectives which can be the
objectives of a rm.
ACTlVlTY 1.3
If you were a nancial manager, explain your main responsibility to
enhance your companys nancial standing.
Finance is the cornerstone of a rm. Whether a rm can continue its business or
not is dependent on its nancial situation. Most nancial decisions are dependent
on the nancial manager. Let us take a look at some of the roles of the nancial
manager.
1.4.1 To Prepare the Frm's FnancaI PIannng
A nancial manager plays the important role of planning the rms nance because
without good nancial management, a rm may go bankrupt. In the task of
predicting and preparing the rms nancial planning, a nancial manager needs
to have information from other departments to ensure that the list of economic
probabilities which are being used by all departments are consistent and make
sense.
1.4.2 To Do FnancaI AnaIyss
All matters involving nance need to be analysed by the nancial manager to
ensure that they help to achieve the rms objective in maximising the rms
wealth.
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1.4.3 Advsng the Management kegardng
lnvestment and Fnancng
The management of a rm needs to make various types of decision such as the
kind of investment which needs to be done, establishing the price of a product, cost
control, types of advertisements, dividend policy, workers policy, etc. Hence, they
may not have the time to reect in detail all of these matters and their implications
to nancial decision. Besides that, in the management itself, there might be people
who are not adept in the nancial eld. Thus, the nancial manager should lessen
the burden of the management by preparing a working paper or making a report
regarding suitable types of investments which can be regarded as the best the rm
can nance, as well as suggesting a compatible price for its products which can give
a reasonable margin of prot to the rm.
In short, it can be said that the role of a nancial manager and members of his
staff are to manage and control all matters related to the nance of the rm, which
would help in achieving the objective of the rm which is maximising its wealth.
ACTlVlTY 1.4
Prepare a list of the work scope of a nancial manager.
SELF-CHECK 1.2
TRUE (T) or FALSE (F) Statements
1. Finance is the same as accounting.
2. In the study of economics, all rms have the objective of
maximising the wealth of a rm.
3. Maximising the wealth of a company can also be regarded as
increasing the price of shares.
4. The role of a nancial manager includes helping to make
decisions regarding the price of products, dividend policy and
workers policy.
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1.5 TYPES DF BUSlNESS DkCANlSATlDN
ACTlVlTY 1.5
Discuss the meaning of sole proprietorship, partnership and company.
There are three types of business organisations:
(a) Sole proprietorship;
(b) Partnership; and
(a) Company.
Let us take a look at each type in detail.
1.5.1 SoIe Propretorshp
A sole proprietorship is a form of business which has only one owner and it is
usually small. This type of business organisation is simple to form. The capital
resource is usually attained from the savings of its owner, or loans from friends
or banks. The proprietor owns all of its assets and also bears all of the business
liability. The liability of a sole proprietorship is unlimited this means that if the
business is in debt to others, the proprietor must sell his own personal assets such
as house, land or automobile to pay off his debts. Prot which is gained from the
business is regarded as the owners revenue and taxes are based on individual
income tax. Examples of sole proprietorship are small sundry shops, such as
businesses selling magazines and newspapers, restaurants, etc.
The advantages and disadvantages of this type of business are elaborated in
Table 1.1.
Table 1.1: The Advantages and Disadvantages of Sole Proprietorship
Advantages Disadvantages
Easy to set up. Unlimited liability.
The management is flexible. The
proprietor can manage the business
the way he sees fit.
The capital is small. Difficult to
expand because of the small capital.
Easy to control because all business
de c i s i ons a r e ma de by t he
proprietor.
The existence of a sole proprietorship
is temporary. It dissolves with the
death of the owner.
Prof i t s are t axed accordi ng t o
individual taxation.
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1.5.2 Partnershp
A partnership can be formed if there exist two or more partners who wish to run a
business. The agreement between partners can either be formal or informal. This
type of business is easy to form. Like sole proprietorship, a general partnership
also has an unlimited liability, that is when the business is in debt to others, all
its business partners who are the owners of the business must pay the debt with
their own personal assets such as land, house, etc. The liability obligation maybe
in the form of percentage owned by the partners concerned. Sometimes, limited
partnership may be formed as a limited partnership liability. In this type of
partnership, there must be at least a partner who is willing to be burdened with
unlimited liability. A partner with limited liability may only provide capital but he
does not manage the business.
In terms of taxes, the prots of a partnership are taxable based on individual income
tax. A partnership can be deregistered if one of the partners pulls out or passes away,
there is misunderstanding amongst the partners or the partners agree to separate.
The advantages and disadvantages of partnership are elaborated in Table 1.2.
Advantages Disadvantages
Easy to form. Unlimited liability.
There are two or more partners.
Abl e to col l ect a bi gger sum
of capi t al compared t o sol e
propri et orshi p. Part ners can
di scuss and wor k t oget her,
lessening the burden of work.
The existence of partnership is not
continuous. It can be deregistered
if one of the partners pulls out or
passes away, there are differences
amongst t he part ners or t hey
deregister the partnership.
Prof i t s are t axabl e based on
personal income tax.
1.5.3 Company
A company is a business entity which is different from its owners. Company
Act 1965 states that a company is a legal body under the law, which can own
assets, has liability obligations, has the power to sue others, as well as to be sued
by others. To form a company, registration must be done with the Registrar of
Companies. Company rules need to be followed, such as preparing a document of
Memorandum of Association and Articles of Constitution. A company can either
be formed as a private limited company or a limited company. For a private limited
Table 1.2: The Advantages and Disadvantages of Partnership
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company, the number of shareholders are limited to 50 people whereas the number
of shareholders of a limited company is unlimited. A limited company can be listed
in the stock exchange if it complies with the requirements and rules of the Securities
Commission and is allowed to do so by Bursa Malaysia.
The liability of the shareholders or owners of a company are limited. If the company
experiences losses, the liability of the owners is limited to the sum of capital
invested in the company.
The shareholders have the right to vote and choose a board of directors who will
oversee the companys management. There is separation between the owners and
the management in a limited company. Company owners are shareholders but the
management of the company is done by employees who are paid by the company.
The advantages and disadvantages of the company type of business are elaborated
in Table 1.3.
Table 1.3: The Advantages and Disadvantages of the Company
Advantages Disadvantages
Limited Liability
If there are losses, the liability of
the owners or the shareholders
is limited to the sum of capital
invested in the business. This can
reduce the risk held by investors.
Transfer of Ownership
The ownership of the company is in
the form of shares and these shares
can be bought and sold with ease
especially if they are listed in the
stock exchange. Hence, transfer of
ownership is easy and this liquidity
characteristic attracts investors.
Difficult to be Form
Compared to sole proprietorship
and partnership, the formation of
a company is more complex and
difficult. A company must prepare
a Memorandum of Association
and Art i cl es of Const i t ut i on
before it can be registered with the
Registrar of Companies. This takes
a longer time and higher cost.
Double Taxation
The proceeds of the company
are taxable twice first, taxes
on the profits of the company
and secondly, taxes on dividends
received by shareholders.
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The Continuous Existence of the
Company
Companies may continue to function
even though a shareholder passes
away or there is transfer in the
ownership of the company. This is
different from sole proprietorship
or partnership where the death of
its owner or one of the partners will
result in the deregistration of the
business.
More Easy in Getting Capital
The advantage of limited liability
and its continuous existence as
well as easy transfer of ownership
will attract many investors and this
makes it easier for the company to
collect capital.
ACTlVlTY 1.6
List the type of business which is suitable to be run by each of the
organisations that we have discussed earlier. Give several examples and
explain why it is suitable.
1.6 THE CHALLENCE DF FlNANClAL
MANACEMENT
ACTlVlTY 1.7
State the differences between accounting and nance based on your
understanding.
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As had already been discussed in the objectives of the course, financial
management is a wide and complex eld. As time moves on it has experienced
many changes and this is a challenge for nancial managers. This challenge is due
to the changes in the factors of nancial environment, like the state of the economy
in the country and outside. Apart from that, the increased usage of information
technology and globalisation have made the nancial management of rms even
more difcult.
The increasing trend towards wider usage of information technology such
as e-business needs big nancing. A lot of money is needed to buy the tools
of information technology, provide workers training, etc. All these involve
investments such as doing nancial analysis, project evaluation, as well as nding
nancial resources.
The trend towards globalisation means that rms will face greater competition.
Financial managers must ensure that all departments of a rm operate efciently
to lessen cost and are able to compete so that the business will continue operating.
ACTlVlTY 1.
Fill in the schedule given below by writing down the characteristics of a
partnership and a limited company. Discuss with your coursemates and
compare the characteristics of each rm:
Types of
Organisation/Characteristics
Sole Proprietorship Partnership Company
Number of owners One person only
Capital resource Owners savings
and loans from
friends and banks
Liability Unlimited
Taxation Based on personal
income tax
Control and management Flexible
management and
easy to control
The existence of the
business
Not continuous
Formation Easy to form
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1.7 lMPDkTANT FACTS
Accounting is a record-keeping system which had been invented to reect how a
rm had been managed, whereas nance involves issues such as money market,
capital market, investment and nancial management.
Financial management refers to how we use money to gain maximum return from
investments. The activities of nancial management are:
(a) Financial analysis;
(b) Financial planning; and
(c) Capital budgeting.
The objectives of a rm are:
(a) Maximise prot;
(b) Maximise the wealth of a rm the objective of nancial management;
(c) Maximise the utility of the manager;
(d) Uplift the standards and welfare of workers;
(e) Social responsibility; and
(f) Continuous existence.
SELF-CHECK 1.3
Fill in the blanks.
1. In nancial management, the main objective of a rm is
to__________________.
2. The liability of a sole proprietor is __________whereas the liability
of a company is__________________.
3. __________________ plays an important role in the operation of
rms to ensure allocation and efcient use of nancing.
4. One of the weaknesses of a company is __________________.
5. Financial management faces many challenges because of the
increased usage of __________________ and __________________.
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The role of nancial managers are:
(a) To prepare a rms nancial planning;
(b) To do nancial analysis; and
(c) To advise the management regarding the suitable types of investment for the
rm and the best method of nancing.
The forms of business organisation are:
(a) Sole proprietorship;
(b) Partnership; and
(c) Company (private limited and limited).
Challenges to nancial management exist because of:
(a) Changes to the nancial environment factors;
(b) Trends towards the increase usage of information technology; and
(c) Globalisation.
SUMMAkY
Accounting is a record-keeping system which reects how a rm had been
managed, whereas nancial management involves the technique of managing
money to gain maximum return from investments.
A rm has several objectives to help nancial managers plan the direction of
the rm and to make effective decisions.
The type of business organisation chosen has important business implications
in terms of nancial resources, liability and taxation.
There are various challenging factors to be faced by nancial managers in the
future.
If you are interested to become involved in the nancial eld, you can visit the
website www.careers-in-business.com to get information regarding careers in this
eld. Apart from that, you can also visit http://www.ykconsultancy.com/faq.
htm to gain more information regarding this topic.
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Capital market
Financial management
Financial statement
Financial resources
Financial manager
Investment