Chapter # 01

The Role & Environment of

Financial Management
 What is Finance
• Finance is the art & science of
managing money.

• Finance is concerned with the

process, institutions, markets &
instruments involved in the transfer
of money among and between
individuals, businesses and
government.
 Major Areas in Finance
• Financial Services

• Managerial Finance
 Financial Services
• The area of finance concerned
with design and delivery of
advice and financial products to
individuals, business and
government.
 Career Opportunities in
Financial Services
• Banking & related institutions

• Personal financial planning

• Investment

• Real estate & Insurance

 Managerial Finance
• Managerial Finance concerns with the
duties of a financial manager.

• Financial manager actively manages

the financial affairs of any type of
business, whether financial or non-
financial, private or public, profit or
non-profit.
 Financial Management
• It deals with preparing financial
planning, identifying sources,
selecting best possible source,
collecting money and investing it,
monitoring the investment and
distributing the profit earned.
An Organizational View
CEO

President &Chief
Operations Officer

Vice-President Vice-President Vice-President

Manufacturing Finance (CFO) Marketing

Treasurer Controller

Financial Planning & Fund raising Manager

Cash Manager

Capital Expenditure Manager

Credit Manager
Financial Management Decision

• Capital Budgeting Decision

• Capital Structure Decision

• Working Capital Management

 Forms of Business
Organization
• Sole Proprietorship

• Partnership

• Corporations
 Comparative Advantages
Sole Partnership Corporation
Proprietorship
Strengths • owner receives all • Can raise more • Limited liability
profit fund than sole
proprietorship •Larger in size
•Low organizational
cost • Borrowing power •Ownership is
more enhanced by transferrable
•Single tax more owners
• Long life
•Independence • More available
brain power & •Can hire
•Secrecy managerial skill professional
manager
•Ease of dissolution • Single tax
•Has better access
to financing
 Comparative Disadvantages
Sole Partnership Corporation
Proprietorship
Weaknesses • Unlimited liability • Unlimited liability • Double taxation

•Limited capital • Limited life • More expensive

to organize
• Proprietor must •Difficult to transfer
be jack-of-all partnership • Subject to
trades greater govt.
regulation
• Difficult to give
employees long •Lacks secrecy
run career
opportunities

• Limited life
 Goal of the Financial Manager
• Maximize Profit

• Maximizing Shareholder Wealth

• Stakeholders

• Role of Business Ethics

 Key Activities of Financial
Manger
• Forecasting & Financial Planning

• Investment & Financing Decision

• Coordination & Control

• Dealing with Financial Market

 Corporate Governance
• The rules, processes, and laws by
which companies are operated,
controlled and regulated.
 Agency Relationship
• Agency Relationship

• Agency Problem

• Agency Cost
– Direct Cost
– Indirect Cost
Solution to Agency Problem
• Managerial Compensation

• Threat of Takeover
 Managerial Compensation

• Incentive plans
 Stock options
• Performance plans
 Performance shares
 Cash bonuses