Fm

• Financial management involves preparing, directing, and managing a company's money activities to maximize wealth or produce the best value for money
• The key objectives of financial management are to create wealth for the business, generate cash, and provide an adequate return on investment while considering the risks and resources invested
• Personal finance deals with an individual's decisions regarding spending and investing income, including how much to spend, save, and invest
• Business finance focuses on decisions related to how a firm raises money from investors, invests money to earn profit, and reinvests profits in the business or distributes them back to investors
• Three key elements to the process of financial management:

  • Financial planning ensures enough funding is available at the right time to meet business needs, whether short term (e.g., investing in equipment) or medium/long term (e.g., significant additions to productive capacity)
  • Financial control helps ensure objectives are met, assets are used efficiently, and management acts in the best interest of shareholders
  • Financial decision making involves investment, financing, and dividends, considering whether profits should be retained or distributed to shareholders
• The scope of financial management includes anticipation, acquisition, allocation, appropriation, and assessment of financial needs and activities within a company
• Major areas in finance:

  • Financial service involves designing and delivering financial advice and products to individuals, businesses, and governments
  • Managerial finance encompasses financial planning, credit administration, investment evaluation, and obtaining funds for a firm
• Professional certifications in finance include Chartered Financial Analyst (CFA), Certified Treasury Professional (CTP), Certified Financial Planner (CFP), American Academy of Financial Management (AAFM), and Professional Certifications in Accounting like CPA, CMA, and CIA
• Legal forms of business organization:

  • Sole Proprietorship: owned by one person, simple, minimal legal restrictions, unlimited liability
  • Partnership: owned by two or more people, ease of organization, combined talents, unlimited liability for general partners
  • Corporation: entity created by law, separate legal entity from owners, limited liability for stockholders, governed by a Board of Directors
• Advantages of corporations:

  • Limited liability of stockholders
  • Perpetual life
  • Ease of transferring ownership, expanding, obtaining resources, or financing
• Disadvantages of corporations:

  • Bound by relatively more government regulations/restrictions
  • May be expensive to organize
  • Must pay income tax on profits and dividend tax if distributing profits as dividends
• Economics is a social science dealing with individual or collective economic activities like production, consumption, distribution, and wealth transfer based on scarce resources
• Finance is the study of financial allocation, answering questions on where to invest money and why, considered a form of applied economics
• Differences between Finance and Accounting:

  • Finance emphasizes cash flows
  • Accounting generally uses the accrual method
  • Financial managers focus on actual cash inflows and outflows, while accountants recognize revenues at the point of sale and expenses when incurred
• Decision rule for financial managers: only take actions expected to increase share price, aiming to maximize shareholders' wealth
• Profit maximization may not lead to the highest share price due to factors like timing, cash flow availability, and risk
• Role of financial managers:

  • Administer financial affairs of all types of businesses
  • Handle cash, invest surplus funds, secure outside financing, manage risks related to currency values, interest rates, and commodity prices
• Role of treasurer involves decisions on financial planning, fixed asset acquisition, obtaining funds for fixed assets, managing working capital, pension funds, foreign exchange, and distributing corporate earnings
• Two key activities related to a firm's balance sheet:

  1. Investment decisions: define efficient asset levels and structure

  2. Financing decisions: determine and maintain proper short and long-term financing combinations
• Corporate governance establishes responsibility and accountability in organizations, involving shareholders, board of directors, managers, and other stakeholders
• Shareholders aim to earn a good return on investment without undue risk exposure, deviations from maximizing shareholder wealth lead to agency problems and costs
• Ways to reduce agency problems and costs:

  1. Properly constructed corporate governance structure

  2. Structured expenditures through compensation plans

  3. Market forces like shareholder activism

  4. Threat of hostile takeovers