FM CHP1

• Financial topics


  Usually grouped into five main areas: Corporate finance, Investments, Financial institutions, International finance, Fintech
• Finance


  The science and art of managing money
• Finance at personal level

  Concerned with individuals' decisions about how much of their earnings they spend, how much they save, and how they invest their savings
• Finance in business context

  Involves how firms raise money from investors, how firms invest money in an attempt to earn a profit, and how they decide whether to reinvest profits in the business or distribute them back to investors
• Owners (stockholders)


  Usually not directly involved in making business decisions, especially on a day-to-day basis
• Corporations


  Employ managers to represent the owners' interests and make decisions on their behalf
• Financial management function


  Usually associated with a top officer of the firm, such as a vice president of finance or the chief financial officer (CFO)
• Vice president of finance


  Coordinates activities of the treasurer and the controller
• Controller's office


  Handles cost and financial accounting, tax payments, and management information systems
• Treasurer's office


  Responsible for managing the firm's cash and credit, financial planning, and capital expenditures
• Financial Services


  The area of finance concerned with the design and delivery of advice and financial products to individuals, businesses, and governments
• Career opportunities in financial services

  • Banking
  • Personal financial planning
  • Investments
  • Real estate
  • Insurance
• Professional certifications in finance

  • Chartered Financial Analyst (CFA)
  • Certified Treasury Professional (CTP)
  • Certified Financial Planner (CFP)
  • American Academy of Financial Management (AAFM)
  • Certified Public Accountant (CPA)
  • Certified Management Accountant (CMA)
  • Certified Internal Auditor (CIA)
• Capital budgeting


  The process of planning and managing a firm's long-term investments
• Capital structure


  The mixture of debt and equity maintained by a firm
• Working capital management


  Refers to a firm's short-term assets and liabilities
• Goal of financial management

  Maximize shareholder wealth
• Decision rule for managers: only take actions that are expected to increase the share price
• Goal of the firm should not be to maximize profit
• Stakeholders are groups such as employees, customers, suppliers, creditors, owners, and others who have a direct economic link to the firm
• Stakeholder focus


  A firm consciously avoids actions that would prove detrimental to stakeholders. The goal is not to maximize stakeholder well-being but to preserve it.
• Sole proprietorship


  A business owned by one person and operated for his or her own profit
• Sole proprietorship


  • Simplest type of business to start
  • Least regulated form of organization
  • Owner keeps all the profits
  • Owner has unlimited liability for business debts
  • All business income is taxed as personal income
  • Life of sole proprietorship is limited to owner's life span
  • Amount of equity that can be raised is limited to the amount of the proprietor's personal wealth
  • Ownership may be difficult to transfer
• Partnership


  A business formed by two or more individuals or entities
• Partnership


  • Advantages and disadvantages are basically the same as those of a proprietorship
  • Primary disadvantages are unlimited liability for business debts on the part of the owners, limited life of the business, and difficulty of transferring ownership
• Corporation


  A business created as a distinct legal entity composed of one or more individuals or entities
• Corporation


  • Legal "person", separate and distinct from its owners with many of the rights, duties, and privileges of an actual person
  • Stockholders and managers are usually separate groups
  • Ownership can be readily transferred
  • Life of corporation is unlimited
  • Limited liability for stockholders
  • Disadvantage of double taxation
• Benefit corporation


  A for-profit corporation with three additional legal attributes: accountability, transparency, and purpose
• The size and importance of the managerial finance function depends on the size of the firm
• Managerial finance function in small firms

  Generally performed by the accounting department
• Managerial finance function in large firms

  Evolves into a separate department linked directly to the company president or CEO through the chief financial officer (CFO)
• Relationship between finance and economics

  Financial managers must understand the economic framework and be alert to the consequences of varying levels of economic activity and changes in economic policy. They must also be able to use economic theories as guidelines for efficient business operation.
• Marginal cost-benefit analysis


  The economic principle that states that financial decisions should be made and actions taken only when the added benefits exceed the added costs
• Managerial finance function


  The size and importance of the managerial finance function depends on the size of the firm
• Finance function in small firms

  Generally performed by the accounting department
• Finance function in large firms

  Evolves into a separate department linked directly to the company president or CEO through the chief financial officer (CFO)
• Finance


  Closely related to economics
• Financial managers


  • Must understand the economic framework and be alert to the consequences of varying levels of economic activity and changes in economic policy
  • Must be able to use economic theories as guidelines for efficient business operation
• Marginal cost-benefit analysis example


  • A manufacturing company is considering whether to increase production by producing one additional unit of a product. They estimate that the marginal cost of producing this additional unit, including materials, labor, and overhead costs, is $100. On the other hand, they project that selling this additional unit will generate a marginal benefit of $80 in revenue.
• As a finance manager please advise the management