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Class 1-MBA-AVOM PDF

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45 views

Class 1-MBA-AVOM PDF

Thank you for sharing this insightful document on finance and financial management. Please feel free to ask me any questions.

Uploaded by

Md. Pabel Ahmed
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Understanding the meaning of finance

and financial management

Suborna Barua, PhD


Assistant Professor
Department of International Business
University of Dhaka
Email: [email protected]

31 August 2020
Financing activities
and decisions
Effectively &
efficiently

Finance is the process of raising fund and


utilizing the same to attain organizational goal.
 Short-term goal
Investment activities Profit maximization
and decisions
Effectively & efficiently  Long-term goal
Shareholders’ value
maximization
Financing activities
• Why do we need fund?
• How much fund is needed for different purposes?
• What is the characteristics of the funds needed, i.e., long-term or short-
term? working capital or fixed investment?
• When do we need the funds?
• Which sources are available and accessible?
• What is the cost of different sources available and accessible for each fund
need?
• How to evaluate the available alternatives?
• Which sources to choose finally for financing?
• How to manage repayment of the financing?
Investment activities
• What are the current and future investment plans?
• What is the characteristics of the investment plans, i.e., long-term or short-
term? Timing of investment needed?
• Do we have surplus cash to invest?
• Which investment options are available for utilizing any current surplus?
• What is the potential return of the different available investment
opportunities?
• How to evaluate the available alternatives?
• Which short-term/long-term investment/utilization plans to choose finally?
• How to manage investments to ensure returns are generated as planned?
Goal of a firm
• Short term goal >>>> Profit maximization
• Focus on current and immediate returns
• Long-term goal >>>> Wealth maximization
• Focus on the company owners’ longer term benefits
• Wealth >> the value of the investment made by the owners or
investors of the firm.
• Managers are appointed to act on behalf of the owners and
therefore, to protect longer term interest of the owners.
• DO NOT SACRIFICE ‘WEALTH’ FOR ‘PROFIT’
Measuring wealth
• The value of the investment made by the owners of a firm depends
on how much BENEFIT the firm is expected to generate, given its past,
current and future business potential.
• Benefit is measured by Cash Flow not Profit;
• In the end, it matters whether or how much cash you have been able
to generate or accumulate rather than profit;
• Profit is not the true measure of benefits and financial health of firms;
WHY?
Measuring wealth
• The Value of Investments made by owners depend on the future cash
flow to be generated by a firm.
• Investment made by owners are called ‘Equity’; we should call Value
of Equity.
• Value of Equity can be calculated by using accounting equation:
A = L + E; so, E = A- L; in other words,

Value of Equity = Value of the Firm – Value of Liabilities


Measuring wealth
• The Golden Three Step Process

1) Develop/calculate the projected/expected cash flows to be


generated by a firm in the future;
2) Calculate the present values of all the projected/expected cash
flows to be generated by a firm in the future
3) Sum up all the present values and you will get the Value of Firm.
3.1 Find out the total value of long-term liabilities of the firm now
3.2 Apply the formula to derive the value of equity:

Value of Equity = Value of the Firm – Value of Liabilities


Measuring wealth and Dividend
• Why or how does firm’s CF matter for Investors/Owners?
• Why or how does Investors’ or Owners’ value increase if firms
generate higher cash flows?
• Not all CF generated goes to the Owners/Investors.
• The portion goes to them called ‘Dividend’; and the rest is called
Retained Earnings.
• Therefore, while Firm Value depends on total CF to be generated,
Equity Value depends on how much they actually are likely to get in
the form of ‘Dividend’.
• How much to distribute as dividend depends on dividend policy.
Decisions dealt by a Finance Manager
• Three key decisions

• Financing decisions
• Investment decisions
• Dividend decisions

• Managing the three key categories of activities and making


the three key decisions everyday is Financial Management
Troubles?
• Managers often conflict with owners/investors, known as a form of
Agency Conflict
• This is in fact natural!
• Managers prefer their interest over that of the owners/investors of a
firm
• Agency conflict hinders higher CF generation ability and thus both
short-term and long-term profitability and CF performance;
• This ultimately lowers firm and equity values
• Can we solve such conflicts? – Accept them and mitigate them with
strategies such as ESOP, firing, and Takeover threats.
Business type and finance manager
• The functions and decisions to be dealt by an FM are the same across
all types of ‘For-profit’ businesses;
• Business can be: Sole tradership, Partnership, and Limited companies
• Limited companies could be Private and Public
• Public limited companies are listed in the stock market and sell their
ownership to general people such as the companies in DSE
• Non-profit organizations also have Finance Manager roles, but the
goal then differs for them.
• The goal of an NPO finance manager would be achieving the
organization’s non-profit goals.
A typical positioning of a finance manager
Questions please

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