Lesson 1 Financial Objectves of The Different Types of Organizations
Lesson 1 Financial Objectves of The Different Types of Organizations
Objectives
• Explain the nature of financial management.
• Explain the purposes of financial management (raising finance,
allocation of financial resources, maintaining control over
resources).
• Distinguish between financial management and financial and
management accounting and explain the relationship between
them.
• Define and distinguish between financial strategy and financial
objectives.
• Describe the relationship between corporate strategy,
corporate objectives, and financial objectives.
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Objectives
• Explain the features of the financial objective of
shareholder wealth maximization.
• Distinguish between shareholder wealth maximization and
satisfaction in a scenario.
• Explain the financial management in a not-for-profit
organization.
• Explain the agency problems and describe the methods
of how to reduce such problems
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• Economic concepts like micro and macroeconomics are directly applied with the
financial management approaches. Investment decisions, micro and macro
environmental factors are closely associated with the functions of financial
manager.
Financial Management
and Accounting
Art of recording and reporting past Manages assets and liabilities of the
Basic Definition financial transactions firm to plan for future growth
•Create wealth
Key objectives Reporting financial management •Generate cash
•Earn good returns
•Effective use of assets
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Distribution of Surplus
• The finance manager has to take decision about net profits. Such can be done by
the way of dividend declaration and retained profits.
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Investments
• Work with financial assets such as stocks and
bonds
• Value of financial assets, risk versus return, and
asset allocation
• Job opportunities
– Stockbroker or financial advisor
– Portfolio manager
– Security analyst
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Financial Institutions
• Companies that specialize in financial matters
– Banks – commercial and investment, credit unions,
savings and loans
– Insurance companies
– Brokerage firms
• Job opportunities
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International Finance
• This is an area of specialization within each of the areas
discussed so far
• It may allow you to work in other countries or at least
travel on a regular basis
• Need to be familiar with exchange rates and political
risk
• Need to understand the customs of other countries;
speaking a foreign language fluently is also helpful
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Business Finance
• Some important questions that are answered
using finance
– What long-term investments should the firm take on?
Stocks, bonds, real estate- through accepting a certain amount of risk because of its potential in capital appreciation.
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Financial Manager
• Financial managers try to answer some, or all, of these
questions
• The top financial manager within a firm is usually the
Chief Financial Officer (CFO)
– Treasurer – oversees cash management, credit management,
capital expenditures, and financial planning
– Controller – oversees taxes, cost accounting, financial
accounting, and data processing
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– Partnership
• General
• Limited liabilities base on the equal share
– Corporation
• S-Corp
• Limited liability company
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Sole Proprietorship
• Advantages • Disadvantages
– Easiest to start – Limited to life of owner
– Least regulated – Equity capital limited to
– Single owner keeps all of owner's personal wealth
the profits – Unlimited liability
– Taxed once as personal – Difficult to sell ownership
income interest
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Partnership
• Advantages • Disadvantages
– Two or more owners – Unlimited liability
– More capital available • General partnership
– Relatively easy to start • Limited partnership
– Income taxed once as – Partnership dissolves when
personal income one partner dies or wishes
to sell
– Difficult to transfer
ownership
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Corporation
• Advantages • Disadvantages
– Limited liability – Separation of ownership and
– Unlimited life management (agency
problem)
– Separation of ownership
and management – Double taxation (income
taxed at the corporate rate
– Transfer of ownership is and then dividends taxed at
easy personal rate, while
– Easier to raise capital dividends paid are not tax
deductible)
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Managing Managers
• Managerial compensation
– Incentives can be used to align management and
stockholder interests
– The incentives need to be structured carefully to make sure
that they achieve their goal
• Corporate control
– The threat of a takeover may result in better management
• Other stakeholders
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Figure 1.2
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Financial Markets
• Cash flows to the firm
• Primary vs. secondary markets
– Dealer vs. auction markets
– Listed vs. over-the-counter securities
• NYSE
• NASDAQ
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Quick Quiz
• What are the four basic areas of finance?
• What are the three types of financial management
decisions, and what questions are they designed to
answer?
• What are the three major forms of business
organization?
• What is the goal of financial management?
• What are agency problems, and why do they exist
within a corporation?
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