NOTES IN FINANCIAL MANAGEMENT productive capacity of the business

or to make acquisitions. This links

 Fin Man is about preparing, directing in with the financial decision-
and managing the money activities of
making process and forecasting.
a company such as buying, selling and
(such as putting up a new branch)
using money to its best results to
maximize wealth or produce best
value for money. Basically, it means 2. Financial Control
applying general management
- Helps the business ensure that
concepts to the cash of the company.
the objectives are being met.
- Everyone should know fin man (like
Financial control determines if
how to manage your own money)
assets are secured and being
 Taking a commercial business as the
used efficiently. It also identifies
most common organizational
if the management act in the best
structure, the key objectives of
interest of shareholders and in
financial management would be to accordance with business rules.
create wealth for the business,
generate cash and provide an
3. Financial Decision Making
adequate return on investment
- The key aspects of financial
bearing in mind the risks that the
decision-making include
business is taking, and the resources
investment, financing and
invested.
dividends. Investments must be
 Personal Finance deals with an
financed in considered, which will
individuals’ decisions concerning the
depend on the source, period of
spending and investing of income. It
financing, cost of financing and the
includes the answers as to how much
net present returns generated. The
of their earnings should they
key financing decision is whether
spend, how much should they
profit earned by the business
save, and how should they invest
should be retained instead of
their savings.
distributing to shareholders via
 Business Finance involves same
dividend. Dividend that are too
type of decisions focusing on how the
high may cause the business to
firms raise money from investors, how
starve of funding to reinvest in
to invest money to ear a profit, and
growing revenues and profits
how to reinvest profits in the business
further.
or distribute them back to investors.
SCOPE OF FINANCIAL MANAGEMENT
There are three key elements to the
process of financial management. These Financial management has a wide scope. It
are the financial planning, financial includes the following five A’s as stated by
control and financial decision making. Dr. S.C. Saxena:
1. Financial Planning 1. Anticipation – the financial needs of
- Management need to ensure that the company are being estimated.
enough funding is available at That is, it finds out how much finance
the right time to meet the needs is required by the company.
of business. In the short term, Ex: before putting up a business,
funding may be needed to invest in this method is necessary.
equipment and stocks, pay
employees and fund sales made on 2. Acquisition – it collects finance for
credit. In the medium and long the company from different sources.
term, funding may be required for Ex: collection/completing your
significant additions to the money for your business.

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 3. Allocation – it uses this collected or The recent global financial crisis and
acquired finance to purchase fixed and subsequent responses by
current assets for the company. governmental regulators, increased
Ex: allocate the money for each global competition, and rapid
items needed. technological change also increase the
importance and complexity of the
4. Appropriation – it distributes part of financial manager’s duties. Increasing
the company profits among the globalization has increased demand
shareholders, debenture holders, and for financial experts who can
some are kept as reserves. manage cash flows in different
Ex: distribution of profits currencies and protect against the
5. Assessment – it also means risks that naturally arise from
controlling all the financial activities of international transactions.
the company. It checks if the
objectives are met. If not, it The following are the professional
determines what can be done about it. certifications in finance:
Ex: continuation of control, for
you to change if there’s need to 1. Chartered Financial Analyst (CFA) –
be changed. a graduate-level course of study
focused largely on the investments
FINANCE AREAS AND CAREER
side of finance. This is offered by
OPPORTUNITIES the CFA institute.
The following are the major areas in the field 2. Certified Treasury Professional
of finance: (CTP) – this program requires
students to pass a single exam that
1. Financial Service – the one is focused on the knowledge and
concerned with the design and skills needed for those working in a
delivery of advice and financial corporate treasury department.
products to individuals, businesses, 3. Certified Financial Planner (CFP) –
and governments. Career students should pass a 10-hpur
opportunities: within the areas of exam covering a wide range of
banking, personal financial topics related to personal financial
planning, investments, real estate, planning in order to obtain CFP
and insurance. status.
4. American Academy of Financial
2. Managerial Finance – concerned Management (AAFM) – this
with the duties of the financial administers certification programs
manager working in a business. This for financial professionals in a wide
encompasses the financial planning or range of fields. Their certifications
budgeting, extending credit to include the Charter Portfolio
customers or other credit Manager, Chartered Asset
administration function, Manager, Certified Risk Analyst,
investment evaluation and Certified Cost Accountant, Certified
analysis, and obtaining of funds Credit Analyst, and many other
for a firm. Managerial finance is the programs.
management of the firm’s funds within 5. Professional Certifications in
the firm. Accounting – include Certified
Public Accountant (CPA), Certified
Career opportunities: financial analyst, Management Accountant (CMA),
capital budgeting analyst, and cash Certified Internal Auditor (CIA), and
manager. many other programs.

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LEGAL FORM OF BUSINESS - Partnership is dissolved when a
partner withdraws or dies, and it is
 Sole Proprietorship – owned by one
difficult to liquidate or transfer
person who’s legally responsible for
partnership.
the debts and taxes of the business.
- Two or more heads may be better
- Most common form of business
for the firm.
Advantages:
 Corporation – entity created by law.
- Simple, and the owner has freedom - Have the legal powers of an
to make all decisions and enjoy all individual in that it can sue and be
the profit sued.
- Minimal legal restrictions and - Make and be party to contracts
government regulation. - Acquire property in its own name.
- It can be discontinued with great - Publicly or privately-owned
ease and tax rate is relatively at business entity that separates form
the minimum. its owner and has a legal right to
- Owner has unlimited liability own property and do business in its
- Owner has limited availability of own name.
outside financing. - Stockholders are not responsible
for the debts or taxes of business.
 Partnership – owned by two or more - Governed by BOD in case of profit
people and operate on an agreement organization or BOT in case of non-
called Article of Co-Partnership. profit org.
- They are legally responsible for the
debts and taxes of business. Advantages:
- Partners must agree upon amount
- Limited liability of stockholders and
each partner will contribute to the
perpetual life.
business, percentage of ownership
- There is ease of transferring
of each partner, share of profits of
ownership, expansion obtaining
each partner, duties each partner
resources of financing.
will perform, and the responsibility
- Relatively bound more government
each partner has for the
regulations/restrictions and maybe
partnership’s debts.
expensive to organize.
Typical partnership includes those: - All forms of business entities are
considered separate entities.
- Medical and Dental Practices However, the corporation is the
- Accounting only form of business that is a
- Architectural and Law firms separate legal entity.

FINANCE, ECONOMICS AND

There is ease of organization compared to ACCOUNTING
corporation. In partnership there are:
 Economics – study of choice
- Combined talents - Social science that deals with
- More available brain power individual or collective economic
- Managerial skill activities such as production,
- In terms of available financing, it consumption, distribution and
can raise more capital for the firm transfer of money and wealth.
than a sole proprietorship. - This is based on the fact that our
- Unlimited liability for general resources are scarce and need to
partners and limited life for the firm deliberately and systematically
allocated.

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  Finance – study of financial stock relative to the stock market as a whole
allocation and answers questions indicates achievement of this goal.
like where to put your money and
Given the following opportunities, which
why.
investment is preferred?
- Form of applied economics
- Firms operate within the economy Earnings per Share Year
and they must be aware of the Invest Year Year Year Total
economic principles, changes in ment 1 2 3
economic activity, and A P14. P10. P4.0 P28.00
economic policy. 00 00 0
- Marginal Cost-Benefit Analysis B 6.00 10.0 14.0 30.00
– primary economic principle that is 0 0
being used in managerial finance.
- This principle reminds the decision
Based on the information provided, the
makers to choose and take actions
choice is not obvious. Profit maximization is
only when the firm will have a net
not consistent with wealth maximization. It
advantage, which means that the
may not lead to the highest possible share
added benefits exceed the added
price due to the following reasons:
costs.
 Accounting – accountants 1. Timing is important. The receipt of
generally use the accrual method funds sooner rather than later is
while in finance, the emphasis is preferred.
on cash flows. - Project B is expected to provide the
- Accountants recognize revenues at higher overall increase in earnings,
the point of sale and expenses thus, is the more profitable
when incurred regardless on when project.
cash will flow into or out of the - But, since the goal of the firm is to
firm. maximize value, and therefore,
- Financial manager focuses on the timing must be considered to
actual inflows and outflows of determine which project is superior.
cash, recognizing revenues - Profit maximization may lead to
when cash is collected and value maximization, but it is not an
expenses when actually paid. absolute case.
GOALS OF THE FIRM AND THE ROLE OF 2. Profits do not necessarily result in
cash flows available to
THE FINANCE MANAGER
stockholders. In finance, cash is
Decision rule for managers: king.
- It is not unusual for a firm to be
Only take actions that are expected to
profitable yet experience a cash
increase the share price.
crunch.
This rule means that whenever the financial - They might have so much profit but
manager decides or choose between or less do not have enough cash to
among alternatives, after assessing the risks continuously run the business.
and the returns, only actions that would - The most common cause is when
increase share price shall be accepted. expenses have a shorter due
Otherwise, the alternative/s shall be rejected. date than expected revenue.
- In such cases, the firm must
The goal of a firm, and therefore of all
arrange short term financing to
managers, is to maximize shareholders’
meet its debt obligations before the
wealth. This can be measured by share price.
revenue arrives.
An increasing price per share of common

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 3. Profit Maximization fails to - Financing decisions generally refers
account for risk. Risk is the chance to the items that appear on the
that actual outcomes may differ liability and equity section of the
from expected outcomes. balance sheet.
- Financial managers must consider
both risk and return because of CORPORATE GOVERNANCE, ETHICS AND
AGENCY
their inverse effect on the share
price of the firm.  Corporate Governance
- Increased risk may decrease the - A system of organizational control
share price, while increased return that defines and establishes the
is likely to increase the share responsibility and
price. accountability of the major
participants in an organization.
Financial managers administer the financial
affairs of all types of businesses such as - Shareholders, board of directors,
private and public, large and small, managers and officers of the
profit-seeking and not-for-profit. corporations and other
Typically, he handles a firm’s cash, investing stakeholders are the major
surplus funds when available and securing participants included here.
outside financing when needed. He also - More detailed responsibilities would
oversees a firm’s pension plans and be established within each part of
manages critical risks related to the organizational chart.
movements in foreign currency values,  Business Ethics
interest rates and commodity prices. The - Are the standards of conduct or
treasurer in a mature firm must make moral judgment that apply to
decisions with respect to handling persons engaged in industry or
financial planning, acquisition of fixed commerce.
assets, obtaining funds to finance fixed - Violations of these standards in
assets, managing working capital finance include, but not limited to
needs, managing the pension fund , misstated financial statements,
managing foreign exchange, and misleading financial forecasts or
distribution of corporate earnings to projections, fraud, bribery,
owners. kickbacks, insider trading,
excessive executive compensation
The two key activities that the financial and options backdating.
manager does as related to a firm’s balance - Bad publicity generally results to
sheet are the following. negative impacts on a firm.
1. Investment Decisions - Ethics programs seek to reduce
- The finance manager defines the lawsuits and judgment costs,
most efficient level and the best uphold and preserve a positive
structure of assets. corporate image, build trust and
- Investment decisions deals with the confidence of the stockholders,
items that appear on the asset and to gain the loyalty and
section of the balance sheet. respect of all stakeholders.
2. Financing Decisions - The expected result of such
- The finance manager determines program is to positively affect the
and maintains the proper firm’s share price.
combination of short- and long- - Shareholders are the owners of a
term financing. corporation, and they purchase
- Also, he raises the needed stocks because they want to earn
financing in the most economical a good return on their investment
without undue risk exposure.
manner.

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 - In most cases, shareholders elect - When the managers take actions
directors, who the hire managers that maximize stock, they could be
to run the corporation on a day-to- given stock options giving them
day basis. the right to purchase stock at a set
- Because managers are supposed to price.
be working on behalf of - This incentive plan may not be
shareholders, they should pursue favorable because of market
policies that enhance behavior that has a substantial
shareholder value. impact on share price and is
- Also, to achieve this goal, the beyond the control that’s why
financial manager would take only performance plans are more
those actions that were expected popular today.
to make a major contribution to the - In this plan, compensation is
firm’s overall profits. based on performance
- When managers deviate from the measures, such as earnings per
goal of maximization of share and/or its growth, or other
shareholder wealth by putting return ratios.
their personal goals above the - Managers may receive
goals of shareholders, this results performance shares and/or
to agency problems and issues. cash bonuses when the set
- This kind of problems increases performance goals are attained.
agency costs. 3. Market Forces
- Agency costs are the costs borne - Such as shareholder crusading
by shareholders due to the from large institutional investors.
occurrence and avoidance of - Institutional investors hold large
agency problems. quantities of shares in many of
- Both cases represent a reduction the corporations in their portfolio
in the shareholders’ wealth. - The power of institutional investors
far exceeds the voting power of
The agency problem and the associated
individual investors
agency costs can be reduced with the
- Managers of these institutions
following:
should be active in the monitoring
1. Properly constructed and implemented of management and vote their
corporate governance structure. shares for the benefit of the
- This should be designed to institute shareholders.
a system of checks and - This can lessen or avoid the
balances to reduce the ability agency problem because these.
and incentives of management to - It pressures on management to
deviate from the goal of take actions that maximize
shareholder wealth maximization. shareholder wealth.
2. Structured expenditures thru - They may use their voting
compensation plans. powers to elect new directors who
- This maybe the most popular way are aligned with their objectives
to deal with the agency problem and will act to replace poorly or
but this is the most expensive non-performing managers.
one. 4. Threat of hostile takeovers
- It could either be incentive or - It occurs when a company or group
performance plans. not supported by existing
- Incentive plans tie management management attempts to
performance to share price acquire the firm.

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- Because the acquirer looks for
companies that are poorly
managed and undervalued, this
threat provokes managers to act in
the best welfares of the firm’s
owners.

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