Introduction to Financial Management

Overview

Financial management begins with a plan, applicable to both individuals and companies. It's essential not just to have resources like cash but also to manage them wisely to ensure long-term sustainability. Without proper financial management, these resources can quickly be depleted, which is why financial management is vital for any organization.

Key Concepts in Financial Management

Shareholder's Wealth Maximization

The primary goal of financial management should be maximizing shareholder wealth, often reflected by the company's stock price. This objective considers the interests of various stakeholders, including:

• Stockholders
• Management
• Employees
• Suppliers
• Customers
• Creditors
• Regulatory agencies
• The community

Long-term success requires balancing the needs of these stakeholders.

Business and Finance Definitions

Business

Business encompasses any human activity focused on satisfying needs and wants, typically motivated by profit. It involves lawful economic activities, such as:

• Producing goods
• Offering services

(Bonneville et al., Miranda, G.S.)

Finance

Finance is the study of principles, institutions, and processes involved in the movement of money and financial resources.

Business Finance

Scope of Business Finance

Business finance involves the allocation, procurement, and efficient management of capital to:

• Maximize profits
• Increase value
• Fulfill a company’s social role

Reasons to Study Finance

Studying finance equips individuals to:

• Manage financial resources
• Make sound economic and investment decisions
• Understand career opportunities in finance

Money

Definition

Money is anything legally accepted as a medium of exchange and a standard of value in a given territory.

Functions of Money

1. Medium of Exchange: Facilitates trade for goods and services.
2. Standard of Value: Helps measure the relative value of goods and services.
3. Store of Value: Preserves purchasing power for future use.
4. Standard of Deferred Payment: Measures obligations and claims.

Financial Decision-Making Concepts

When making financial decisions, the following principles apply:

• More value is preferred to less.
• The sooner cash is received, the more valuable it is.
• Less-risky assets are preferred over riskier ones.

Finance Tasks

Financial managers focus on:

• Allocating available funds
• Acquiring funds as needed
• Utilizing funds to achieve organizational goals

Corporate Organization Structure

Shareholders

Shareholders elect the Board of Directors (BOD), and each share equals one voting right. The BOD is responsible for acting in the shareholders' best interest.

Board of Directors

The BOD is the highest decision-making body. Their responsibilities include:

• Setting policies for investments, capital structure, and dividends
• Approving strategies, goals, and budgets
• Appointing and removing top executives

Corporate Leadership Roles

VP for Sales and Marketing

Responsibilities include:

• Developing marketing strategies
• Managing sales
• Conducting market research
• Maintaining customer relationships

VP for Production

Focuses on:

• Meeting customer demand
• Reducing production costs
• Maximizing facility utilization

VP for Administration

Oversees:

• Coordination across departments
• Employee hiring
• Reducing operating costs

VP for Finance (CFO)

Key functions include:

• Financing: Managing long-term investment and working capital decisions.
• Investing: Supporting long-term investments through capital budgeting.
• Operations: Handling day-to-day financial operations.
• Dividend Policies: Deciding on the distribution of profits.

Role of Financial Management

Financial management is tasked with making decisions that maximize shareholder value. This involves determining the company’s capital structure—how much of its assets are financed by debt versus equity.

Careers in Finance

Finance professionals can pursue careers in:

• Commerce and industry (e.g., financial analyst, credit analyst)
• Government (e.g., administrative clerk, examiner)
• Academia (e.g., lecturer, research assistant)

Generalization

Financial management is about making informed financial decisions through the proper allocation, procurement, and utilization of resources to achieve a company’s goals. Financial managers play a critical role in ensuring efficient and effective use of these resources.