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financial management.pdf

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financial management.pdf

  1. 1. Shayan Nasir
  2. 2. Finance is management of money including activates such as investing, borrowing, lending, saving, budgeting and forecasting. The finance field includes three main subcategories: personal finance, corporate finance, and public (government) finance.
  3. 3. Finance versus Economics and Accounting Finance as we know it today grew out of economics and accounting. Economists developed the notion that an asset’s value is based on the future cash flows the asset will provide, and accountants provided information regarding the likely size of those cash flows. Finance then grew out of and lies between economics and accounting, so people who work in finance need knowledge of those two fields.
  4. 4. Financial Management:- is concerned with the acquisition, financing, and management of assets with some overall goal in mind. Thus the decision function of financial management can be broken down into three major areas: the investment, financing, and asset management decisions. Financial management focus on decision on how and what type of assets acquire, how to raise capital needed to buy assets and how to maximize the value of firm.
  5. 5. Capital market is a place where buyers and sellers indulge in trade (buying/selling) of financial securities like bonds, stocks, etc. The trading is undertaken by participants such as individuals and institutions. Capital market trades mostly in long-term securities. Investment:- The investment decision is the most important of the firm’s three major decisions when it comes to value creation. It begins with a determination of the total amount of assets needed to be held by the firm.
  6. 6. Investments relate to decisions concerning stocks and bonds and include a number of activities: (1) Security analysis deals with finding the proper values of individual securities (i.e., stocks and bonds). (2) Portfolio theory deals with the best way to structure portfolios, or ―baskets,‖ of stocks and bonds. Rational investors want to hold diversified portfolios in order to limit risks, so choosing a properly balanced portfolio is an important issue for any investor. (3) Market analysis deals with the issue of whether stock and bond markets at any given time are ―too high, ‖too low,‖ or ―about right.”
  7. 7. Forms of Business organization:- 1)Sole proprietorship is an unincorporated business owned by one individual. Going into business as a sole proprietor is easy—a person begins business operations. Proprietorships have three important advantages: (1) They are easily and inexpensively formed, (2) they are subject to few government regulations, and (3) they are subject to lower income taxes than are corporations. However, proprietorships also have limitations: Proprietors have unlimited personal liability for the business's debts
  8. 8. Partnership is a legal arrangement between two or more people who decide do business together. Partnerships are similar to proprietorship in that they can be established relatively easily and inexpensively. Moreover, the firm’s income is allocated on a pro rata basis to the partners and is taxed on an individual basis. This allows the firm to avoid the corporate income tax. However, all of the partners are generally subject to unlimited personal liability, which means that if a partnership goes bankrupt and any partner is unable to meet his or her pro rata share of the firm's liabilities
  9. 9. Corporation:- A legal entity created by a state, separate and distinct from its owners and managers, having unlimited life, easy transferability of ownership, and limited liabilities. corporation is a business entity that is owned by its shareholder(s), who elect a board of directors to oversee the organization's activities. The corporation is liable for the actions and finances of the business – the shareholders are not.
  10. 10. Corporate governance The system by which corporations are managed and controlled. It encompasses the relationships among a company’s shareholders, board of directors, and senior management. Three categories of individuals are, thus, key to corporate governance success: first, the common shareholders, who elect the board of directors; second, the company’s board of directors themselves; and, third, the top executive officers led by the chief executive officer (CEO).
  11. 11. Objectives of Financial Management Maximizing profits Provide insights on, for example, rising costs of raw materials that might trigger an increase in the cost of goods sold. Tracking liquidity and cash flow Ensure the company has enough money on hand to meet its obligations. Ensuring compliance Keep up with state, federal and industry-specific regulations. Developing financial scenarios These are based on the business’ current state and forecasts that assume a wide range of outcomes based on possible market conditions.
  12. 12. Manage relationships Dealing effectively with investors and the boards of directors. Ultimately, it’s about applying effective management principles to the company’s financial structure.
  13. 13. Scope of Financial Management Financial management encompasses four major areas: Planning The financial manager projects how much money the company will need in order to maintain positive cash flow, allocate funds to grow or add new products or services and cope with unexpected events, and shares that information with business colleagues. Planning may be broken down into categories including capital expenses, T&E and workforce and indirect and operational expenses.
  14. 14. Budgeting The financial manager allocates the company’s available funds to meet costs, such as mortgages or rents, salaries, raw materials, employee T&E and other obligations. Ideally there will be some left to put aside for emergencies and to fund new business opportunities. Companies generally have a master budget and may have separate sub documents covering, for example, cash flow and operations; budgets may be static or flexible.
  15. 15. Managing and assessing risk Line-of-business executives look to their financial managers to assess and provide compensating controls for a variety of risks, including: Market risk Affects the business’ investments as well as, for public companies, reporting and stock performance. May also reflect financial risk particular to the industry, such as a pandemic affecting restaurants or the shift of retail to a direct-to-consumer model.
  16. 16. Credit risk The effects of, for example, customers not paying their invoices on time and thus the business not having funds to meet obligations, which may adversely affect creditworthiness and valuation, which dictates ability to borrow at favorable rates. Liquidity risk Finance teams must track current cash flow, estimate future cash needs and be prepared to free up working capital as needed.
  17. 17. Importance of Financial Management Solid financial management provides the foundation for three pillars of sound fiscal governance: Strategizing Identifying what needs to happen financially for the company to achieve its short- and long-term goals. Leaders need insights into current performance for scenario planning, for example. Decision-making Helping business leaders decide the best way to execute on plans by providing up-to-date financial reports and data on relevant KPIs.
  18. 18. Controlling Ensuring each department is contributing to the vision and operating within budget and in alignment with strategy. With effective financial management all employees know where the company is headed, and they have visibility into progress.
  19. 19. Three Types of Financial Management The functions above can be grouped into three broader types of financial management: Capital budgeting Relates to identifying what needs to happen financially for the company to achieve its short- and long-term goals. Where should capital funds be expended to support growth?
  20. 20. Capital structure:- Determine how to pay for operations and/or growth. If interest rates are low, taking on debt might be the best answer. A company might also seek funding from a private equity firm, consider selling assets like real estate or, where applicable, selling equity Working capital management:- As discussed above, is making sure there’s enough cash on hand for day-to-day operations, like paying workers and purchasing raw materials for production.

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