an overview of financial management
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An Overview of Financial Management. Class Objectives. Read, interpret, and analyze financial reports Manage working capital and profits Understand the importance of growth Know how to finance growth. Class Objectives cont. Sources, types, and costs of capital - PowerPoint PPT PresentationTRANSCRIPT
An Overview of Financial ManagementAn Overview of Financial Management
Class ObjectivesClass ObjectivesRead, interpret, and analyze
financial reportsManage working capital and
profitsUnderstand the importance of
growthKnow how to finance growth
Class Objectives cont.Class Objectives cont.Sources, types, and costs of
capitalRisk, reward, and value
creationInvestment analysisStructure and negotiate a new
hospitality venture
Hospitality Financial Hospitality Financial ChallengesChallenges
Labor intensive
Fluctuating sales volume
Low profitability
Capital intensive
Reliance on discretionary incomes
A multi-faceted industry
What is Finance?What is Finance?
money or other liquid resources of a government, business, group, or individual
the system that includes the circulation of money, the granting of credit, the making of investments, and the provision of banking facilities
What is Finance?What is Finance?
the science or study of the management of funds
the obtaining of funds or capital
Areas in Finance Areas in Finance Markets and institutions
– Money market & Capital market– Financial institutions; Banks, Insurance compan
y, Finance company etc. Investment
– Decision making of investors Financial management
– Maintenance and creation of economic value or wealth
Use of computers and electronic transfers of information
The globalization of business
Financial Management Issues
Forecasting and planningInvestment and financing decisionsCoordination and controlTransactions in the financial marketsRisk management
Responsibilities of the Financial Staff
Sole proprietorshipPartnershipCorporation
Alternative Forms ofBusiness Organization
Advantages:– Ease of formation– Subject to few regulations– No corporate income taxes
Disadvantages:– Limited life– Unlimited liability– Difficult to raise capital
Sole Proprietorship
A partnership has roughly the same advantages and disadvantages as a sole proprietorship.
Partnership
Advantages:– Unlimited life– Easy transfer of ownership– Limited liability– Ease of raising capital
Disadvantages:– Double taxation– Cost of set-up and report filing
Corporation
The primary goal is shareholder wealth maximization, which translates to maximizing stock price.Do firms have any responsibilities to soci
ety at large?Is stock price maximization good or bad
for society?Should firms behave ethically?
Goals of the Firm
SurviveAvoid financial distress and bankruptc
yBeat the competitionMaximize sales or market shareMinimize costsMaximize profitsMaintain steady earnings growth
Possible financial Goals
is to maximize the current value per share of the existing stock
Because we consider stockholders of the firm are true owner.
The Goal of financial management
Projected earnings per shareTiming of the earnings streamRiskiness of the earnings streamUse of debt (capital structure)Dividend policy
Factors Influenced by Managers that Affect Stock Price
Ten Axioms that Form the Basics of FinTen Axioms that Form the Basics of Financial Managementancial Management
1. The Risk- Return Tradeoff: We won’t take on additional risk unless we expect to be compensated with additional return
2. The time value of money: A dollar received today is worth more than a dollar received in the future.
3. Cash-not profits- is King.4. Incremental cash flow: It’s only what cha
nges that counts.
5. The curse of competitive markets: Why it’s hard to find exceptionally profitable projects.– Differentiate products– Minimize cost
6. Efficient capital market: The markets are Quick and the prices are right.
7. The Agency problem: Managers won’t work for the owners unless it’s in their best interest.
Ten Axioms that Form the Basics of FinanTen Axioms that Form the Basics of Financial Managementcial Management
8. Tax bias business decisions9. All risk is not equal: Some risk can be diversified away, and some can not.10.Ethical behavior is doing the right thing, and Ethical dilemmas are everywhere in finance.
Ten Axioms that Form the Basics of Financial Management
Business EthicsBusiness Ethics
BriberyPersonal gainInsider informationProduct safetyEmployee practices
An agency relationshipagency relationship exists whenever a principal hires an agent to act on his or her behalf.
Within a corporation, agency relationships exist between:– Shareholders and managers– Shareholders and creditors
Agency Relationships
Managers are naturally inclined to act in their own best interests.
But the following factors affect managerial behavior:– Managerial compensation plans– Direct intervention by shareholders– The threat of firing– The threat of takeover
Shareholders versus Managers
Shareholders (through managers) could take actions to maximize stock price -high risk project for higher returns- that are detrimental to creditors.
Creditors has bankruptcy threat. In the long run, such actions will raise the cost of
debt(when a company takes part in more risky business) and ultimately lower stock price (while risk has been increased dramatically).
Shareholders versus Creditors