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Chapter 1 Overview of Financial Management & Environment

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Chapter 1 Overview of Financial Management & Environment

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  • March 2012
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Page 1 of 14
CHAPTER 1
Overview of Financial Management & Environment
1-1

Overview of Financial Management
Role of financial management Forms of business organization Goals of the corporation Agency relationships

1-2

All Successful Firms Accomplish 2 Goals
They identify, create, & deliver products or services that are highly valued This happens only if the firm provides more value than its competitors (in the form of either lower prices or better products)

They sell at prices high enough to cover costs and to compensate owners and creditors for their exposure to risk The profit must be high enough to adequately 1-3 compensate investors

3 Key Attributes for Success
1. 2.

Skilled People at all levels
Leaders, managers and work force

Strong Relationships with groups outside the company
Successful companies develop win-win relationships with suppliers, who then deliver high-quality materials on time and at a reasonable cost

3.

Enough Capital to execute their plans & support operations 1-4

3 Key Attributes for Success
3.

Enough Capital to execute their plans & support operations
Most companies need cash to purchase land, buildings, equipment, and materials Companies can reinvest a portion of their earnings, but most must also raise additional funds externally, by some combination of selling stock and/or borrowing in the financial markets 1-5

3 questions Financial Management must answer
What causes a company to have a particular stock value? How can managers make choices that add value to their companies? How can managers ensure that their companies don’t run out of cash while executing their plans? 1-6

5 Primary Activities of Financial Management
Cash Management Minimize Cost of Capital Strategic Investment (Capital Budgeting) Allocation of Income (Dividends vs. Retained Earnings) Risk Management 1-7

Alternative Forms of Business Organization
Sole proprietorship Partnership Corporation
1-8

Factors to consider
Ease...