Summary Financial Management 244 Notes

FINANCIAL MANAGEMENT 244
SUMMARIES

CHAPTER 1
INTRODUCTION TO
FINANCIAL MANAGEMENT

,Defining financial management
 Financial management is a process of creating value in an organisation
o This process consists of planning, organising, directing and controlling
the financial activities of a business
 Value is created when the wealth of the owner(s) of the business increases
over time
 Financial management and accounting are not the same activities
o Accounting has a historical perspective
o Financial management has a forward-looking perspective
 Financial management is also linked to economics
o Financial managers must make decisions within a constantly changing
economic environment
o An understanding of economic indicators is necessary to make
informed, educated decisions
 Financial managers also need to keep an eye on the inflation rate, as this
influences the prices of resources
 Higher inflation and the volatile SA rand have become major sources of
concern for local importers and exporters, and have contributed to SA’s
declining attractiveness as an international destination

,The Financial Manager
1. The role and responsibilities of the financial manager
 The financial manager is responsible for an organisation’s financial-
management activities
 The financial director is in charge of managing the company’s cash resources,
its credit department, the company’s capital expenditures, financial planning,
tax affairs and record-keeping
 The chief financial officer is responsible for the company’s financial-
management activities
 The financial manager is in charge of managing the business’ treasury,
finance and human-resource divisions

2. Financial-management decisions
 In which non-current assets should the firm invest?
o This type of decision is referred to as a capital-budgeting decision
o This category involves the acquisition and management of non-current
assets
o Financial managers should only invest in value-adding non-current
assets
o To evaluate whether or not the new asset will be a value-adding
investment, we must evaluate the net present value (NPV)
 To calculate the NPV of an asset, we need to estimate the size,
timing and risk of the cash flows that will be generated using the
asset
o Cash outflows will occur when money is spent and cash inflows when
money is received
o The manager should estimate the size and when these cash flows
occur
o If the present value of an asset’s cash flows exceeds its cost, the NPV
is positive
 Where will the owner obtain the necessary long-term financing to fund the
purchase of the new asset?
o Decisions on selecting the most appropriate forms of financing are
called capital-structure decisions
o These decisions concern the mix of debt and equity that the business
uses to fund its activities
o Three options for obtaining finances to pay for assets
 Borrow the money
 Use retained earnings
 Raise funds from family and friends
o Publicly listed companies have the additional option of issuing shares
to raise capita

,  How will the owner manage the organisation’s day-to-day financial activities?
o These decisions are referred to as working-capital-management
decisions
o Working capital refers to short-term, assets and liabilities of a firm, and
typically includes inventory, cash, trade receivables and trade payables
o Decisions centre on how the baker will approach the day-to-day
management of short-term assets in the business
o Managers of businesses that sell on credit need to decide the terms
they extend their customers until they have to pay and whether the
business will offer discounts for early payments
o All of these decisions need to be made to ensure that the business
functions efficiently, and that there are sufficient resources available for
the business to remain profitable and liquid