Financial Management
Role: Use a blend of quantitative tools and analyses to make financial decisions that create value for
the owners of the firm
➢ Corporate finance is all about maximising firm value or shareholder value/wealth
Maximising firm value is all about CASH FLOWS:
➢ A firm generates cash inflows by selling the goods and services produced by its productive
assets and human capital
➢ A firm is successful in creating value when the cash inflows exceed the cash outflows needed
to pay operating expenses, creditors, and taxes
Residual cash flow: Remaining cash paid by the firm to the owners as dividend (Net profit)
- The value of any asset is determined by the future cash flows it will generate
ROLE OF THE FINANCIAL MANAGER
Stakeholder’s: Anyone with a financial claim or interest in the firm, including shareholders
Shareholders: Ownership interest
,To create firm value, the financial manger can make three fundamental decisions:
Capital Budgeting decision Financing decision Working capital management
decision
- Deciding what - Determines how the - Determines how
productive assets to productive assets are current assets and
buy financed current liabilities are
- Plant, machines, - Trade offs between managed
patents, trademarks advantages and - Seeks to maximise
disadvantages od debt value creation and
Decision rule: Accept and equity financing minimize destroying
investment project if the value value
of future cash inflows exceeds Two ways raising equity: - Mismanagement of
the cost of the project 1. Share issue working capital can
2. Reinvesting residual cause a firm to go into
MOST IMPORTANT DECISION cash flows ptcy
Net working capital: Difference
between current assets and
current liabilities
How to FM’s decisions affect the SOFP:
, Forms of business organizations:
1. Sole proprietorship (Sole Trader)
➢ Unincorporated owner-manager business – the most common type of business
Advantages Disadvantages
Easy and cheap to form No perpetual succession
Least regulated Unlimited liability
All business income and taxed once as a Equity capital limited to the wealth of the one
personal income of owner owner
Difficult to sell ownership interest
2. Partnership
➢ Formed by two or more people who can operate in terms of an agreement
Advantages Disadvantages
Business income taxed once as personal income No perpetual succession
of partners
Partners are jointly and severally liable for
Ability to raise more equity capital and ability to partnership debts
share expertise and duties
Possible nasty disputes
Difficult to sell ownership interest
3. Company
➢ Is an incorporated legal entity that is separate from its owners and governed by the
Companies Act
Advantages Disadvantages
Owners have limited liability Separation of ownership and management give
rise to the agency problem
Company has perpetual succession
Double Tax of Company profits
More equity capital can be raised
More regulates
Easy to sell ownership interest
Types of Companies
- Private company: Prohibits sell of its securities to the public and restricts transferability of its
severities
- Public company: Can either be listed or unlisted
, Characteristics of a company:
➢ Shareholders elect the board of directors at an AGM
➢ The board is the most important body, and they represent the shareholders and appoint
the CEOe CEO runs the day-to-day management and reports to the board
➢ An audit committee oversees both the external and internal auditors
➢ The CFO or financial director reports to the CEO and runs the financial function
Company organization chart:
Goal of Financial Management
What is the issue with profit maximisation?
- Manipulation of accounting profits
- Does not reflect cash flows
- Doesn’t tell us when cash flows are to be received
- Ignores uncertainty about cash flows
➢ Maximising firm value or shareholder wealth is the appropriate goal
Role: Use a blend of quantitative tools and analyses to make financial decisions that create value for
the owners of the firm
➢ Corporate finance is all about maximising firm value or shareholder value/wealth
Maximising firm value is all about CASH FLOWS:
➢ A firm generates cash inflows by selling the goods and services produced by its productive
assets and human capital
➢ A firm is successful in creating value when the cash inflows exceed the cash outflows needed
to pay operating expenses, creditors, and taxes
Residual cash flow: Remaining cash paid by the firm to the owners as dividend (Net profit)
- The value of any asset is determined by the future cash flows it will generate
ROLE OF THE FINANCIAL MANAGER
Stakeholder’s: Anyone with a financial claim or interest in the firm, including shareholders
Shareholders: Ownership interest
,To create firm value, the financial manger can make three fundamental decisions:
Capital Budgeting decision Financing decision Working capital management
decision
- Deciding what - Determines how the - Determines how
productive assets to productive assets are current assets and
buy financed current liabilities are
- Plant, machines, - Trade offs between managed
patents, trademarks advantages and - Seeks to maximise
disadvantages od debt value creation and
Decision rule: Accept and equity financing minimize destroying
investment project if the value value
of future cash inflows exceeds Two ways raising equity: - Mismanagement of
the cost of the project 1. Share issue working capital can
2. Reinvesting residual cause a firm to go into
MOST IMPORTANT DECISION cash flows ptcy
Net working capital: Difference
between current assets and
current liabilities
How to FM’s decisions affect the SOFP:
, Forms of business organizations:
1. Sole proprietorship (Sole Trader)
➢ Unincorporated owner-manager business – the most common type of business
Advantages Disadvantages
Easy and cheap to form No perpetual succession
Least regulated Unlimited liability
All business income and taxed once as a Equity capital limited to the wealth of the one
personal income of owner owner
Difficult to sell ownership interest
2. Partnership
➢ Formed by two or more people who can operate in terms of an agreement
Advantages Disadvantages
Business income taxed once as personal income No perpetual succession
of partners
Partners are jointly and severally liable for
Ability to raise more equity capital and ability to partnership debts
share expertise and duties
Possible nasty disputes
Difficult to sell ownership interest
3. Company
➢ Is an incorporated legal entity that is separate from its owners and governed by the
Companies Act
Advantages Disadvantages
Owners have limited liability Separation of ownership and management give
rise to the agency problem
Company has perpetual succession
Double Tax of Company profits
More equity capital can be raised
More regulates
Easy to sell ownership interest
Types of Companies
- Private company: Prohibits sell of its securities to the public and restricts transferability of its
severities
- Public company: Can either be listed or unlisted
, Characteristics of a company:
➢ Shareholders elect the board of directors at an AGM
➢ The board is the most important body, and they represent the shareholders and appoint
the CEOe CEO runs the day-to-day management and reports to the board
➢ An audit committee oversees both the external and internal auditors
➢ The CFO or financial director reports to the CEO and runs the financial function
Company organization chart:
Goal of Financial Management
What is the issue with profit maximisation?
- Manipulation of accounting profits
- Does not reflect cash flows
- Doesn’t tell us when cash flows are to be received
- Ignores uncertainty about cash flows
➢ Maximising firm value or shareholder wealth is the appropriate goal
