FIN2601: Financial Management
Principles of Managerial Finance, Lawrence J. Gitman: 2nd Edition
Study Unit: 1 (Chapter 1 & 2 in textbook)
The role and environment of managerial finance
Chapter 1: The role of managerial finance:
1.1 Finance and business:
Define the functions of a financial manager:
Finance= The science and art of managing money.
Individual context: Finance is concerned with individuals decisions about how much of their earning they
spend, how much they save and how they invest their savings.
Business context: How firms raise money from investors, how firms invest money in an attempts to earn a
profit, and how they decide whether to reinvest profits in the business or distribute them back to
investors.
1. Financial services= area of finance concerned with the design and delivery of advice and financial
products to individuals, businesses and governments.
2. Managerial finance= concerns the duties of the financial manager in a business.
Financial managers= actively manages the financial affairs of all types of businesses, whether private or
public or large or small, profit seeking or not for profit.
• Administer financial affairs of all types of businesses.
• Varied tasks as developing financial plans or budgets, extending credit to customers, evaluating
proposed large expenditures and raising money to fund firms operations.
• Protect firms against risks that arise from international business.
,Primary activities of the financial manager:
1. Financial analysis and planning
2. Investment decisions
3. Financing decisions
Discuss the legal forms of business organisation:
Legal forms of business organization:
1. Sole proprietorships= a business owned by one person and operated for his/her own profit.
• Raises capital from personal resources, or by loans.
• He/she is responsible for all business decisions.
2. Partnership= business owned by two or more people and operated for a profit.
• Larger than sole proprietorship.
• Common in finance, insurance, legal and real estate industries.
• Partnership agreement= the written contract used to formally establish a business partnership.
3. Company= an entity created by law.
• Legal powers of an individual in that it can sue and be sued, make and be party to contracts,
acquire property in its own name.
,• Shareholders= owners of a company whose ownership or equity takes the form of either
ordinary shares or preferred shares.
• Limited liability= legal provision that limits stockholders liability for a corporations debt to the
amount they initially invested in the firm by purchasing stock.
• Ordinary shares= the purest and most basic form of company ownership.
• Dividends= periodic distribution of cash to the shareholders of a firm.
, Board of directors= group elected by the firms shareholders and typically responsible for approving
strategic goals and plans, setting general policy, guiding corporate affairs, and approving major
expenditures.
• Inside directors= key company executives
• Outside/ independent directors= executives from other companies, major shareholders and
national community leaders. They receive compensation in the form of cash, shares and share
options.
Managing director/ CEO= corporate official responsible for managing the firms day-to-day operations and
carrying out the policies established by the board of directors.
1.2 Goal of the firm:
Principles of Managerial Finance, Lawrence J. Gitman: 2nd Edition
Study Unit: 1 (Chapter 1 & 2 in textbook)
The role and environment of managerial finance
Chapter 1: The role of managerial finance:
1.1 Finance and business:
Define the functions of a financial manager:
Finance= The science and art of managing money.
Individual context: Finance is concerned with individuals decisions about how much of their earning they
spend, how much they save and how they invest their savings.
Business context: How firms raise money from investors, how firms invest money in an attempts to earn a
profit, and how they decide whether to reinvest profits in the business or distribute them back to
investors.
1. Financial services= area of finance concerned with the design and delivery of advice and financial
products to individuals, businesses and governments.
2. Managerial finance= concerns the duties of the financial manager in a business.
Financial managers= actively manages the financial affairs of all types of businesses, whether private or
public or large or small, profit seeking or not for profit.
• Administer financial affairs of all types of businesses.
• Varied tasks as developing financial plans or budgets, extending credit to customers, evaluating
proposed large expenditures and raising money to fund firms operations.
• Protect firms against risks that arise from international business.
,Primary activities of the financial manager:
1. Financial analysis and planning
2. Investment decisions
3. Financing decisions
Discuss the legal forms of business organisation:
Legal forms of business organization:
1. Sole proprietorships= a business owned by one person and operated for his/her own profit.
• Raises capital from personal resources, or by loans.
• He/she is responsible for all business decisions.
2. Partnership= business owned by two or more people and operated for a profit.
• Larger than sole proprietorship.
• Common in finance, insurance, legal and real estate industries.
• Partnership agreement= the written contract used to formally establish a business partnership.
3. Company= an entity created by law.
• Legal powers of an individual in that it can sue and be sued, make and be party to contracts,
acquire property in its own name.
,• Shareholders= owners of a company whose ownership or equity takes the form of either
ordinary shares or preferred shares.
• Limited liability= legal provision that limits stockholders liability for a corporations debt to the
amount they initially invested in the firm by purchasing stock.
• Ordinary shares= the purest and most basic form of company ownership.
• Dividends= periodic distribution of cash to the shareholders of a firm.
, Board of directors= group elected by the firms shareholders and typically responsible for approving
strategic goals and plans, setting general policy, guiding corporate affairs, and approving major
expenditures.
• Inside directors= key company executives
• Outside/ independent directors= executives from other companies, major shareholders and
national community leaders. They receive compensation in the form of cash, shares and share
options.
Managing director/ CEO= corporate official responsible for managing the firms day-to-day operations and
carrying out the policies established by the board of directors.
1.2 Goal of the firm:
