FIM01- FUNDAMENTAL OF FINANCIAL

MANAGEMENT
01 AN OVERVIEW OF FINANCIAL
MANAGEMENT
J. VILLENA, CPA

FINANCIAL MANAGEMENT
- Concerns the acquisition, financing, and management of assets with some
overall goal in mind.

THREE MAJOR AREAS:

Investment Decision
-is the most important of the firms three major decisions when it
comes to value creation.
Financing Decision
-is concerned with the makeup of the right-hand side of the balance
sheet.
Asset Management Decision
-once assets have been acquired and appropriate financing provided,
these assets must still be managed efficiently.

What is the Goal of the Firm?

Maximization of Shareholder Wealth!

CORPORATE SOCIAL RESPONSIBILITY (CSR)

-is a corporation's initiatives to assess and take responsibility for the company's
effects on environmental and social wellbeing.

THE MODERN CORPORATION

-There exists a SEPARATION between owners and managers.

ROLE OF MANAGEMENT
Management acts as an agent for the owners (shareholders) of the firm.
AGENCY THEORY
Jensen and Meckling developed a theory of the firm based on agency
theory.
Agency Theory is a branch of economics relating to the behaviour of
principals and their agents.

CORPORATE GOVERNANCE
-refers to the system by which corporations are managed and controlled.
-Includes shareholders, board of directors, and senior management

Board of Directors
Typical responsibilities:
1. Set company-wide policy;
2. Advise the CEO and other senior executives;
3. Hire, fire, and set the compensation of the CEO;
4. Review and approve strategy, significant investments, and
acquisitions;
5. Oversee operating plans, capital budgets, and financial reports to
common shareholders

SARBANES-OXLEY ACT OF 2002

-addresses corporate governance, auditing and accounting, executive
compensation, and enhanced and timely disclosure of corporate information.

-Imposes new penalties for violations of securities laws

-Established the Public Company Accounting Oversight Board (PCAOB) to adopt

auditing, quality control, ethics, disclosure standards for public companies and
their auditors, and policing authority

-Generally increasing the standards for corporate governance

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 FIM01- FUNDAMENTAL OF FINANCIAL
MANAGEMENT
01 AN OVERVIEW OF FINANCIAL
MANAGEMENT
J. VILLENA, CPA

ORGANIZATION OF THE FINANCIAL MANAGEMENT FUNCTION

FIVE FOUNDATIONAL PRINCIPLES OF FINANCE

1. Cash flow is what matters
2. Money has a time value
3. Risk requires a reward
4. Market prices are generally right
5. Conflicts of interest cause agency problems.

THE ROLE OF FINANCE IN BUSINESS

1. Where to Invest? (Capital budgeting decision)
2. How to raise money to fund the investment? (Capital structure decision)
3. How to manage cash flows from daily operations? (Working capital decision)

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 FIM01- FUNDAMENTAL OF FINANCIAL
MANAGEMENT
01 AN OVERVIEW OF FINANCIAL
MANAGEMENT
J. VILLENA, CPA
THE ROLE OF FINANCIAL MANAGERS
1. Knowledgeable of financial tools is relevant for decision making in all areas of
business.
2. Decisions involve an element of time and uncertainty.
3. Decisions taken in business should be financially feasible.

LEGAL FORMS OF BUSINESS ORGANIZATIONS

1. Sole Proprietorship
Advantages of a Sole Proprietorship
Easy and inexpensive to register
Regulatory burden is generally light
You have direct control of decision making
Minimal working capital required for start-up
All profits go to you directly

Disadvantages of a Sole Proprietorship

Unlimited liability
Income is taxable at your personal rate and, if your business is
profitable, this could put you in a higher tax bracket
Lack of continuity for your business if you are unavailable
Can be difficult to raise capital on your own

2. Partnerships
Advantages of a Partnership
Partnerships are relatively easy to establish; however time should be
invested in developing the partnership agreement.
With more than one owner, the ability to raise funds may be increased.
Start-up costs are shared equally with you and your partner(s)
Equal share in the management, profits and assets

Disadvantages of a Partnership
Partners are jointly and individually liable for the actions of the other
partners.
Since decisions are shared, disagreements can occur.
Some employee benefits are not deductible from business income on
tax returns.
The partnership may have a limited life; it may end upon the
withdrawal or death of a partner.
Can be difficult to find a suitable partner.

Types of Partnerships that should be considered:

i. General Partnership
ii. General Professional Partnership (GPP)
iii. Limited Partnership
iv. Joint Venture

3. Corporations
Advantages of a Corporation
Limited liability
Ownership is transferable
Continuous existence
Easier to raise capital than it might be with other business structures
Possible tax advantage as taxes may be lower for an incorporated
business

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 FIM01- FUNDAMENTAL OF FINANCIAL
MANAGEMENT
01 AN OVERVIEW OF FINANCIAL
MANAGEMENT
J. VILLENA, CPA
Disadvantages of a Corporation
A corporation is closely regulated
More expensive to set up a corporation than other business forms
Extensive corporate records required, including documentation filed
annually with the government
You may be required to prove residency or citizenship of directors

BUSINESS ETHICS

Business ethics is the study of proper business policies and practices

regarding potentially controversial issues, such as corporate
governance, insider trading, bribery, discrimination, corporate social
responsibility and fiduciary responsibilities. Law often guides business
ethics, while other times business ethics provide a basic framework
that businesses may choose to follow to gain public acceptance.

ETHICAL DILEMMA: Each person has his or her own set of values, which
forms the basis for personal judgments about what is the right thing.

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