Lecture 1 : The goal of financial management

Financial management entails planning for the future for a person or a business
enterprise to ensure positive cashflow. It includes the administration and mainenance of
financial assets.
- Covers the process of identifying and managing risk.
- To judge whether financial management in a firm works properly, a goal must be set,
in general: goal is to maximize profit in the long run and increase value
Financial management is concerned with the acquisition, financing and management of assets
with some overall goal in mind.
The decision function of financial management can be broken down into 3 parts:
1. Investment decisions
2. Financing decisions
3. Asset management decisions
1. Investment decisions:
- Affects the value creation of the firm
- The determination of total amount of assets needed and also the structure of assets.
The result is the left side of the balance sheet.
2. Financing decisions:
- Focusing on the structure of funds needed.
- Results of the funds decisions are recorded on the right side of the balance sheet.
(what is the best ratio between debt and own capital? What are the
advatnages/disadvantages of debt financing/own capital? )
3. Asset management:
- Effectively, focus on current more than fixed assets
Financial staff responsibilities: forecasting . planning, major investment and financing
decisions, dealing with the financial markets, risk management.
Forms of business organizations:
1. Sole proprietorship: business owned by one individual.
+ easy and cheap to form, more flexible
- unlimited personal liability, life of the business linked to the owner, more risky –
problems to obtain large sums of capital.
 2. Partnership: legal arrangement between two or more people who decide to do
business together (income allocated on a pro rata basis = according to their shares,
taxed on individual basis – no corporate income tax) , unlimited personal liability.
3. Corporation: legal entity where the ownership and management is separated. Liability
of the owner is limited to the invested amount.
- Unlimited life
- Easier to raise capital necessary to operate
- Highest liquidity
- Agency problems: potential conflict of interest between ownership and management
or managers acting for stockholders and debtholders.
4. LLC: hybrid between partnership and corporation

Lecture 2: Basic categories in business finance :

1. Profit
2. Cash flow
3. Interest and interest rate
4. Time value of money
5. Required rate of return
6. Opportunity cost
7. Risk and uncertainty
1. Profit :
- Financial benefit, when the amount of revenue gained from a business activity exceeds
the expenses, costs and taxes
- Can be : spent, re-invested (retained earnings)
- A.) GROSS PROFIT = sales – cost of goods sold
B.) OPERATING PROFIT = gross profit – operating expenses (salaries, overheads)
C.) NET PROFIT = operating profit – all other expenses including taxes and interest
paid
2. Cash flow:
- the net amount of cash and cash equivalents moving into and out of a business (cash in
/out)
- can be positive and negative
- 3 categories: 1. Operating CF 2. Investing CF 3. Financing CF
3. Interest and interest rate
- Price of money
- Interest in €, interest rate in %
- Nominal interest rate : stated in contract between saver and borrower
- Real interest rate : adjusted for inflation and taxes
- Types of interest:
1. Simple : interest in each period is calculated from the initial value
FV=PV(1+i x n)
2. Compound : interest is earned also on previous interests
FV= PV(1+i)n
3. Periodic compounding : the interest is paid more than once over one period
FV=PV(1+i)n x m
4. Time value of money:
- An € today os worth more than an € to be recieved in the future ( you can invest today
and recieve more in the future)
- The proces of going to future value from present value is called compounding, from
FV to PV is discounting
FV= the amount to wich a cash flow will grow over a given period of time when
compounded at a given interest rate
PV= value today of a future cash flows
5. Required rate of return
- Minimum annual percentage earned by an investment p.a. in %
- Depends on total interest level in economy and risk of the investment
- Often used on discounting of the investment cash flow
6. Opportunity cost
- Alternative cost
- Resources limited, therefore not all investments possible
- Value of the second best opportunity
7. Rist and uncertainty
- Risk is volatility of unexpected outcomes (value of assets, equity or earnings), the
outcome is random but the probability distribution is known
- Uncertainty: the probability distribution is unknown
- The concept of risk is related to probability:
Probability is a number that indicates that some event may occur, is never negative,
values between 0 and 1 (0% to 100%), sum of all probabilities is 1
 - Risk can be measured by standard deviation (3 sigma rule – 68,3%, 95,5%, 99,7%)

Lecture 3: Financial statements

Objective of financial statements: stakeholders need to monitor the firm to ensure that
their interests are being served, FS provide info about entity´s financial position and
performance for all stakeholders ( internal, external – banks,gov ... )
- FS important for managerial decisions.
- To compare entities, FS are prepared using accepted accounting standards (IASs –
international accounting standards, IFRSs – International financial reporting standards
– reduces differences
- Structure and content of FS defined by law
- IASs requires following structure :
1. Statement of financial position (balance sheet)
2. Statement of comprehensive income or an income statement plus statement
showing other comprehensive income
3. Statement of changes in equity
4. Statement of cash flows
5. Accounting policies and explanatory notes
( 4. Is not obligatory in SR)
1. Balance sheet : a snapshot of the firm, as it provides a view on the firm´s financial
position at a specific date (assets, liability, equity)
Assets: represented in €, only cash represents actual money ,
Recievables – money that other owe to the company, inventories- amount of money the
company invested in raw materials, work in progress and finished goods, property plant
equipment - amount of money company paid for fixed assets less the acumulated
depreciation
Claims against assets : debt and ownership position (preferred stock!)
If assets decline, the L and preferred stock remain constant, so only stockholder´s equity
declines. (the risk of asset value fluctuations is by the common stockholders.)
Inventory accounting : (stated in explanatory notes)
LIFO (last-in, first-out) method
FIFO (first-in, first-out) method
Depreciation methods :
Accelerated for tax purposes, straight line (lower deprec.) for stakeholder reports.
2. Income statement
Revenues and expenses ( operating, financial)
3. Cash flow statement
Not obligatory in SVK for small and medium enterprises, for large obligatory, a part
of the accounting policies and explanatory notes
Calculated in two methods
DIRECTLY
INDIRECTLY (using financial statements)
4. Accounting policies and explanatory notes
Information about: accounting entity, acc. Entity bodies, shareholders, controling
parties, acc. Principles and policies, data on A, L and E sides of balance sheet, income,
expenses, income tax, off-balance sheet accounts, chash flow, changes in equity

4. Lecture: Financing a business

Sources of funds can be: Own and liabilities , internal and external , short and long
term
Internal: do not require agreement from counterparty, retained earnings, only
agreement of management of the business
External: require agreement of counterparty

Internal --- Long term