CHAPTER 1

INTRODUCTION
LEARNING OBJECTIVE
At the end of this chapter, you should be able to:
 Define finance and financial management.
 Explain the component of financial management.
 Describes the roles of financial managers.
 Explain the goals of the firm.
DEFINITION
Finance
The process which money is transferred among business,
individuals and governments by financing and investing
activities. Finance is money movement. Cth : Our parents simpan duit dlm tabung haji , maybe utk guna in future.

Financial Management
Planning, organizing, directing and controlling the financial
activities which is obtaining and utilization of funds in the
firm. PODC in order to obtain fully utilization of funds.
Areas of Decision
 Investment Decision
It is the most important decision in a firm. It begins with the firm determining the
firm determining the total amount of assets needed to be held by the firm.
1. Capital Investment - This type of decision involves large sums of money. The
effect of this decision on the firm is normally critical.
2. Working Capital Investment. - This is a more routine form of decision. It
usually takes place on a daily basis.
1.We have RM10,000 so what we gonna do with that money ? Maybe set up our business (capital investment).Sekali kluar byk terus.
2.To purchase raw materials , cth restaurant , they will restock daily .
 Areas of Decision
Financing Decision
Sources of finance
1. Borrowing From bank or other sources i.e parents , loan shark stock dari previous year yg digunakan utk current years.
2. Capital by issuing common stock or preferred stock or using retained
earnings. sell our company share , so we will get capital from that stock.

Assets Management Decision

By managing currents assets effectively and efficiently, the firm can
increase its returns and minimize risk.
Parties in the Financial Environment money circulation

1. Financial Manager
Financial managers are responsible for deciding how to invest the firm's
funds in expanding its business and how to obtain funds. org yg buat decisions.
2. Investors
Investors can be individuals or financial institutions that provide funds
to firms, government, agencies or other individuals who need funding.
cth : bank dah dpt duit kita tapi dy provide investment dkt org lain .
Parties in the Financial Environment
3. Financial Markets tempat utk duit kita simpan duit
Financial markets represent forums that facilitate the flow of funds
among investors, firms, government units and agencies
Money Market
The markets dealing with short term securities that have a life of one
year or less
Capital Market
The markets where securities have a maturity of more than one year
Parties in the Financial Environment
4. Financial Institutions bank / tmpt yg org simpan duit.

org tgh
Financial institutions serve as intermediaries that channel the
savings of individuals, businesses and governments into loans or
investments.
Roles of Financial Manager
1. Forecasting and Planning
Financial manager must be able to forecast the firm’s future performance. Forecasting
is made based on the firm’s past and present performances
ada data ii yg sblm ni , kena tgok financial dy stable ke tk . so org finance akn tgok (forecasting) apa yg akan jadi in the future.
2. Investment and Financing Decision
Financial managers will be able to do the following tasks:
a. Determine sales growth rates.
b. Determine what specific assets to purchase.
c. Determine the best method of financing assets whether to use debt or to use
equity.
d. Determine the best investment instruments whether to invest in common stock,
bond, money market mutual funds and many more.
Roles of Financial Manager
3. Coordination and Control Financial
Manager has to interact with other departments within the organization

4. Dealing with Financial Markets

As financial managers, they will have to deal with money market or capital
market.
Goals of the Firm
Wealth Maximization
Definition Maximizing the total
market value of the existing
shareholders' common
stock
Time Horizon Focus on short term and
long term approaches
Profit Maximization
Profit is the amount of
revenue remaining after
deducting all costs and
expenses.
It can be achieved in the
short term approach
Goals of the Firm
Wealth Maximization Profit Maximization

Timing of return Consider time value of Profit no consideration

money (TVM) on time value of
money

Risk It is considers risk Not considered a risk

Advantages and disadvantages of Profit
maximization
Advantages
Easy to calculate profit.
Easy to determine the link between
financial decisions and profit.
Stresses on efficient use of capital
resources.
Disadvantages
Emphasizes on short-term target.
Ignores risk and real world
complexities when making financial
decisions.
Concentrates on total earnings
Ignores costs of funds provided by
shareholders in computing profit.
 Advantages and disadvantages of
Shareholders’ wealth maximization
Advantages Disadvantages

Emphasizes long-term returns Goal does not offer any clear relationship between
stock price and financial decisions.
Considers risk when making financial decisions. It may take a long time to achieve.

Considers timing of returns. To maximize earnings per share, the firm may have
to implement a dividend policy that may never pay
dividends.
Takes into account the economic expectations
since it affects movement in stock price
Concentrates on earnings per share.
CONCLUSION
Financial management is important in the business. Basically, finance
involves securing of funds from investors and investing the funds with
the aim of achieving the firm’s goal. This chapter also discussed the
goal of the firm and the most relevant goal that is shareholder’s
wealth maximization.
REFERENCES
Arwa Mohammad,Ahmad Hadi Ibrahim,Izyani Hasbullah,Nor Asilah Amin,
Nurhidayatul Asyikin Ramlan ,Nur Azlina Abdullah ,Nurul Fazlin Ab Mutalib , Siti
Zuraidah Zainal ,Wan Hereezuan Wan Ab Rahim, Financial Management (2018),
Kolej Poly Tech MARA