_ UNIT 4; INTRODUCTION TO FINANCIAL MANAGEMENT INTRODUCTION This course will provide you with an overview of financial management; we begin the lesson by discussing what finance is 8 well as the different forms of organizations. The purpose of a company's management should be to increase shareholder ‘wealth, We wrap by discussing how businesses should provide managers with the incentives they need to focus on long-term value maximization. LEARNING OUTCOMES: Atthe end of the lesson, yau are expected to: «Define finance. «Identify the types of finance «Define Financial Management © Discuss the importance of financial management. ‘« Identty the scope of financial management. * Determine the firm's goal and why shareholders’ wealth maximization is prioritized over other objectives + Identify the advantages and disadvantages of different forms of business organizations + Identify the potential conflict that arise within the firm between the ‘stockholders and managers and discuss the measures thal firms can use to solve these potential conficts. LESSON 1: DEFINITION OF FINANCE Finance‘is an integral facet in every organization. In every organization needs finance to meet all the requirements in the economic world, It indicates the health and the economic status of the organization. It is called the lifeblood of business organization.Scanned with CamScannerFinance can be defined as the management of the flows of money through an organization, whether it will be a corporation, school, bank or government agency (John J. Hampton, 1979). It involves rising of funds, procurement and utilization of funds to achieve the financial goals of the organization, Finance is the art and science of managing money (Khan and Jain, 2011). It ‘connotes the process and procedures of administration of the flow of money or resources within the omganization. LESSON 2: TYPES OF FINANCE There are two types of finance namely: + Private finance — involves the finance in the private type of business organization. + Public finance — involves the finance in the government sector LESSON 3: DEFINITION OF FINANCIAL MANAGEMENT Financial Management refers to the planning, organizing, and control of a company's or erganizations financial activities such as funds acquisition and ufiization. It concerns with acquisition, financing, and management of the firm's financial resources. Financial Management functions can be classified inlo the following (categories based on the preceding definition; + Investment decisions «Financing decisions * Asset Management decisions Investment decision Investment decisions involve determining how much money should be spent on assets, which assets should be purchased, and which assets should be lowered or removed ( if any) in order to keep the firm running. Financing decisions How the assets of the company are financed is determined by financial decisions. The financial manager determines which sort of funding will be most beneficial to the firm's success.Scanned with CamScanner eee ee, of financial decision-making, (Howard and Upton) 4 ILS the provision of financial decision-making, harmonizing individual motives ‘and enterprise goals. (Weston and Brigham) 5 It deals with procurement of funds and their effective utilization in the business. (S.C. Kuchhal) LESSON 4: IMPORTANCE OF FINANCIAL MANAGEMENT Financial management is critical since itis the lifeblood af the ‘company: * Financial planning Financial management determines the budgetary necessities of the business organization to help meet the objectives of the organization, tt mat involve raising of funds, procurement and utilization of funds: * Acquisition of funds ‘One of the top priorities of financial management is the acquisition 0 funds for the organization. it involves the determination of the possibi Sources of finance to meet the required needs of the organization, «Proper use of funds, Ullization of fund is ane of the functions of financial management The proper use of funds indicates that the organization is effective an efficient in managing its financial resources, ‘+ Financial decisions Since financial management is interrelated with ‘the other function 3 Scanned with CamScannerBy} oO eoveuwojed (eoueuy ey) Us puooal ees bupnanoy Buyuncooy + SP Yons APNYS JO play PUE SBUIIdISSIp snolieA oWOS YUM PAIEIaLOHUl S} Uogounj 83] “uopezueGo ue U! edse yuepodwi| Ue s} jUaWeBeUEW /eUBUL ANSWADVNVW TWIONYNId 40 3d098 's NOSS37 “sBulnes eziiqow pur sjowcld 0} sdjay Aqavayy pue YYESM pUE AyIqeWjoid JoyBiIy Wee o} uOEZUE_IO 84) djoy ja juswebeueW jerouLY oANIO Ue JED sy) ‘sues Bugowog © SU) SE JOM SE SIBLMO s}] Jo YOM SY 9)B[E5S9 6} pea] ILM FeYF W puedxe Aqueswubis 0 uonezuetie oy) sdioy jweweBeUeW jeoUeULY “YyeoM. 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LESSON 6: GOALS OF FINANCIAL MANAGEMENT + Maximize profit? Some individuals assume thal the firm's goal is always to maximize profit, yet profit alone does not maximize the firm's entire worth because ft ignores the following factors. First, It ignores changes in the firm's Ask level Second, it overlooks cash flows accessible to investors and does not identify the lime or length of expected returns. « Maximize Shareholder Wealth ‘As a result, the firm's goal, as well 6s the goals of all managers and employees, is to enhance the wealth of the owners. The financial manager chould not only examine profit when making investment decisions; he or she should also consider the following factors: » The ‘isk associated with the investment proposal or the functioning of the company + When and how profits will come into the company is determined by time design. This refers to when profits are received by the corporation and, more important, when profits will increase oF decrease, = The quality and reliability of the profits reported by the firm.Scanned with CamScanner‘The impact ofall ofthese on the company's overall valuation should be considered by @ competent financial management. Although the primary purpose is to maximize shareholder value, other slakeholders are also crucial, Some businesses have expanded their attention to encompass the interests of other stakeholders such as employees, customers, suppliers, creditors, owners, and anyone who have a direct stake in the company, The goal of maximizing the wealth of the owners is unaffected by the viewpoint of the stakeholders. This viewpoint is regarded as pert of the company’s social obligation, By maintaining healthy stakeholder connections, & is intended to deliver long-term benefits to shareholders. Stakeholder turnover, conflict, and itigation could all be reduced as a resuil of such interactions. As @ result, the company can better achieve its geal of maximising shareholder ‘wealth, LESSON 7: FORMS OF BUSINESS ORGANIZATION ‘Any type of business organization can be used as the legal enlity. The following are the most prevalent types of company organization that will be explored in this module: a + Sole Proprietorship. e h4\ © Partnerships SOLE * e * Corporations PROPRIETORSHIP QW soerepioni 1 A sole proprietorship, = [secens sometimes. known as a single proprietorship, is a type of business structure in which one individual owns, manages, and controls the company. He ‘or she must get financing for the company, be responsible for all business choices, and thus be the single owner of the company's gains and losses. The sole proprietorship is the most basic and straightforward business structure. This Is due to the fact that establishing it requires very little legal formality, Small businesses such as grocery stores, restaurants, bike shops, ‘and plumbing shops are examples of typical single proprietorships. The 6Scanned with CamScanner * Subject to Few government regulations. in comparison to other types Of business erganizations, sole proprietorship has the most flexibility ar the government does not interfere with it. It is just necessary that the business be lawful and complies with the norms and regulations of the focal authorities. * Full ownership and control. You're in charge. The sole proprietor is responsible for the management and control of this sort of business. He or she may, however, hire a manager or other people to run the company. Drawbacks: + Unlimited liability. The sole entrepreneur is personally liable for the ‘company's responsibilities. If the company goes bankrupt and the ‘assets aren't enough to caver the debts, creditors may pursue his ot her personal assets. * Limited Resources. The ability to raise funds or capital is constrained. Capital may be limited to the owners assets, and business growth may be contingent on the owners capacity to borrow money. As a result, the scope of business expansion is limited, Lack of continuity. The company’s itespan is finite. Because this Sort of business Is controlled and held by Proprietorship may be closed if the retires, y @ single person, th individual dies, becomes ill, Scanned with CamScannerScanned with CamScanner