Financial Management

Lecture 1
Overview of Financial Management
Course leader : Dr. Asnake Minwyelet (Ph.D.))
 Content/Chapters in this Course
Chapter 1: Introduction to Financial Management
Chapter 2: Concepts of Time, Value and Return in
Financial Management
Chapter 3: Valuation of Securities
Chapter 4: Capital Budgeting
Chapter 5: Cost of Capital, Capital Structure and
Leverage Analysis
Chapter 6: Dividend Policies and Decisions
Chapter 7: Working Capital and Cash Management
Chapter 8: Receivables and Inventory Management
Chapter 9: Working Capital Financing
Chapter 10: Long - Term and Asset - Backed Financing
 
Chapter One : Introduction to Financial Management
• Topics Included in Chapter One
1.Definition/Meaning and scope of Finance
2.Basic Areas Finance
3.Finance Function/Decisions/Activities
4.Financial Manager ’s Role in a Business
Enterprise
5.Financial Goals of a Business Enterprise
6.Goal-Conflict: Agency Problem
7.Organization of Finance Function
Definition/Meaning and Scope of Finance

Definition of “Finance”?
Introduction to Financial Management (Cont.)
Definition of “Finance” - the word finance is used in various 
contexts, in  referring to money, how money is generated/raised 
or  its management.
• In short, Finance can be defined as the art and science
of managing money - Management of Money.
• Thus, Financial Management means planning, 
organizing, directing and controlling the financial 
activities such as procurement and utilization of funds 
of the enterprise. 
• It means applying general management principles to 
financial resources of the enterprise.
• Financial Management is generally concerned with 
procurement, allocation & control of financial 
resources.
 Basic Areas/Types Of Finance
• Corporate Finance
– Management of financial decisions at corporate level 
• Investments (Financial Investment)
– Work with financial assets such as stocks and bonds 
• Financial Institutions
– Companies that specialize on financial matters 
• International Finance
– Oversea business operation/relation
 Financial Management Decisions/Activities/Functions
qFinancial management is used to help make four
major decisions/activities/functions:
1. Which assets should we invest in? – Investment
decision
2. How will we pay for these assets? – Financing
decisions
3. How do we manage the day-to-day finances of 
the firm? - Working Capital Management/Asset
Management
4. What should we do with the earnings
generated by the assets? – Dividend decisions
 Forms of Business Organizations
–Sole Proprietorship – owned by one person
–Partnership -owned by two or more
–C o r p o r a t i o n   –   o w n e d   b y   s e v e r a l 
shareholders
• Financial  management decision is more 
complex in corporate forms than others 
due to complex nature of the organization
• Development of the field also owes to 
this form of organization
 Goal Of Financial Management/Firm
• What should be the goal of a corporation/Firm?
– Maximize profit?
– Minimize costs?
– Maximize sale or market share?
– Maximize the current value of the company’s stock?
– Survival?
– Avoid financial distress and bankruptcy?
– Beat the competition?
– Maintain steady earnings growth?
• Goal of management: maximize the economic well-
being, or wealth, of the owners (current shareholders) 
– maximize the price of the stock.
• Share price today = Present value of all future expected 
dividends discounted at required return.
 Goal-Conflict - The Agency Problem
• Agency Problems: Goals of the parties are not 
aligned (interest conflict between parties)
– Agent is someone who is hired to represent the 
principal’s interest (ex. Shareholders vs managers)
• Managers won’t work for the owners unless it is in their
best interest
• The agency problem
– The manager-owner relations
– The owner-creditor relations
• Equity: Potential conflict between shareholders and 
managers (principal-agent problem) 
• Debt: Potential conflict between shareholders and 
debt holders (creditors) 
Role and Organization of Finance Function in a 
Typical Business Organization
Board of
Directors

President

VP: Sales VP: Finance VP: Operations

Treasurer Controller

Credit Manager Cost Accounting

Inventory Financial
Manager Accounting

Capital Budgeting
Tax Department
Director
 Chapter End Question
• What are specific types/examples of goal 
conflicts (agency problems) between:
– Shareholders and managers
– Shareholders and debt holders (Creditors)
• What are the possible mechanisms to deal with 
(manage) goal conflicts (agency problems) 
between:
– Shareholders and managers
– Shareholders and debt holders (Creditors)
END of CHAPTER ONE