Overview of Financial

Management
Finance

Finance is basically the study of money, both cash inflows and

cash outflows

3 General Concepts in Finance:

(1)More value is preferred to less

(2)The sooner cash is received, the more valuable it is
(3)Less risky assets are more valuable than riskier assets
Forms of Business Organization
Primary Goal of the Firm
Maximization of shareholders’ wealth, which is carried out by
maximizing the value of the firm

Why is this better than maximizing profit?

Role of ethics and good governance

Ethics - standards of conduct that management follows when

making business decisions
Corporate governance - set of rules that a firm follows when
conducting business
Analysis of Financial
Statements
Basic Financial Information & Their Uses

The information provided in financial reports is used by

the firm’s managers, its creditors, stockholders, potential
creditors and stockholders, and other stakeholders and
interested parties.
Financial Statements

(1)Statement of Financial Position/ Balance Sheet

(2)Income Statement
(3)Statement of Changes in Equity
(4)Statement of Cash Flows
(5)Notes to Financial Statements
Ratio Analysis/ Financial Statement Analysis
- Consists of an examination and interpretation of various ratios to forecast the
future financial position of the firm.

(1) Liquidity ratios - give an indication as to how well the firm can meet its
current obligation
(2) Asset management ratios - show how efficiently the firm utilizes its assets
to generate revenues
(3) Debt management ratios - give an indication of how well the firm is
servicing its current debt and whether the firm can take on more debt

(4) Profitability ratios - give information on how profitable the firm is

operating and utilizing its assets

(5) Market value ratios - give an indication of what stockholders think of

the firm’s future prospects.
Questions
1) If we divide users of ratios into managers, short-term lenders,
long-term lenders and stockholders, which ratios would each group
be most interested in, and for what reasons?
2) If A/R turnover ratio is decreasing, what will be happening to the
average collection period?
3) If a firm’s ROE is low and management wants to improve it,
explain how using more debt might help?