The Role and Environment of Managerial Finance: Powerpoint

PowerPoint
to accompany
Chapter 1
The role and

environment of
managerial
finance
Learning Goals:
 Define finance.
 Define the managerial finance function and its
relationship to economics and accounting.
 Identify the primary activities of the financial
manager within a firm.
 Explain the goal of the firm, corporate governance,
the role of ethics and the agency issue.
 Understand the financial institutions and markets
and the role they play in managerial finance.
 Discuss business taxes and their importance in
financial decisions.
Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) –
9781442518193/ Gitman et al / Principles of Managerial Finance / 6th edition
Finance and Business
 Finance: the art and science of managing money.
 Two broad areas:

1. Financial Services: the design and delivery of
advice and financial products to individuals,
business and government.
2. Managerial Finance: the duties of the

financial manager in the business firm.
 Legal forms of business ownership:
 Sole Trader: A business owned by one person
and operated for his or her own profit
 Partnership: A business operated by two or

more people together for a profit.
 Corporation: An intangible business entity

created by law and is a separate ‘entity’ to its
owners.
 Strengths of the basic legal forms of business
organisation Table 1.1, page 6.
 Weaknesses of the basic legal forms of business
organisation Table 1.1, page 6.
 Career opportunities in managerial finance:
 Financial Analyst
 Capital Expenditure Manager
 Project Finance Manager
 Cash Manager
 Credit Analyst/Manager
 Pension Fund Manager
 Foreign Exchange Manager
The Managerial Finance
Function
 Organisation of the finance function:
 Is dependent upon the size of the organisation.
 In large organisations the CFO is assisted by
the:
 Treasurer: responsible for the firm’s financial
activities
 Controller: responsible for the firm’s
accounting activities.
Function
 Closely related to and often overlaps with two allied
fields:
 Economics
 Accounting
 Two key differences between accounting and

finance:
 Emphasis on cash flows
 Decision making
Function
 Emphasis on cash flows:
 Finance Managers: Focus is on cash flow and
maintaining solvency. [Accounts are prepared on
a cash basis]
 Accounting Managers: Focus is on financial

statement preparation and paying taxes.
[Accounts are prepared on an accruals basis]
Function
 Decision making:
 Financial Managers: evaluate the accounting
data and make decisions based on assessment
of the associated risk and returns.
 Accountants: focused on the collection and

presentation of financial data.
Function
 Primary activities of the financial manager
Page 12.
Goal Of The Firm
 Profit maximisation: taking only those actions that
are expected to make a major contribution to the
firm’s overall profit.
 Doesn’t take into consideration:

 Timing of returns
 Cash flows available to shareholders
 Risk
Goal Of The Firm
 Maximising shareholder wealth:
 The goal of the firm, its managers and
employees
 Measured by share price
Page 15.
Goal Of The Firm
 Challenges posed by wealth maximisation goal:
 Stakeholders: preservation of positive
stakeholder relationships, often associated with
“social responsibility”.
 Corporate Governance: ethical and responsible
governance to ensure sustainability.
 Ethics: Maintaining high ethical standards both
legally and morally.
 Agency Issue: Management’s personal goals
being placed before corporate goals.
Goal Of The Firm
 Minimising the agency problem:
 Market forces
 Agency costs
 Incentive plans: such as share options
 Performance plans: such as performance
shares and cash bonuses.
Financial Institutions and
Markets
 External funds can be sourced three ways:
1. Financial institutions
2. Financial markets
3. Private placement
Markets
 Financial Institutions:
 Intermediaries that channel the savings of individuals,
businesses and governments into loans or
investments.
 Many different types:
 Banks, building societies, credit unions
 Life insurance and finance companies
 Superannuation and pension funds
 Merchant banks
 Specialised government funding agencies etc
Markets
 Regulatory scene for financial institutions:
Page 22.
Markets
 Financial Markets:
 Forums in which suppliers of funds and
demanders of loans and investments can
transact directly.
 Two main financial markets:

 Money Market – short term debt instruments
or marketable securities
 Capital/Securities Market – long term
securities (shares, bonds etc)
Markets
 The money market:
 Created by a financial relationship between suppliers
and demanders of short term funds (maturities of
12mths or less)
 Transactions are generally made in marketable

securities such as:
 Treasury notes
 Commonwealth Bonds
 Commercial Bills
 Promissory Notes
Markets
 The money market:
 Suppliers and demanders are brought
together through mediums such as banks,
securities dealers.
 Two markets:
 Official
 Unofficial
Markets
 The capital market:
 A market that enables suppliers and demanders
of long term funds to make transactions via
forums provided by various securities exchanges.
 Trades bonds and shares (preference and

ordinary).
Business Taxes
 Goods and services tax (GST):
 Broad based consumption tax of 10% on most goods and services consumed in Australia.
 Is paid at each step in the supply chain, but ultimately by the consumer.

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PowerPoint

The role and

 Two broad areas:

2. Managerial Finance: the duties of the

 Partnership: A business operated by two or

 Corporation: An intangible business entity

 Two key differences between accounting and

 Accounting Managers: Focus is on financial

 Accountants: focused on the collection and

 Doesn’t take into consideration:

 Two main financial markets:

 Transactions are generally made in marketable

 Trades bonds and shares (preference and

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