Financial Management

Lecture # 1
The Role of Financial Management
Key Discussion Points
• Introduction
• What is Financial Management?
• The Goal of the Firm
• Organization of the Financial Management Function
• Need for International Financial Management
Introduction
• Initially (1900’s), financial managers primarily raised funds and
managed their firms’ cash positions
• Present Value concepts expanded their responsibilities and to
become concerned with the selection of capital investment projects
• Today, external factors have an increasing impact on the role of
financial manager i.e.
• Heightened corporate competition • Fluctuating exchange rates
• Technological change • Tax law changes
• Volatility in inflation and interest rates • Environmental issues
• Worldwide economic uncertainty • Ethical concerns over dealings
What Is Financial Management?
Financial management is concerned with the acquisition (investment),
financing, and management of assets with some overall goal in mind
• Investment Decision: Determination of the total amount of assets
needed to be held by the firm (Assets at firm’s balance sheet)
Assets that can no longer be economically justified may need to be reduced,
eliminated, or replaced
• Financing Decision: Determination of the other side of balance sheet
(Liabilities and Equities at firm’s balance sheet)
Dividend policy must be viewed as a vital part of the firm’s financing decision
• Asset Management Decision: After appropriate acquisition and
financing, these assets must still be managed efficiently (Operations)
 The Goal of the Firm
• Although various objectives (goals) are possible, however the key goal of
a firm is to maximize the wealth of the firm’s present owners
• Shares of common stock give evidence of ownership in a corporation
• Shareholder wealth is represented by the current stock price, which is
reflection of the firm’s decisions (investment, financing, and asset management)
Value Creation: Profit maximization is known as the proper objective of
the firm (Firm Performance)
• Earnings per share (EPS) is often advocated as proxy of profit maximization

• Other measures of valuation are ROI, ROA and operating performance (EBIT)
The Goal of the Firm (Cont.)
Agency Problems: The separation of ownership and control in the modern corporation
results in potential conflicts between owners and managers
• The objectives of management may differ from shareholder
• It can create a situation in which management may act in its own best interests rather than those of the
shareholders
• We may think of management as the agents of the owners (shareholders)
• Jensen and Meckling developed a comprehensive theory of the firm under agency
arrangements (Agency theory)
“the shareholders, can assure themselves that the agents will make optimal decisions
only if appropriate incentives are given and only if the agents are monitored”
• Incentives include stock options, bonuses, and perquisites (i.e. Car, Office)
• Monitoring by systematically reviewing management perquisites, auditing financial
statements, and limiting management decisions
The Goal of the Firm (Cont.)
Corporate Social Responsibility (CSR): Management is responsible for
maximizing shareholder wealth by keeping CSR in balance.
CSR activities such as:
• Protecting the consumer
• Paying fair wages to employees
• Maintaining fair hiring practices
• Safe working conditions
• Supporting education
• Dealing with environmental issues as clean air and water
Organization of the Financial
Management Function
• It is important to understand the role
that financial management plays in
the operations of the firm (Any type)
• Figure 1.1 is an organization chart for
a typical manufacturing firm that
gives special attention to the finance
function
• The controller’s responsibilities are
primarily accounting in nature
• The treasurer’s responsibilities fall
into the decision areas most
commonly associated with financial
management