LESSON 1 Flashcards
is the process of planning, organizing, directing, and controlling the financial resources of an organization.
Financial management
plays a critical role in the success of a company.
Financial Management
managing risk and ensuring that the company is not exposed to unnecessary financial risks.
Financial Management
- is a broad field that involves the study of how individuals, businesses, and organizations manage money and resources over time. It encompasses a wide range of activities, including investing, borrowing, lending, budgeting, and managing risk.
Finance
is an important field because it plays a crucial role in the functioning of the economy.
FINANCE
is concerned with the financial operations of a company, such as raising capital, making investment decisions, and managing financial risks.
Corporate Finance
corporations are responsible for analyzing financial data and making informed decisions about the use of company resources.
Financial Managers
is focused on managing an individual’s personal financial resources, such as income, expenses, and investments.
Personal Finance
includes various financial instruments such as stocks, bonds, derivatives, and other securities that are used to manage risk and return.
Finance
the study of financial markets, institutions, and systems, as well as financial regulations and laws.
Finance
Function of Financial Manager “Daily”
Daily:
cash management
(receipt and disbursement of funds) inventory control
short-term financing
foreign exchange hedging
Bank relations
Function of Financial Manager “Occasionally”
Occasionally:
intermediate financing bond issues
leasing
stock issues
capital budgeting dividend decisions forecasting
One of the primary goals of financial management is to maximize profits by increasing revenues and minimizing expenses.
Profit Maximization
Another important goal of financial management is to maximize the wealth of the shareholders. This involves increasing the share price and paying dividends to shareholders.
Wealth Maximization
Financial managers also need to manage financial risks by identifying and mitigating potential financial risks to the organization.
Risk Management
Financial managers must allocate capital effectively to ensure that it is used efficiently and that the organization can achieve its strategic goals.
Effective Capital Allocation
Financial managers must ensure that the organization’s financial operations are efficient and that resources are used effectively to minimize costs.
Efficient Operations
Financial managers must ensure that the organization is financially sustainable in the long term by making decisions that balance short-term profitability with long-term growth and stability.
Long-Term Sustainability
Goals of financial management
Profit Maximization
Wealth Maximization
Risk Management
Effective Capital Allocation
Efficient Operations
Long-Term Sustainability
Roles of Financial Management
Financial Planning
Financial Control
Financial Reporting
Risk Management
Capital Management
Compliance
This involves forecasting financial performance, analyzing financial data, and developing strategies to achieve financial targets.
Financial Planning
This involves monitoring financial performance, identifying areas for improvement, and implementing changes to optimize financial operations.
Financial Control
This involves analyzing financial data, preparing financial statements, and presenting financial information to stakeholders.
Financial Reporting
This involves developing risk management strategies, analyzing risk factors, and implementing risk mitigation measures.
Risk Management
This involves managing cash flows, investing capital in profitable projects, and raising capital through various financial instruments.
Capital Management
This involves staying up-to-date with regulatory changes, implementing compliance measures, and managing relationships with regulatory bodies.
Compliance
Functions of Financial Management:
Financial Planning
Budgeting
Financial Analysis
Financing
Investment decisions
Risk Management
Financial Reporting
involves the development of financial goals, objectives, and strategies that align with the organization’s overall strategic plan.
Financial Planning
Involves the development of a detailed financial plan that outlines the organization’s anticipated income, expenses, and capital expenditures over a specific period.
Budgeting
involves the interpretation and evaluation of financial data to assess the organization’s financial performance, identify trends, and make informed decisions about resource allocation.
Financial Analysis
involves the procurement of financial resources required to achieve the organization’s financial goals.
Financing
involve the allocation of financial resources to various projects or investments to generate returns.
Investment decisions
involves the identification, assessment, and mitigation of financial risks to the organization.
Risk management
involves the preparation and dissemination of financial information to stakeholders.
Financial reporting
Activities of Financial Management
1.Capital Budgeting
2. Capital Structure
3. Working Capital Management
is the process of evaluating and selecting long-term investment projects that involve significant expenditures of resources, such as money, time, and personnel.
Capital budgeting
The capital budgeting process typically involves the following steps:
Identifying potential investment projects
Evaluating the potential projects
Prioritizing the projects
Selecting the projects
Implementing and monitoring the projects
This can be done by brainstorming, market research, or other methods to generate a list of potential projects.
Identifying potential investment projects
This involves assessing each project’s potential profitability, risks, and other factors. Methods used to evaluate projects include net present value (NPV), internal rate of return (IRR), payback period, and profitability index.
Evaluating the potential projects
Once the potential projects have been evaluated, they can be ranked according to their potential return on investment, risk, or other criteria.
Prioritizing the projects
Based on the results of the evaluation and prioritization, the organization can choose which projects to pursue.
Selecting the projects
Once a project has been selected, it is implemented and monitored to ensure that it stays on track and achieves its goals.
Implementing and monitoring the projects
refers to the mix of debt and equity financing used by a business or organization to finance its operations and investment activities.
Capital Structure
key concepts related to capital structure
Debt Financing
Equity Financing
Leverage
cost of capital
capital structure
involves borrowing money from lenders such as banks, bondholders, or other financial institutions.
Debt financing
involves selling ownership shares in the company to investors such as shareholders or venture capitalists
Equity financing
refers to the use of debt financing to finance a company’s operations and investment activities.
Leverage
is the average cost of all sources of financing used by a company, including debt and equity.
Cost of capital
refers to the various models and frameworks used to determine the optimal mix of debt and equity financing for a company.
Capital structure theory
refers to the way a business or organization finances its short-term assets and liabilities. Working capital is the difference between a company’s current assets (such as cash, inventory, and accounts receivable) and its current liabilities (such as accounts payable and short-term loans
Working capital structure
Working Capital Structure
Current assets
Current liabilities
The working capital ratio
Working capital management
The cash conversion cycle
are assets that can be easily converted into cash within one year, such as cash, inventory, and accounts receivable
Current assets
are debts and obligations that are due within one year, such as accounts payable, short-term loans, and accrued expenses.
Current liabilities
(also known as the current ratio) is a measure of a company’s ability to meet its short-term financial obligations.
The working capital ratio
involves managing a company’s current assets and liabilities to ensure that it has enough cash and liquidity to meet its short-term obligations. This may involve strategies such as inventory management, accounts receivable management, and accounts payable management.
Working capital management
.is a measure of the time it takes for a company to convert its investment in inventory and accounts receivable into cash. It is calculated by subtracting the number of days of accounts payable from the sum of the number of days of inventory and accounts receivable.
The cash conversion cycle
