An Overview of Financial Management
Class Objectives
Read, interpret, and analyze financial reports
 Manage working capital and profits
 Understand the importance of growth
 Know how to finance growth

Class Objectives cont.
Sources, types, and costs of capital
 Risk, reward, and value creation
 Investment analysis
 Structure and negotiate a new hospitality venture

Hospitality Financial Challenges
A multi-faceted industry
Low profitability
Fluctuating sales volume
Labor intensive
Capital intensive
Reliance on discretionary incomes
What is Finance?

money or other liquid resources of a
government, business, group, or
individual
 the system that includes the circulation of
money, the granting of credit, the making
of investments, and the provision of
banking facilities
What is Finance?

the science or study of the management
of funds
 the obtaining of funds or capital
Areas in Finance

Markets and institutions
– Money market & Capital market
– Financial institutions; Banks, Insurance
company, Finance company etc.
 Investment
– Decision making of investors
 Financial management
– Maintenance and creation of economic value
or wealth
Financial Management
Issues

Use of computers and electronic transfers
of information
 The globalization of business
Responsibilities of the Financial Staff

Forecasting and planning
 Investment and financing decisions
 Coordination and control
 Transactions in the financial markets
 Risk management
Alternative Forms of
Business Organization
 Sole
proprietorship
 Partnership
 Corporation
Sole Proprietorship

Advantages:
– Ease of formation
– Subject to few regulations
– No corporate income taxes

Disadvantages:
– Limited life
– Unlimited liability
– Difficult to raise capital
Partnership

A partnership has roughly the same
advantages and disadvantages as a sole
proprietorship.
Corporation
 Advantages:
– Unlimited life
– Easy transfer of ownership
– Limited liability
– Ease of raising capital
 Disadvantages:
– Double taxation
– Cost of set-up and report filing
Goals of the Firm
The primary goal is shareholder wealth
maximization, which translates to
maximizing stock price.
Do firms have any responsibilities to
society at large?
Is stock price maximization good or
bad for society?
Should firms behave ethically?
Possible financial Goals
Survive
Avoid financial distress and
bankruptcy
Beat the competition
Maximize sales or market share
Minimize costs
Maximize profits
Maintain steady earnings growth
The Goal of financial management

is to maximize the current value per
share of the existing stock
 Because we consider stockholders of the
firm are true owner.
Factors Influenced by Managers
that Affect Stock Price

Projected earnings per share
 Timing of the earnings stream
 Riskiness of the earnings stream
 Use of debt (capital structure)
 Dividend policy
Ten Axioms that Form the Basics of
Financial Management
1. The Risk- Return Tradeoff: We won’t
take on additional risk unless we expect to
be compensated with additional return
2. The time value of money: A dollar
received today is worth more than a dollar
received in the future.
3. Cash-not profits- is King.
4. Incremental cash flow: It’s only what
changes that counts.
Ten Axioms that Form the Basics of
Financial Management
5. The curse of competitive markets: Why it’s
hard to find exceptionally profitable projects.
– Differentiate products
– Minimize cost
6. Efficient capital market: The markets are
Quick and the prices are right.
7. The Agency problem: Managers won’t work
for the owners unless it’s in their best interest.
Ten Axioms that Form the Basics of
Financial Management
8. Tax bias business decisions
9. All risk is not equal: Some risk can be
diversified away, and some can not.
10.Ethical behavior is doing the right thing,
and Ethical dilemmas are everywhere in
finance.
Business Ethics

Bribery
 Personal gain
 Insider information
 Product safety
 Employee practices
Agency Relationships

An agency relationship exists
whenever a principal hires an
agent to act on his or her behalf.

Within a corporation, agency
relationships exist between:
– Shareholders and managers
– Shareholders and creditors
Shareholders versus Managers

Managers are naturally inclined to act in
their own best interests.
 But the following factors affect
managerial behavior:
–
–
–
–
Managerial compensation plans
Direct intervention by shareholders
The threat of firing
The threat of takeover
Shareholders versus Creditors

Shareholders (through managers) could
take actions to maximize stock price -high
risk project for higher returns- that are
detrimental to creditors.

Creditors has bankruptcy threat.

In the long run, such actions will raise the
cost of debt(when a company takes part in
more risky business) and ultimately lower
stock price (while risk has been increased
dramatically).