I NTRODUCTION TO F INANCE
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INSTRUCTOR:
MICHAEL EFFAH ASAMOAH

L ECTURE 1
T HE R OLE AND F UNCTIONS OF F INANCIAL
M ANAGEMENT
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By the end of the lecture students should be able to:
Explain the importance of the financial managers role.
Describe financial management from the perspective of the three decision areas facing the financial manager.
Identify the goals of the firm and understand why shareholder’s wealth maximisation is preferred over other goals.
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To engage in most kinds of business activities one needs assets . These may be tangible or intangible.
 The process of firms raising funds to acquire these assets is described as making financing and asset acquisition decisions.
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Public finance is concerned with how governments raise revenues to undertake projects that are of interest to the general public . Here too, the authorities must decide how to raise funds for the project: increase general taxes, tax only a few, sell state assets.
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Whether in business or in government, decisions must be made which largely borders on finance eg, which assets or projects to invest in.
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Naturally for a business, one would like to invest in projects that will generate higher payoffs than they cost . (It is logical to express these payoffs in monetary terms).
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The process of deciding which projects are worthwhile to invest in is described as project appraisal or making capital budgeting or investment decision .
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To the extent that funds are misallocated, the growth of the firm will be slowed.
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Thus in every business organization, efficient allocation of resources is very vital for the optimal growth of the firm.
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For public finance, the payoffs may not be monetary . Rather, investments are made with the view to providing certain necessities to the general public.
 Efficient allocation of public resources will ensure that the populace obtain the highest satisfaction level of personal wants.
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To the extent funds are misallocated in the case of public finance, the growth of the economy will be on the decline.
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Thus an understand the tenets of financial management is very vital for both firms and government.
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Now, because economic resources are limited, a judicious decision must be made in respect of the kind of expenditures that must be made . Such decisions could be improved if decision makers understand the role of financial management in business.
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Financial Management covers all the activities directed at ensuring that financial resources both short and long term are obtained and used in the most efficient and effective way to achieve organizational objectives.
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It can also be viewed as the management of all the processes associated with the efficient acquisition and deployment of both short and long term financial resources to achieve organizational objectives.
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In consequence, financial management is concerned with key decision making functions of an organization.
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D ECISION A REAS OF F INANCIAL M ANAGEMENT
( F UNCTIONS OF THE F INANCE M ANAGER )
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Investment Decisions
This is the process of determining whether a proposed project is worth undertaking and allocating resources among viable projects.
The Finance manager is therefore expected to b abreast with the various techniques regarding project evaluation
Financing Decisions
The decisions includes championing the raising of finances that are required to undertake proposed and accepted projects .
Decisions concerning the mix of debt and equity.
The overriding consideration is to reduce cost of capital and minimize risk of operations.
One the mix is determined, the financial manager must determined how to physically get the funds. Short term loan arrangements, sale of bonds, long term lease agreements are the few ways.
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D ECISION F UNCTIONS OF F INANCIAL M ANAGEMENT
Asset (Working Capital) Management
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Once assets have been acquired through the appropriate financing, they need to be efficiently managed . The financial manager is charged with the responsibility over all the firm’s assets.
 Financial management is to ensure that the level of operating assets (Debtors,
Stocks, Cash, Creditors) are sufficient to meet the day-to-day working capital needs of the company.
 Thus the management of current assets are fundamental to the financial mger.
Dividend Decisions
 Linked to the firm’s financing decisions, thorough financial mgt. requires that appropriate advice is given on a dividend policy that will help enhance share holder value.
 A good dividend payout ratio should balance against the opportunity cost of their investment.

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Acquisition Decisions
The strategy of mergers and acquisitions and the external growth of the firm are key finance functions .
The finance manager is expected to be conversant with valuation methods.
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The above decisions or functions which cover the entire activities of finance are necessary in fulfilling both the financial and non financial objectives of the firm
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T HE G OAL / O BJECTIVES OF THE F IRM
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The objectives of the firm are both financial and non-financial .
Financial Objectives
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Financial objectives can be viewed from two (2) perspectives:
 The Shareholders’ view
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Other stakeholder’ view
The shareholders’ view
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For a profit making entity the strategic objective should be centered on profit-maximization, translated into wealth maximization.
Shareholders wealth is measured by dividend received each year and partly by capital gains arising from increase in share price over the holding period
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G OALS OF THE FIRM
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Other Stakeholders’ view
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These are people who form part of the business equations are:
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Employees – Employees will certainly press-home their demand for increased salary and compensation packages
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Suppliers – Suppliers will be interested in prompt payment for their supplies and shy away from companies which are not committed to debt settlement
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Government - The Government will be interested in prompt payment of taxes and levies

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Non-Financial Objectives.
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There are some objectives that the firm must aspire to achieve if it wants to stay in business, although these are not financial they are necessary. These include:
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Growth
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Survival
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Providing top quality service to customers
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Maintaining respect for the environment
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Strong and contended workforce 15

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Agency theory is a branch of economics and behavioral finance that relates to the nature of the behaviour of principals and their agents .
 Shareholders own the company by providing capital and managers run and control the company on a day-to-day basis. This automatically creates agency relationship, where managers become the agents of the shareholders .
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However, owners run the risk that managers may look after their own interest at the expense of owners who provide the funds.
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As a result of separation ownership from control , managers are in a better position to pursue their own interest at the expense of shareholders,
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The agency problem will be eliminated if shareholders can observe all actions of managers
But this will be expensive!
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Examples of agency problems: to increase job security, managers may seek to build a huge empire to make hostile takeover less likely.
This also
Increases managers’ power, status and salary
Ensures more pecks, allowances, etc.
To reduce the risk that they face, principals bear certain costs to ensure or encourage agents to act in interest of principals.
We call these agency costs!
Examples of Agency costs: Expenditure to monitor managerial actions such as audit costs , appointing external people onto the board of directors and paying
17 them , Insistence on elaborate corporate governance mechanisms

A CHIEVING G OAL C ONGRUENCE
Comprehensive reporting requirements
Auditing
Limits on management power
Stock options
Bonuses
Improved working conditions
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C ORPORATE S OCIAL R ESPONSIBILITY
Economic
• businesses have a responsibility to produce both public and private goods that society wants for a profit
Legal
• Businesses have a responsibility to comply with law
Ethics
• Businesses have a responsibility to exhibit behaviour beyond the requirements of the law
Discretionary
• Businesses should exhibit voluntary roles driven by societal norms
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The separation of ownership (shareholders) and control (managers) may result in a number of conflicts of interest between managers and shareholders.
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As we have already stated, conflicts of interest can also arise that affect creditors as well as other stakeholders such as suppliers and employees.
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In order to remove or at least minimize such conflicts of interest, corporate governance structures have been developed and implemented in most companies .
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W HAT IS C ORPORATE G OVERNANCE ?
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Corporate Governance refers to the system by which companies are managed and controlled.
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It encompasses the relationship among a company’s shareholders board of directors and senior management .
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These relationships provide the framework within which corporate objectives are set and performance is monitored.
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Specifically, corporate governance is the system of principles, policies procedures and clearly defined responsibilities and accountabilities used by stakeholders to overcome conflicts of interest inherent in the
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C ORPORATE G OVERNANCE – K EY P LAYERS
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Three categories of individuals that are key to the success of corporate governance:
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The common shareholders who elect board of directors
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The company’s board of directors
The top executives led by the CEO.
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The failure to establish an effective system of corporate governance represents a major operational risk to the company and its investors.
Corporate governance deficiencies may even imperil the continued existence of a company.
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C ORPORATE G OVERNANCE – K EY P LAYERS
Shareholders
Management
Team
Board of
Directors
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O BJECTIVES OF C ORPORATE G OVERNANCE
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The modern company is subject to a variety of conflict of interest This fact leads to the following two major objectives of corporate governance:
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To eliminate or mitigate conflicts of interest particularly those between managers and shareholders , and
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To ensure that the assets of the company are used efficiently and productively and in the best interests of investors and other stakeholders.
How can a company achieve these objectives?
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A company should have a set of principles and procedures sufficiently comprehensive to be called a corporate governance system.
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O BJECTIVES OF C ORPORATE G OVERNANCE
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It should be noted that no single system of effective corporate governance applies to all firms in all industries worldwide .
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Different industries and economic systems, legal and regulatory environments, and cultural differences may affect the characteristics of an effective corporate governance system for a particular company.
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However, there are certain characteristics that are common to all sound corporate governance structures.
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A TTRIBUTES OF C ORPORATE G OVERNANCE
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The core attributes of an effective corporate governance system are:
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Delineation of the rights of shareholders and other core stakeholders;
Clearly defined manager and director governance
responsibilities to shareholders;
Identifiable and measurable accountabilities for the performance of the responsibilities ;
Fairness and equitable treatment in all dealings between managers, directors and shareholders; and
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A TTRIBUTES OF C ORPORATE G OVERNANCE
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Complete transparency and accuracy in disclosures regarding operations, performance, risk, and financial position.
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These core attributes form the foundation for systems of good governance, as well as for the individual principles embodied in such systems.
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Investors and analysts should determine whether companies in which they may be interested have these core attributes.
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B OARD OF D IRECTORS
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Board of directors are a critical part of the system of checks and balances that lie at the heart of corporate governance.
They represent the firms owners and consists of insiders, related outsiders and outsiders . Board members both individually and as a group, have the responsibility to:
Establish corporate values and governance structures for the company to ensure that the business is conducted in an ethical, competent fair and professional manner .
Ensure that all legal and regulatory requirements are met and complied with fully and in a timely fashion .
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Review and ratify important decisions.

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B OARD OF D IRECTORS
Establish long-term strategic objectives for the company with the goal of ensuring that the best interest of shareholders comes first and that of other stakeholders are also met .
Establish clear lines of responsibility and a strong system of accountability and performance measurement in all phases of the company’s operations.
Hire the CEO, determine the compensation package and periodically evaluate the officer’s performance
Meet frequently enough to adequately to perform its duties, and meet in extraordinary sessions where necessary.
Ensure the mgt. has supplied the board with sufficient information in order to make informed decisions.
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E NHANCING B OARD E FFECTIVENESS
More diversity in the backgrounds of board members.
A board should be composed of a least a majority of independent members with the autonomy to act independently of management.
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Stronger internal management and accounting control systems .
There should also be internal mechanisms to support the independent work of the board such as the authority to hire outside consultants without mgt.’s intervention or approval.
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More formal processes to evaluate the board’s performance rather than using the absolute end of term of office.
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Board members should have appropriate experience and expertise relevant to the company’s business . Some businesses may require
30 specialized members as part of the board.

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CEO / MD
Deputy MD
- Operations
Deputy MD
- Finance
Controller Treasure 31