Financial Management
Yan Fu-hai
CPA, FPNA,Professor
Economics and Management School
Lanzhou University of Technology
Part One
Introduction to Financial Management
Learning Objectives
• Understand the definition of financial
management
• Know the target of financial management
• Describe function and tasks of financial
management
• Know Financial management system and
financial management environment
What is Financial management?
• At the macro level, finance is the study of financial
institutions and financial markets and how they
operate within the financial system in both the U.S.
and global economies.
• At the micro level, finance is the study of financial
planning, asset management, and fund raising for
businesses and financial institutions.
• Financial management can be described in brief using
the following balance sheet.
What is Financial management?
• A well-developed financial system is a hallmark and
essential characteristic of any modern developed
nation.
• Financial markets, financial intermediaries, and
financial management are the important components.
• Financial markets and financial intermediaries
facilitate the flow of funds from savers to borrowers .
• Financial management involves the efficient use of
financial resources in the production of goods.
What is Financial management?
Macro
Finance
Working
Capital
ABC Company
Balance Sheet
As of December 31, 19xx
Assets:
Liabilities & Equity:
Current Assets
Current Liabilities
Cash & M.S.
Accounts payable
Accounts receivable
Notes Payable
Inventory
Total Current Assets
Fixed Assets:
Investment
Decisions
Gross fixed assets
Total Current Liabilities
Long-Term Liabilities
Total Liabilities
Equity:
Less: Accumulated dep.
Common Stock
Goodw ill
Paid-in-capital
Other long-term assets
Retained Earnings
Total Fixed Assets
Total Assets
Working
Capital
Total Equity
Total Liabilities & Equity
Financing
Decisions
What is Financial management
• Some important questions that are answered
using finance
– What long-term investments should the firm take
on?
– Where will we get the long-term financing to pay
for the investment?
– How will we manage the everyday financial
activities of the firm?
1-7
What is Financial management
• Financial managers try to answer some or all
of these questions
• The top financial manager within a firm is
usually the Chief Financial Officer (CFO)
– Treasurer – oversees cash management, credit
management, capital expenditures and financial
planning
– Controller – oversees taxes, cost accounting,
financial accounting and data processing
1-8
Financial Management Decisions
• Capital budgeting
– What long-term investments or projects should the
business take on?
• Capital structure
– How should we pay for our assets?
– Should we use debt or equity?
• Working capital management
– How do we manage the day-to-day finances of the
firm?
1-9
Forms of Business Organization
• Three major forms in China
– Sole proprietorship
– Partnership
• General
• Limited
– Corporation
• S-Corp
• Limited liability company
1-10
Sole Proprietorship
• Advantages
– Easiest to start
– Least regulated
– Single owner keeps all
the profits
– Taxed once as personal
income
1-11
• Disadvantages
– Limited to life of owner
– Equity capital limited to
owner’s personal wealth
– Unlimited liability
– Difficult to sell
ownership interest
Partnership
• Advantages
–
–
–
–
1-12
Two or more owners
More capital available
Relatively easy to start
Income taxed once as
personal income
• Disadvantages
– Unlimited liability
• General partnership
• Limited partnership
– Partnership dissolves
when one partner dies or
wishes to sell
– Difficult to transfer
ownership
Corporation
• Advantages
– Limited liability
– Unlimited life
– Separation of ownership
and management
– Transfer of ownership is
easy
– Easier to raise capital
1-13
• Disadvantages
– Separation of ownership
and management
– Double taxation (income
taxed at the corporate
rate and then dividends
taxed at the personal rate)
Goal Of Financial Management
• What should be the goal of a corporation?
–
–
–
–
Maximize profit?
Minimize costs?
Maximize market share?
Maximize the current value of the company’s
stock?
• Does this mean we should do anything and
everything to maximize owner wealth?
1-14
The Agency Problem
• Agency relationship
– Principal hires an agent to represent his/her interest
– Stockholders (principals) hire managers (agents) to
run the company
• Agency problem
– Conflict of interest between principal and agent
• Management goals and agency costs
1-15
Managing Managers
• Managerial compensation
– Incentives can be used to align management and
stockholder interests
– The incentives need to be structured carefully to
make sure that they achieve their goal
• Corporate control
– The threat of a takeover may result in better
management
• Other stakeholders
1-16
Work the Web Example
• The Internet provides a wealth of information
about individual companies
• One excellent site is finance.yahoo.com
• Click on the web surfer to go to the site,
choose a company and see what information
you can find!
1-17
Corporate Organization
The Managerial Finance Function
• The size and importance of the managerial
finance function depends on the size of the firm.
• In small companies, the finance function may be
performed by the company president or
accounting department.
• As the business expands, finance typically
evolves into a separate department linked to the
president.
The Managerial Finance Function
Relationship to Economics
• The field of finance is actually an outgrowth of
economics.
• In fact, finance is sometimes referred to as financial
economics.
• Financial managers must understand the economic
framework within which they operate in order to react or
anticipate to changes in conditions.
The Managerial Finance Function
Relationship to Economics
• The primary economic principal used by financial
managers is marginal analysis which says that
financial decisions should be implemented only when
benefits exceed costs.
The Managerial Finance Function
Relationship to Accounting
• The firm’s finance (treasurer) and accounting
(controller) functions are closely-related and
overlapping.
• In smaller firms, the financial manager generally
performs both functions.
The Managerial Finance Function
Relationship to Accounting
• One major difference in perspective and emphasis
between finance and accounting is that accountants
generally use the accrual method while in finance, the
focus is on cash flows.
• The significance of this difference can be illustrated
using the following simple example.
The Managerial Finance Function
Relationship to Accounting
• The Zasloff Corporation experienced the following
activity last year:
Sales:
$100,000 (50% still uncollected)
Cost of Goods:
$ 60,000 (all paid in full under
supplier terms)
Expenses:
$ 30,000 (all paid in full)
• Now contrast the differences in performance under the
accounting method versus the cash method.
The Managerial Finance Function
Relationship to Accounting
INCOME STATEMENT SUMMARY
ACCRUAL
Sales
$100,000
-COGS
(60,000)
Gross Margin
$ 40,000
-Expenses
(30,000)
Net Profit/(Loss)
$ 10,000
CASH
$ 50,000
(60,000)
$(10,000)
(30,000)
$(40,000)
The Managerial Finance Function
Relationship to Accounting
• Finance and accounting also differ with respect to
decision-making.
• While accounting is primarily concerned with the
presentation of financial data, the financial manager is
primarily concerned with analyzing and interpreting this
information for decision-making purposes.
• The financial manager uses this data as a vital tool for
making decisions about the financial aspects of the
firm.
Thanks for Your Attention