Arzu AKŞAHİN
201442810
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What is Financial Management?
The Goal of the Firm
Corporate Governance
Organization of the Financial Management Function
1.1. Important Notions

Finance is the money, funds or capital that individual or
corporate can benefit.

Financing is the act or the process of providing these
money, funds or capital.

Financial Management is the process which includes the
determination of the capital needed by the firm,
the
providing of this capital and the
effective use of this
capital.
1.2. Historical of Financial Management

Financial management has emerged as an independent
discipline in the early 20th century.

Until this date, financial management was accepted as a
field of economics.

During these years, it was expected that financial
management mainly provides source of funds.
1.2. Historical of Financial Management

But, with the Great Depression in 1929, bankruptcies happened
and all this chaos gave a new perspective to economic and
especially to financial management.

From this date, what is expected from financial management was
not simple as the former.

Bankruptcies showed that providing assets were not sufficient if
the firms wanted to be able to continue their existence.

Besides financing policy, investment and dividend policy should
also be heeded.
1.3. Financial Management and Decisions

Definition of financial management today accepted:
Financial management deals with “the acquisition,
financing and management of assets with some
overall goal in mind” (Van Horne).

This definition refers to the managerial finance functions:
 Investment Decision
 Financing Decision
 Asset Management Decision
1.3. Financial Management and Decisions

Investment Decision is the process in which the firm chooses the most appropriate area
of investment with scarce resources. It concerns how distribute the assets between short
and long-term assets.
Long-term proposal brings some uncertainties and so some risks.
Investment decision must evaluate the balance between the risks and the returns.

Financing Decision is also known as capital structure decision. It allows to determine
the sources of funds. The sources of long-term funds include equity capital and debt
capital. A particular combination of debt and equity may be more beneficial and
financial management decides about the optimal proportions.

Asset Management Decision is about the efficient management of the assets, once they
have been acquired and appropriate financing provided. Varying degrees of operating
responsibility is the charge of the financial manager. The financial manager should be
more concerned with the management of current assets than fixed assets.

Financial management is a goal-oriented activity.

Concerning the nature of the goal, there are two different
approaches:
 Profit Maximization
 Shareholders’ Wealth Maximization
2.1. Profit Maximization

It has long been the traditional and narrow approach. It
consists on maximizing a firm’s earning after taxes.

But, it fails for a number of reasons:
 It is vague, profit is not defined precisely or correctly.
 It ignores the timing or duration of expected returns.
 It does not consider the risk.

Sometimes earning per share maximization is cited as a
version of profit maximization.
It deals with earning after taxes divided by the number of
common shares outstanding.
2.2. Shareholders' Wealth Maximization

With latest innovations and improvements, it is one of the modern
approaches accepted today.

Here, the goal is to maximize the wealth of the shareholders for
whom the firm is managed;
In another words, to increase the current net value of business or
shareholder capital gains, with the objective of bringing in the
highest possible return.

It is a long term goal.
It considers both time of returns and risk.
2.3. Agency Theory

It is important to be careful because sometimes ownership-management controversy may
appear.

The desires or goals of the principal and manager may be in conflict, and the principal may be
unable to verify (because it difficult and/or expensive to do so) what the manager is actually
doing.
The principal and manager may have different attitudes towards risk. Because of different risk
tolerances, the principal and manager may each be inclined to take different actions.

An agency theory is founded to prevent it.

Agency theory is concerned with resolving problems that can exist in agency relationships;
between shareholders and board of directors for example.
3.1. Definition of Corporate Governance

It is a set of rules with which organizations are directed
and controlled.

Companies are owned by the shareholders but run by the
board directors.

Corporate governance ensures that the company is run in
the interests of the shareholders.
3.2. Historical of Corporate Governance

It emerged in the 1990’s. The reasons of this emergence are
financial crisis and especially corporate scandals.

Enron is a company of US energy sector and it was causing the
biggest financial scandal of the last 20 years.
For a time, Enron was considered by the press and financial
analysts as a new model of management.
In fact, the company artificially inflated its profits and masked its
deficits. It ends with a bankruptcy.
Its goal was to inflate the market value.
3.2. Historical of Corporate Governance

This case led to new laws and accounting rules, such as SarbanesOxley Act and the new accounting rules IAS and IFRS.

Sarbanes- Oxley Act of 2002 introduced the regulation of financial
practice and corporate governance.
 It imposed new penalties for violations of securities law.
 It established the Public Company Accounting Oversight Board
(PCAOB).
It is a non-profit corporation. Its goal is to adopt auditing,
quality control, ethics and disclosure standards.
3.3. Principles of Corporate Governance

Corporate governance primary pillars are fairness,
accountability, responsibility and transparency.
 Fairness: The company applies the principle of equal treatment to all
rights owners.
 Accountability: The board of directors should give an explanation or
reason for each action and conduct.
 Responsibility: The company should develop codes of ethical conduct
for their directors.
 Transparency: The company should deliver as many information as
possible to the public and shareholders.
Stockholders
Board of Directors
President (CEO)
Vice- President
Manufacturing
Vice- President
Finance (CFO)
Treasurer
•Capital Budgeting
•Cash Management
•Credit Management
•Dividend Disbursement
•Fin Analysis/Planning
•Pension Management
•Insurance/Risk Management
•Tax Analysis/Planning
Vice- President
Marketing
Controller
•Cost Accounting
•Cost Management
•Data Processing
•General Ledger
•Government Reporting
•Internal Control
•Preparing Fin Statements
•Preparing Budgets
•Preparing Forecasts
Charreaux, G. (2006). Théorie Financiere et Stratégie Financiere . Lavoisier , 109-137.
Cohen, E. (1991). Gestion Financiere de l'Entreprise et Développement Financier . Vanves: UREF.
Gitman, L. J. (1991). Principles of Managerial Finance. New York : Harper Collins .
Joumard, R. (2009). Le Concept de Gouvernance. Bron: INRETS.
Paramasivan, C., & Subramanian, T. (2008). Financial Management . New Age.
The 107th United States Congress (2002, July 30). Sarbanes-Oxley Act. Public Law 107–204, 116 stat.
745 . United States.
Van Horne, J. C. (1974). Financial Management and Policy . London : Prentice Hall.
Van Horne, J. C., & Wachowicz, J. M. (2008). Fundamentals of Financial Management . London :
Prentice Hall.