AE 19 - Introduction to Financial Management
Financial Management - is the practice of making a business plan and then ensuring all departments stay on track.
Financial Management enables CFO or VP for Finance to provide data that:
• supports creation of long-range vision
• informs decision where to invest
• yields insights on how to fund investments
• shows the liquidity and profitability of the company
Financial Management’s Concerns:
• raising
• allocating
• controlling
Firm’s Goal (POV of Finance People)
- to maximize the wealth of its common stockholders through the value of its common stock.
Profit Maximization vs. Stockholders’ Wealth Maximization
A. Goal: Profit Maximization
Objective: obtain large amounts of profits
1. Calculating profit is easy
2. Determining the link between financial decisions and profits is simple
B. Goal: Shareholders’ Wealth Maximization
Objective: achieve highest market value of common stock
1. The long term is emphasized
2. Risk or uncertainty is recognized
3. The timing of the return is taken into account
4. Stockholders’ return is considered
Financial Managers - responsible for the financial health of an organization. They create financial reports, direct
investment activities, and develop plans for the long-term financial goals of their organization.
Responsibilities of a Finance Manager
• Producing accurate financial reports and information
• Developing cash flow statements
• Projecting profit
• Managing credit
• Providing advice in making financial decisions
• Directing investments
• Making financial forecasts
• Budgeting
• Managing risk of financial loss
Agency Theory - poses a potential conflict of interest between the stockholders and the managers.
Misconceptions about Financial Management
1. Financial Management is accounting.
2. Financial Management is a review of Mathematics.
3. Financial Management is a branch of statistics.
