Chapter 1

INTRODUCTION OF
FINANCIAL MANAGEMENT
 CHAPTER OBJECTIVES

 The role and objective of financial management

 The basic concept of cash flows in organization.
 Agency problems
 Organization of the financial management function and
career opportunities in this field of study
 The relationship between financial management and
other disciplines in a company and in the economy as a
whole.
 Legislative environment and financial environment of
financial managers.
 FINANCIAL MANAGEMENT

 Financial management involves activities

related to managing and allocating a firm’s
cash flows to achieve the firm’s goal.
CASH GENERATION PROCESS
 CASH FLOWS

The cash flows of company are divided by three

categories:
 Cash flows from operating activities: includes
all cash flows directly involving the production and
delivery of goods or service
 Cash flows from investment activities:
includes expenditures for (and proceeds from
dispositions of) assets intended to be used to
generate cash flows
 Cash flows from financing activities: include
cash received from (or returned to) capital
providers such as banks, other lending institutions,
and shareholders
OBJECTIVES OF FINANCIAL MANAGER

 The most widely accepted objective of

the firm is to maximize shareholder
wealth.
 It is important to recognize that the
maximization of shareholder wealth is a
market concept, not an accounting concept
DETERMINANTS AFFECT STOCK PRICE
 AGENCY PROBLEMS

 Agency relationship occurs when one of more

individuals (the principals) hire another
individual (the agent) to perform a service on
behalf of the principals.
 Inefficiencies that arise because of agency
relationships have been called agency
problems.
 AGENCY PROBLEMS

Stockholders and Managers

- The separation of ownership and control in
the modern corporation results in potential
conflicts between owners and managers.
Stockholders and Creditors
- Because the returns offered to creditors are
fixed whereas the returns to stockholders are
variable, conflicts may arise between creditors
and owners
FINANCIAL MANAGEMENT FUNCTION
FINANCIAL MANAGEMENT AND OTER
DISCIPLINES
 Accounting:
- Accountants and financial managements have
the strong relationship because they
concentrate in the field of “cash and cash
flows” of an organization.
- Accountant looks like the scorekeepers of
organization, the financial management is the
investors.
 FINANCIAL MANAGEMENT AND OTER
DISCIPLINES
Marketing, production, human resources:
Marketing, production, human resources
function influences the cash flows that is in the
field of financial management.
Microeconomics and maxcroeconomics:
Ttypical firm is heavily influenced by the overall
performance of the economy and is dependent
upon the money and capital markets for
investment funds.
FINANCIAL MANAGEMENT AND OTER
DISCIPLINES
FINANCIAL MANAGEMENT DECISIONS
PREPARATION FOR CLASS

 Review chapter 1 and chapter 2 in

Fundamentals of Financial Management, Van
Horne
 Read chapter 3 – Time value of money

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