The Goals and Functions of Financial Management Chapter 1 The Goals and Functions of Financial Management

PPT 1-1 FIGURE 1-1 Functions of the financial manager

Chapter 1 - Outline LT 1-1 Definition of Finance Short-Term vs. Long-Term Financing Decisions Risk-Return Trade-Off Financial vs. Real Capital Stocks vs. Bonds Forms of Organization Goals of Financial Management

Finance Is a Combination of Accounting and Economics LT 1-2 Financial Management (or Business Finance) is concerned with managing a corporation’s money For example, a company must decide: –where to invest its money – whether or not to replace an old asset – when to issue new stocks and bonds – whether or not to pay dividends

Short-Term vs. Long-Term Financing LT 1-3 Working Capital is concerned with short-term (S/T) financing decisions <1 year ex., managing cash and other current assets Capital Budgeting is concerned with long-term (L/T) financing decisions >1 year ex., purchasing a new machine in the future

The Risk-Return Tradeoff LT 1-4  Profitability   Risk  Profitability   Risk ex., investing in stocks vs.savings accounts Stocks are more profitable but riskier Savings accounts are less profitable and less risky (or safer) Financial manager must choose appropriate combinations

Financial capital vs. Real capital LT 1-5 Financial Capital (or Accounting Capital) = money Real Capital (or Economic Capital) = plant and equipment

Stocks vs. Bonds LT 1-6 Stock = ownership or equity Stockholders own the company Bond = debt or IOU Bondholders are owed $ by company

Forms of Organization LT 1-7 Sole Proprietorship (one owner) - largest in actual number but smallest in total sales revenue Partnership (two or more owners) Corporation (legal entity unto itself) - smallest in actual number but largest in total sales revenue

Goals of Financial Management LT 1-8 Maximizing Shareholder Wealth Corporate Social Responsibility Ethical Behavior