1 1 Chapter The Goals and Functions of Financial Management G. M. Wali Ullah Lecturer Independent University, Bangladesh

A RT AND S CIENCE OF RAISING AND TRANSFERRING FUNDS / MANAGING MONEY A RT AND S CIENCE OF RAISING AND TRANSFERRING FUNDS / MANAGING MONEY S CIENCE THAT DESCRIBES THE MANAGEMENT, CREATION AND STUDY OF MONEY, BANKING, CREDIT, INVESTMENTS, ASSETS AND LIABILITIES. S CIENCE THAT DESCRIBES THE MANAGEMENT, CREATION AND STUDY OF MONEY, BANKING, CREDIT, INVESTMENTS, ASSETS AND LIABILITIES.

A business owned by one person Freedom Freedom Simplicity Low Start Up Costs Tax Benefits UnlimitedLiability Lack of Continuity Lack of Continuity Difficulty in Raising Money Reliance on One Person Reliance on One Person Advantages Disadvantages Forms of Organization: Sole Proprietorships

Greater Talent Pool Greater Talent Pool More Capital Ease of Formation Ease of Formation Tax Benefits Unlimited Liability Unlimited Liability Lack of Continuity OwnershipTransferDifficult Possibility of Conflict A business venture with two or more owners A business venture with two or more owners Advantages Disadvantages Disadvantages Forms of Organization: Partnerships

Limited Liability Limited Liability Continuity Continuity Greater Likelihood Greater Likelihood of Professional of Professional Management Management Easier Access to Easier Access to Money Money Potential Shareholder Revolts Revolts Higher Start-Up Costs Costs Regulation Double Taxation Double Taxation A corporation is a separate legal entity Advantages Disadvantages Forms of Organization: Corporations A corporation is owned by shareholders

Public and Private Corporations  P UBLIC CORPORATIONS ’ SHARES ARE AVAILABLE FOR PURCHASE ON THE MARKET FOR THE GENERAL PUBLIC  T HE SHARES IN A PRIVATE CORPORATION ARE HELD BY A SMALL GROUP OF INDIVIDUALS AND ARE NOT SOLD TO THE PUBLIC

Earnings Per Share AlternativesYear 1Year 2Total A $1.50$2.00$3.50 B $2.00$1.50$3.50

The Goals of Financial Management

E XAMINES THE RELATIONSHIP BETWEEN THE OWNERS AND THE MANAGERS OF THE FIRM. E XAMINES THE RELATIONSHIP BETWEEN THE OWNERS AND THE MANAGERS OF THE FIRM. I N PRIVATELY OWNED FIRMS, MANAGEMENT AND OWNERS ARE USUALLY THE SAME PEOPLE. M ANAGEMENT /O WNERS OPERATES THE FIRM TO SATISFY ITS OWN GOALS, NEEDS, FINANCIAL REQUIREMENTS, AND THE LIKE. I N PRIVATELY OWNED FIRMS, MANAGEMENT AND OWNERS ARE USUALLY THE SAME PEOPLE. M ANAGEMENT /O WNERS OPERATES THE FIRM TO SATISFY ITS OWN GOALS, NEEDS, FINANCIAL REQUIREMENTS, AND THE LIKE. H OWEVER, AS A COMPANY MOVES FROM PRIVATE TO PUBLIC OWNERSHIP, MANAGEMENT NOW REPRESENTS ALL THE OWNERS. T HIS PLACES MANAGEMENT IN THE AGENCY POSITION OF MAKING DECISIONS THAT WILL BE IN THE BEST INTERESTS OF ALL SHAREHOLDERS. H OWEVER, AS A COMPANY MOVES FROM PRIVATE TO PUBLIC OWNERSHIP, MANAGEMENT NOW REPRESENTS ALL THE OWNERS. T HIS PLACES MANAGEMENT IN THE AGENCY POSITION OF MAKING DECISIONS THAT WILL BE IN THE BEST INTERESTS OF ALL SHAREHOLDERS. B ECAUSE OF DIVERSIFIED OWNERSHIP INTERESTS, CONFLICTS BETWEEN MANAGERS AND SHAREHOLDERS CAN ARISE THAT IMPACT THE FINANCIAL DECISIONS OF THE FIRM. B ECAUSE OF DIVERSIFIED OWNERSHIP INTERESTS, CONFLICTS BETWEEN MANAGERS AND SHAREHOLDERS CAN ARISE THAT IMPACT THE FINANCIAL DECISIONS OF THE FIRM.

T HE FINANCIAL MANAGER : CONTROLS THE DAILY CASH INFLOWS AND OUTFLOWS RESULTING FROM BUSINESS OPERATIONS CONTROLS THE DAILY CASH INFLOWS AND OUTFLOWS RESULTING FROM BUSINESS OPERATIONS MAKES THE OCCASIONAL INVESTMENT AND FINANCING DECISIONS ESSENTIAL FOR THE FUTURE FINANCIAL SUCCESS OF THE BUSINESS MAKES THE OCCASIONAL INVESTMENT AND FINANCING DECISIONS ESSENTIAL FOR THE FUTURE FINANCIAL SUCCESS OF THE BUSINESS MAY WORK IN A CORPORATION OR OTHER FORM OF BUSINESS ORGANIZATION MAY WORK IN A CORPORATION OR OTHER FORM OF BUSINESS ORGANIZATION T HEIR OVERRIDING GOAL IS TO MAXIMIZE THE WEALTH OF THE OWNERS BY EARNING AN ATTRACTIVE RETURN IN THE BUSINESS AT AN ACCEPTABLE LEVEL OF RISK