1. Financial Management Role of Financial Manager
Goals of Financial Management
MARCELA HERTNEKYOVA

2. MAIN GOAL: MAXIMISE PROFIT
SMALL BUSINESSES
- managed and run by the owners of the business
MAIN GOAL: MAXIMISE PROFIT
LARGE BUSINESSES (CORPORATIONS)
- typically owned by shareholders not involved in running the business on a day to day basis.
MAIN GOAL: MAXIMISE CORPORATION’S VALUE WHILE REDUCING FINANCIAL RISK
FINANCIAL MANAGERS make decisions on behalf of the shareholders

3. Organizational chart

4. KEY DECISIONS TO BE MADE
INVESTMENT DECISIONS
FINANCE DECISIONS
DIVIDEND DECISIONS
LONG TERM DECISIONS
SHORT TERM OPERATIONS (managing cash, inventories, short term borrowing or lending)
SHORT TERM DECISIONS

5. INVESTMENT DECISIONS INTERNAL INVESTMENT PROJECTS
- New product development
- Major equipment purchases
- Opening new factory or store
EXTERNAL INVESTMENT PROJECTS
- Company Takeover
- Merger
DISINVESTMENT
- Selling off unprofitable segment of the firm

6. FINANCING DECISIONS HOW FINANCES WILL BE OBTAINED ? DEBT FINANCING
- Issue of bonds or debentures
- Bank Loan
EQUITY FINANCING
- Share Issue
- Retained Earnings
MIXTURE OF BOTH

7. - DIVIDEND PAYMENTS → to satisfy shareholders
DIVIDEND DECISIONS
THE PROPORTION OF COMPANY PROFITS TO BE DISTRIBUTED TO SHAREHOLDERS
- DIVIDEND PAYMENTS → to satisfy shareholders
THE PROPORTION OF COMPANY PROFITS TO BE RETAINED BY THE COMPANY
- RETAINED EARNINGS → to finance future growth

8. GOALS OF FINANCIAL Management
Survive
Avoid Bankruptcy
Maximise Profit
Minimise Cost
Maximise Sales/ Market Share
Corporations: Maximise Shareholders Wealth
- Current market value per share of the existing stock
- The size of the company’s dividend payments

9. AGENCY PROBLEM Agency Relationship
PRINCIPAL: Shareholders (Wealth Maximisation)
AGENT: Management (Salary, Employment Security, Prestige and Position)
Agency Problem : The possibility of conflict of interest between shareholders and management of a firm →AGENCY COST (direct & indirect)

10. Why Maximising Profit is not our main goal but Maximising Shareholders wealth or the share price is our main goal
Company A – Funded by 400,000 $1 Shares and $600,000 Debt Finance – Profit $70,000 – due to interest expense that we receive a tax deduction for
Return per share - $70,000 / 400,000 =
17.5 cents per share
Company B Funded by 1,000,000 $1 Shares – Profit $100,000
Return per share = 10 cents pershare

11. SOLUTION TO AGENCY PROBLEM
How closely are management goals aligned with shareholders goals?
MANAGEMENT COMPENSATION
● SHARE OPTIONS: Compensation tied to financial performance
● CAREER PROSPECTS: Promotion, Higher Demand- Salary
Can management be replaced if they do not pursue shareholders goals?
CONTROL OF THE FIRM
● Board of Directors: can fire and hire management on their behalf
● Replacement of management by takeover- poorly managed firms are more attractive for takeover as greater profit potential exists

12. NON- FINANCIAL OBJECTIVES
Employees (welfare, safety, salary and conditions)
Customers (safe products and services)
Government (compliance with legislation)
Community (pollution, public safety, welfare)

13. Financial managers
Capital Budgeting: planning and managing a firm’s long term investments
- Identify long term investment opportunities
- Evaluate size, timing and risk of future cash flows
Capital Structure: obtaining finances to support long term investments
- Deciding on the specific mixture of long-term debt and equity
- Where and how to raise the money ?
- Evaluating different financing options and associated costs
Working Capital Management: ensuring that firm has sufficient resources to continue its operations
- How much cash and inventory to keep at hand?
- Should credit sales be offered to customers?
- How will short-term financing be obtained?
Dividend Payout decision

14. Financial management Summary