1. Financed bySupported byImplemented in cooperation with Financed bySupported byImplemented in cooperation with Introduction to Finance & Financial Management …mind the financial aspects of different legal forms

2. Financed bySupported byImplemented in cooperation with  What is Finance?  Financial aspects of different legal forms  Goal & concepts of Financial Management Overview

3. Financed bySupported byImplemented in cooperation with Study of how and under what terms savings (money) are allocated between lenders and borrowers. Finance is distinct from economics in that it addresses not only how resources are allocated but also under what terms and through what channels Financial contracts or securities occur whenever funds are transferred from issuer to buyer. What is Finance in general? The study of finance requires a basic understanding of: Securities Corporate/business law Financial institutions and markets The study of finance requires a basic understanding of: Securities Corporate/business law Financial institutions and markets

4. Financed bySupported byImplemented in cooperation with Real Versus Financial Assets Real assetsFinancial assets Tangible things owned by persons and businesses What one individual/business has lent to another Residential structures and propertyConsumer credit Major appliances and automobilesLoans Office towers, factories, minesMortgages Machinery and equipmentBonds & Stocks

5. Financed bySupported byImplemented in cooperation with Financial System - Overview Government Business Non- residents Market intermediaries Financial intermediaries Households Financial intermediaries (e.g.): Banks and other deposit-taking institutions Insurance companies Pension Funds Mutual Funds

6. Financed bySupported byImplemented in cooperation with 1. Corporate finance = Business Finance 2. Investments 3. Financial institutions 4. International finance Basic Areas of Finance Corporate Finance Financial Institutions Investments DOMESTIC INTERNATIONAL

7. Financed bySupported byImplemented in cooperation with Investments: Work with financial assets such as stocks and bonds Financial institutions: Companies that specialize in financial matters Banks – commercial and investment, credit unions, savings and loans Insurance companies Brokerage firms International finance: An area of specialization within each of the areas, but with an international dimension Basic Areas of Finance (Cont’d)

8. Financed bySupported byImplemented in cooperation with Study of how businesses evaluate investments and raise capital to fund them. Three questions addressed: 1. What long-term investments should the firm undertake? (capital budgeting decisions) 2. How should the firm fund these investments? (capital structure decisions) 3. How can the firm best manage its cash flows as they arise in its day-to-day operations? (working capital management decisions) Business Finance How to spend the money? How to get the money? How to manage cash (liquid) money? How to get and use money

9. Financed bySupported byImplemented in cooperation with Types of Business Organisations Business/Legal Forms Sole Proprietorships PartnershipsCorporations Hybrids

10. Financed bySupported byImplemented in cooperation with It is a business owned by a single individual that is entitled to all the firm’s profits and is responsible for all the firm’s debt. There is no separation between the business and the owner when it comes to debts or being sued. Sole proprietorships are generally financed by personal loans from family and friends and business loans from banks. Sole Proprietorship

11. Financed bySupported byImplemented in cooperation with Business owned by one person Sole Proprietorship (Cont’d) Advantages Easiest to start Least regulated Single owner keeps all of the profits Taxed once as personal income Disadvantages Limited to life of owner Equity capital limited to owner’s personal wealth Unlimited liability Difficult to sell ownership interest

12. Financed bySupported byImplemented in cooperation with Business owned by two or more persons Partnership Advantages Two or more owners More capital available Relatively easy to start Income taxed once as personal income Disadvantages Unlimited liability General partnership Limited partnership Partnership dissolves when one partner dies or wishes to sell Difficult to transfer ownership

13. Financed bySupported byImplemented in cooperation with In limited partnerships, there are two classes of partners: general and limited. The general partners runs the business and face unlimited liability for the firm’s debts, while the limited partners are only liable on the amount invested. One of the drawback of this form is that it is difficult to transfer the ownership of the general partner. Limited Partnership

14. Financed bySupported byImplemented in cooperation with “an artificial being, invisible, intangible, and existing only in the contemplation of the law.” Corporation can individually sue and be sued, purchase, sell or own property, and its personnel are subject to criminal punishment for crimes committed in the name of the corporation. Corporation is legally owned by its current stockholders. The Board of directors are elected by the firm’s shareholders. One responsibility of the board of directors is to appoint the senior management of the firm. Corporation

15. Financed bySupported byImplemented in cooperation with A legal “person” distinct from owners and a resident of a state Corporation Advantages Limited liability Unlimited life Separation of ownership and management Transfer of ownership is easy Easier to raise capital Disadvantages Separation of ownership and management (agency problem) Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate, while dividends paid are not tax deductible)

16. Financed bySupported byImplemented in cooperation with Provide a cross between a partnership and a corporation. Limited liability company (LLC) combines the tax benefits of a partnership (no double taxation of earnings) and limited liability benefit of corporation (the owner’s liability is limited to what they invest). S-type corporation provides limited liability while allowing the business owners to be taxed as if they were a partnership – that is, distributions back to the owners are not taxed twice as is the case with dividends in the standard corporate form. Hybrid Organisations

17. Financed bySupported byImplemented in cooperation with Characteristics of different business forms Business formNumber of owners Are owners liable for the firm’s debts? Do owners manage the firm? Does an ownership change dissolve the firm? Access to capital Taxation Sole Proprietorship OneYes Very limitedPersonal Taxes PartnershipUnlimitedYes; each partner has unlimited liability Yes Very limitedPersonal Taxes Limited Partnership At least one GP, but no limit on LPs GPs-unlimited liability LPs-limited liability GPs-manage the firm LPs-no role in management GPs-Yes LPs-No, can change LimitedPersonal Taxes LLCUnlimitedNoYesNoDependent upon size Personal Taxes CorporationUnlimitedNoNo-although managers generally have an ownership stake NoVery easy access Double Taxation: Earnings taxed at corporate level; Dividends taxed at personal level

18. Financed bySupported byImplemented in cooperation with 1. Money has a time value. A dollar received today is more valuable than a dollar received in the future (due to interests, investment returns,…) 2. There is a risk-return trade-off. One shall take extra risk only if one expects to be compensated for extra return. 3. Cash flows are the source of value. Profit is an accounting concept designed to measure a business’s performance over an interval of time. Cash flow is the amount of cash that can actually be taken out of the business over this same interval. 4. Market prices reflect information. Investors respond to new information by buying and selling their investments. The Four Basic Principles of Finance

19. Financed bySupported byImplemented in cooperation with PROFIT CASH It is possible for a firm to report profits but have no cash. For example, if all sales are on credit, the firm may report profits even though no cash is being generated. Profits versus Cash

20. Financed bySupported byImplemented in cooperation with Business Finance Functions Financial ManagementExternal FinancingCapital Budgeting Risk Management Governance Business Finance Functions

21. Financed bySupported byImplemented in cooperation with Capital Budgeting Function Capital Budgeting – the process firms use to choose the set of investments that generate the most wealth for shareholders Select investments for which the marginal benefits exceed the marginal costs.

22. Financed bySupported byImplemented in cooperation with Risk Management Function Managing the firm’s exposure to significant risks: Interest rate risk Exchange rate risk Commodity price risk

23. Financed bySupported byImplemented in cooperation with Dimensions of the External Financing Function Equity vs. debt Funding via capital market vs. via financial intermediary Public vs. private capital markets Going public

24. Financed bySupported byImplemented in cooperation with Financial Management Function Managing daily cash inflows and outflows Forecasting cash balances Building long-term financial plans Choosing the right mix of debt and equity

25. Financed bySupported byImplemented in cooperation with KEY CONCEPTS Financial Management – management of the finances of the firm in order to maximize the benefit to the members (owners/shareholders) Goals of financial management Profitability Viability Long term development Financial Management

26. Financed bySupported byImplemented in cooperation with Benefits of effective financial management Sufficient funds to provide high quality products/services Effective resource allocation Ability to invest in modern equipment Consequences of not effectively managing financials  Consistently incurring cost overruns  Inability to provide quality patient product/services on a daily basis  Inability to invest in new equipment  Reflects poorly on the business reputation Importance of financial management

27. Financed bySupported byImplemented in cooperation with Allocation of staff – if the firm is understaffed and employees are required to work overtime, expenses will increase and cash will decrease which could lead to costs going over budget. Investigate why costs were higher during the month than budgeted. Consider whether the department/ division will need to upgrade its equipment to meet future work requirements. Determine the correct amount of supplies / raw materials / consumables. This is working capital management and impacts on cash management. Determine to follow internal controls to reduce risk (and when in certain circumstances to breach those controls). Examples of decisions with financial implications

28. Financed bySupported byImplemented in cooperation with Key terms Capital budgeting Capital structure Cash outflows and inflows Commodity Price Risk Corporation Debt Equity Exchange Rate Risk Financial market General partner General partnership Interest Rate Risk Limited liability company (LLC) Limited partner Limited partnership Partnership Shareholder Shares Sole proprietorship Stock Stockholders Working capital management