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

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

4. 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

5. 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

6. 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

7. 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

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

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

10. 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

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