Chapter 1 Overview of Financial Management & Environment

Topics: Stock, Corporation, Bond Pages: 14 (2524 words) Published: March 8, 2012
Overview of Financial Management & Environment

Overview of Financial Management
Role of financial management Forms of business organization Goals of the corporation Agency relationships


All Successful Firms Accomplish 2 Goals
They identify, create, & deliver products or services that are highly valued This happens only if the firm provides more value than its competitors (in the form of either lower prices or better products)

They sell at prices high enough to cover costs and to compensate owners and creditors for their exposure to risk The profit must be high enough to adequately 1-3 compensate investors

3 Key Attributes for Success
1. 2.

Skilled People at all levels
Leaders, managers and work force

Strong Relationships with groups outside the company
Successful companies develop win-win relationships with suppliers, who then deliver high-quality materials on time and at a reasonable cost


Enough Capital to execute their plans & support operations 1-4

3 Key Attributes for Success

Enough Capital to execute their plans & support operations
Most companies need cash to purchase land, buildings, equipment, and materials Companies can reinvest a portion of their earnings, but most must also raise additional funds externally, by some combination of selling stock and/or borrowing in the financial markets 1-5

3 questions Financial Management must answer
What causes a company to have a particular stock value? How can managers make choices that add value to their companies? How can managers ensure that their companies don’t run out of cash while executing their plans? 1-6

5 Primary Activities of Financial Management
Cash Management Minimize Cost of Capital Strategic Investment (Capital Budgeting) Allocation of Income (Dividends vs. Retained Earnings) Risk Management 1-7

Alternative Forms of Business Organization
Sole proprietorship Partnership Corporation

Factors to consider
Ease of formation Taxation Liability of owners Life of enterprise Ease/difficulty of raising capital Transfer of ownership 1-9

Sole Proprietorship
Unincorporated business owned by one individual (1 owner) Advantages: Easily and inexpensively formed Subject to few regulations Its income is not subject to corporate taxation but it is taxed only as a part of the proprietor’s income


Sole Proprietorship
Difficult to raise capital
It is difficult for a single owner to obtain the capital needed for growth

Unlimited liability
The proprietor has unlimited personal liability for the business’s debts

Limited life
The life of a proprietorship is limited to the life of its founder

Used primarily for small businesses


More than 1 owner Exists whenever two or more persons associate to conduct a business for profit Partnership agreements Formal or informal Define the ways any profits and losses are shared between partners 1-12

Major advantage
Its low cost and ease of formation

Partnership’s income is not subject to corporate taxation but is taxed only as a part of the partner’s personal income


Unlimited liability Limited life of the organization Difficulty transferring ownership Difficulty raising large amounts of capital

Regarding liability
The partners can potentially lose all of their personal assets, even assets not invested in the business Under partnership law, each partner is liable for 1-14 the business’s debts

It is possible to limit the liabilities of some of the partners by establishing a limited partnership Certain partners are designated general partners and others limited partners Limited partners are liable only for the amount of their investment in the partnership Limited partners typically have no control General partners have unlimited liability 1-15

In both regular and limited partnership, at least one...
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