Finance 1

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Can be defined as the art and science of managing money

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Finance

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Derived from the Latin word "finis"

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Finance

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The financial activities and problems of individuals

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Personal finance

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The financial activities and problems of business enterprises

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Business finance and banking

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The financial activities and problems of government bodies

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Public finance

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Usually performs the finance function in small firms

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Accounting department

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Their function are more external in nature

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Treasurer (chief financial manager)

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Functions of Treasurer (chief financial manager):

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*financial planning and fund raising

*making capital expenditures decisions

*managing cash

*managing credit activities

*managing pension fund

*managing foreign exchange

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Controller's (comptroller/chief accountant) functions:

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*corporate accounting

*tax management

*financial accounting

*cost accounting

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Financial manager functions can be classified as:

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*daily

*occasional

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Three interrelated areas in finance:

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*money and capital markets

*investments

*financial management or business finance

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Deals with securities markets and financial institutions

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Money and capital markets

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Focuses on the decisions made by both individuals and institutional investors as they choose securities for their investment portfolios

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Investments

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Involves decisions with the firm

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Financial management or business finance

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The broadest of the three areas and one with the most job opportunities

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Financial management or business finance

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Defined as the art and science of managing the financial resources of a business

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Business finance

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Functions of business finance:

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*allocation of financial resources

*procurement of funds

*efficient and effective utilization of financial resources

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Two financial decisions:

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*capital budgeting decision

*financing decision

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The decision to invest in assets like plants, equipment and know-how

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Capital budgeting decision

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The choice of how to pay or finance a particular investment

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Financing decision

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Major areas of financial operations:

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*capital and operating budget

*financial structure

*working capital management

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Concern with the evaluation of funds commitments for purposes of identifying projects which will provide maximum benefit compared with costs incurred

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Capital and operating budget

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Purpose of capital budgeting:

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To identify the most desirable investments projects

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Refers to specifications of financial requirements for raw materials, personal services, travel and other expenses incurred in the normal course of business activities

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Operating budget

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Refers to the specific mixture of long term debt and equity the firm uses to finance its operation

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Financial structure

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Two areas of concern in financial structure:

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*how much to borrow

*what are the least expensive sources of funds for the firm

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The portion of the total resources of a firm which is used to finance its current assets

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Working capital (revolving ot operating capital)

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Standards of conduct or moral judgement

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Ethics

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Viewed as necessary for achieving the firm's goal of owner wealth maximization

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Ethical behavior

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Goal of ethical standards:

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To motivate business and market participants to adhere to both the letter and the spirit of laws and regulations concerned with business and professional practice

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Suggested questions by Robert A. Cooke that can be used to assess the ethical viability of a proposed action:

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*is the action arbitrary or capricious? Does it unfairly single out an individual or group?

*does the action conform to accepted moral standards?

*does the action violate the moral or legal rights of any individual or group?

*are the alternative courses of action that are less likely to cause actual or potential harm?

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The concept that business should be actively concerned with the welfare of society at large

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Social responsibility

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Goals of financial management:

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*maximize profits

*maximizing shareholder's wealth

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Most important goal for financial management

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Earn the highest possible profit for the firm

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Three drawbacks to profit maximization:

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*a change in profit may also represent a change in risk

*the timing of the benefits

*profit maximization also disregards risk

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This requires careful analysis

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Working capital

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Involves looking into its appropriate level, structural health, circulation and comparative liquidity

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Working capital

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Refers to the adequacy thereof to enable a business entity to operate efficiently towards the attainment of its predetermined objectives considering the cost of money invovled

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Appropriate level of working capital

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Factors to be considered when identifying the level or amount of working capital to be maintained:

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*nature of operations

*length of period required to manufacture or obtain goods for sale, production or purchase volume and unit costs

*terms of purchase and sale, gross margin on sales and operating expenses

*inventory turnover

*seasonal variations price fluctuations or possible loss from decline in value of current assets

*average number of days in the operating cycle

*expansion programs

*dividend policies

*taxation

*variation in sales volume

*operating efficiency of the business

*credit standing of the company

*competitive conditions

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Contributes to business failures because of its inability to promptly pursue company objectives, inability to take advantage of business opportunities ....

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Inadequate working capital

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Refers to its composition and yhe ability of the business organization to meet financial requirements

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Structural health of working capital

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Refers to the relative composition thereof from one current asset item to another in the process of conducting operations and the rate of the flow

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Circulation of working capital

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Refers to the relative composition thereof with emphasis on cash and marketable securities and how soon can the noncash items among the current assets be converted into cash

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Liquidity of working capital

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Classification of financing requirements of a firm:

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*permanent

*seasonal (temporary)

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Refers to what should stay with the firm throughout the budget year

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Permanent financing requirements

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Refers to additional requirements arising from fluctuation in the volume of activity arising from seasonal charges in the level of demand for products or services during the year

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Seasonal financing requirements

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Operations are conducted on a minimum amount of working capital

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Aggressive financing strategy

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Financed by using long-term sources of funds with seasonal requirements financed by short-term sources

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Permanent capital requirement

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This strategy puts too much pressure on the firm's short term borrowing capacity so that it may have difficulty in satisfying unexpected needs from funds

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Aggressive financing strategy

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Strategies for the efficient management of working capital:

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*adequacy

*liquidity

*conservation

*profitability

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Allocation of working capital among various needs in adequate amount

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Adequacy

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Availability of cash to meet obligations as they fall due

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Liquidity

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Economical use of working capital by preventing damages or waste arising from natural calamities, malversation or pilferage

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Conservation

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The objective is to use working capital to increase profit or at least maintain previous level and avoid loses

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Profitability

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Most liquid yet the least productive asset

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Cash

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Guarantees payment of obligations when due but lessens productivity when hoarded

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Cash

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Three fundamental reasons for holding cash:

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*to maintain a state of solvency

*precautionary motive

*speculative motive

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Strategies in managing cash:

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*accelerating cash collections

*decelerating cash collections

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Accelerating cash collections may be done through:

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*granting of cash discounts

*concentration banking strategy

*lock-box system

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Decelerating cash collections may be done through:

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*issuance of a promissory notes to the suppliers

*issuance of post-dated checks

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Refers to a system which spreads collection of the company's receivables among a number of banks located at strategic areas

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Concentration banking system

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A device whereby the company rents a deposit box in a bank in a locality

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Lock-box system

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Management of receivables will be involved in:

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*the estimate of investment in receivables

*turnover of receivables

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Refers to the number of times that the company is able to collect its receivables

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Turnover of receivables

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Slow turnover means that:

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*it could have been the result of a lenient credit and collection policy

*credit standards may be low thus allowing the entry of delinquent customers

*collection system is not effective