PRINCIPLES OF FINANCE - Lecture 01 (Introduction to Finance)

PRINCIPLES OF FINANCE (FIN-101)

1/15/2015 1PREPARED BY - MR. JEWEL KUMAR ROY

Mobile No. 01924337923 Email Id: [email protected]

CHAPTER 1 : INTRODUCTION TO FINANCE

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• Finance?The art and Science of managing money

Concerned with the process, institution, markets, and instrumentinvolved in the transfer of money among and betweenindividuals, businesses, and governments.

• Types?

OverdraftBank term loans

Asset-based financeReceivables FinanceInvoice discounting

Angel fundingVenture capital

Personal resources

PREPARED BY - MR. JEWEL KUMAR ROY Mobile No. 01924337923

Email Id: [email protected]

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CHAPTER 1 : INTRODUCTION TO FINANCE (Continue….)

• Functions?

According to R. C. Osborn The Finance function is the process of acquiring and utilizing funds of a business.

According to Bonneville and Dewey Financing consists of raising , providing , managing of all the money , capital or funds of any kind

to be used in connection with the business.



Finance Department• Calculating fund’s requirement of organization – Means how much money we require to run the business• Finding sources of finance – It means to check from where we can raise money & out of that which source

of finance is suitable for our organization• Utilization of funds – It means utilization of profits which a company earns during a financial year

a. Investment Decision

b. Financial Decision

c. Dividend Decision

d. Liquidity Decision

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The Managerial Finance Function

Managerial Finance is closely related to, but quite different from, Economics and Accounting. ?

Organizational View

Since most business decisionsare measured in financialterms, the financial managerplays a key role in theoperation of the firm

The size and importance of the managerial finance depend on the size of the firm.

In small firm the finance function generally performed by theaccounting department

In medium-to-large-size firm

Separate department, vice-president of finance (CFO),Treasurer, Controller

The officer responsible for the firm’s financial activities: financialplanning and fund raising, managing cash, making capital expendituredecision, managing credit activities and managing the investmentportfolio

The officer responsible for the firm accountingactivities: tax management, data processing, andcost and financial accounting

Financial Manager




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Relationship to Economics

The Financial Manager must understand the economic framework, and be alert to theconsequences of varying levels of economic activity and changes in economic policy ?Must be able to use economic theories as guidelines for efficient busineness operation

Supply-demand analysis Profit-Maximazing strategies Price Theory

Marginal Analysis

Economic principle which states thatfinancial decisions should be madeand actions taken only when theadded benefit exceed the addedcosts

Benefits with new computer BDT100.000Less: Benefits with old computer 35.000

(1) Marginal (Added) benefits BDT 65.000

Cost of new computer BDT 80.000Less: Proceeds from sale of old com 28.000

(2) Marginal (added) costs BDT 52.000

Net Benefit [(1) – (2)] BDT 13.000

Example




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The Managerial Finance FunctionRelationship to Accounting

The finance and accounting function are closely related and generally overlap; indeed, managerial financeand accounting are not often easily distinguishable. In small firm the controller often carries out of thefinance function, and in large firms many accountants are intimately involved in various finance activities ?

Two Basic Differences

Emphasis of cash flows

Decision Making

Accrual Method vs. Cash Method

Recognizes revenue at the point ofsale and recognized expenseswhen incurred

Recognized revenues and expensesonly with respect to actual inflow andoutflows of cash

Accounting View Financial View

Income statementABC CorporationFor the year xxxx

Sales Revenue BDT 100.000Less: Costs 80.000Net Profit BDT 20.000

Income statementABC CorporationFor the year 2015Cash inflow BDT 0Less: Cash Outflow 80.000

Net Profit ($80.000)

The accountant devotes the majority of attention tothe collection and presentation of financial data

The financial manager evaluates the accountant’sstatements, develops additional data, and makesdecisions based on subsequent analyses

This does not mean that accountant never makedecision, or that financial manager never gatherdata




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Key Activities of The Financial Manager

Primary Activities

Performing Financial Analysis and Planning

Making Investment Decisions

Making Financing Decision

1. Transforming financial data into a form that can be used to monitorthe firm’s financial condition

2. Evaluating the need for increased (or reduced) productive capacity3. Determining what additional (or reduced) financing is required

Determine both the mix and the type of assets found on the firm’s balance sheet

The left-hand side of the balance sheet

Deals with The right-hand side of the balance sheet and involves two major area:1. Most appropriate mix of short-term and long-term financing must be established2. Which individual short-term or long-term sources of financing are the best at given point in time

Balance Sheet

CurrentAssets

FixedAssets

CurrentLiabilities

Long-TermFunds

Performing Financial Analysis

and Planning

Mak

ing

Inve

stm

ent D

ecisi

on

Making Financing Decision




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Goal of The Financial Manager

Maximize Profit?

Some people believe that the owner’s objective is always to maximize profits

The Financial Manager are expected to make a major contribution to the firm’s overallprofit

For Corporation, profit are commonly measured in terms of Earnings per Share (EPS)

EPS:The amount earned during theperiod on each outstanding shareof common stock

period’s total earnings avaliable for the firm’s common stock holders

The number of shares of common stock outstanding

Investment year 1 year 2 year 3 total

X 1.40 1.00 0.40 2.80Y 0.60 1.00 1.40 3.00

Earning per share (EPS) (IN BDT)

Profit maximization fails for reason:1. Timing of return2. Cash flow available to stockholder3. Risk

The chance that actual outcomes may differsfrom those expected

Basic primises in managerial finance is thattrade-off exist between return (cash flow)and risk

Return and risk are in fact the keydeterminant of share price– whichrepresents the wealth of the owners in thefirmStockholder are risk-averse ?

√




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Maximizing Shareholder Wealth

The goal of the financial manager is tomaximize the wealth of the owners forwhom the firm is being managed

Measured by the share price of the stock

Timing of return (cash flow)

magnitude

Risk

FinancialManager

Financial DecisionAlternative or action

Return?Risk?

Increase SharePrice ?

Yes

Yes

Reject

Acept

Financial decisions and share price




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The Agency Issue

The goal of the financial manager should beto maximize the wealth of the owners ofthe firm

Management can be viewed as agents ofthe owners who have hired them and giventhem decision-making authority to managethe firm for the owners’ benefit

In theory In practise

Most financial managers would agree with the goalof owner wealth maximization

However, managers also concern with theirpersonnel wealth, job security, lifestyle, andprivilege

Agency problem

The likelihood that managers may place personnelgoals ahead of corporate goals

Agency Cost

Monitoring expenditure

Bonding expenditure

Structuring expenditure

Opportunity cost

To prevent or minimize problem

Audit & control

Fidelity bondManagerial compensation

Stock option, performance share, cash bonuses




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The Role of Ethics

Ethics – Standard of conduct or moraljudgement

example

Corporate Ethics Guidelines and Policies

Ethics and share price

Issues Update

http://www.cfainstitute.org

Good Corporate Governance

Corporate Social Responsibility

Certified Financial Analyst

http://www.kpk.go.id/modules/edito/content.php?id=27http://www.bi.go.id/NR/rdonlyres/2246113B-DC63-4731-8558-3693A6254962/3449/pbi8406.pdf

Responsibility

Fairness

Transparency

Accountability

www.fcgi.or.id

http://www.goodyear-indonesia.com/social_responsibility.htmlhttp://www.telkom.co.id/pojok-media/siaran-pers/telkom-memperoleh-penghargaan-corporate-social-responsibility.html




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10 Basic Principles of Financial Management


1. Organize Your Finances

2. Spend Less Than You Earn

3. Put Your Money to Work

4. Limit Debt to Income-Producing Assets

5. Continuously Educate Yourself

6. Understand Risk

7. Diversification Is Not Just for Investments

8. Maximize Your Employment Benefits

9. Pay Attention to Taxes

10. Plan for the Unexpected



1/15/2015 13PREPARED BY - MR. JEWEL KUMAR ROY

Mobile No. 01924337923 Email Id: [email protected]

Documents

PRINCIPLES OF FINANCE - Lecture 01 (Introduction to Finance)