Chapter 1 Introduction

to Financial management

By: Ghada Ismail

Session contentAreas of finance.

Importance of finance.

Main decisions taken by financial managers.

Forms of business organizations.

Basic Areas Of Finance1. Investment

2. Financial institutions

3. Corporate finance / Business Finance

4. International financeFIN30

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1-Investment Work with financial assets such as stocks

and bonds. Value financial assets, evaluate risk versus

return, and handle asset allocationJob opportunities

Stockbroker or financial advisor Portfolio manager Security analyst

2-Financial InstitutionsCompanies that provide financial

services Banks – commercial and investment,

credit unions, savings and loans Insurance companies

Job opportunities Commercial loan officer. Mortgage consultant. Insurance specialist.

3- Business finance Work in the finance department of business

organizations. The main area of our course.Job opportunities

Financial analyst. Financial manager. Controller.

Top paid CFOs 1. Peter Oppenheimer, Apple ($68.6 m)

2. Safra Catz, 3. Patrick Pichette, Oracle ($51.7 m) Google ($38.7 m)

4. Michael Angelakis, 5. Keith Sherin, Comcast ($23.2 m) GE ($20.2 m)

4-International Finance An area of specialization within each of the

areas discussed so far Need to be familiar with:

exchange rates and political risk. customs of other countries. foreign languages.

Corporate Finance

Financial Institutions Investments

INTERNATIONAL

DOMESTIC

Why Study Finance?You need finance knowledge for each of the following business areas:Marketing

To be able to sell financial products To determine products’ prices.

Why Study Finance?Accounting

To prepare accounting reports Management

To evaluate job performance and profitability

To understand executives contracts.Personal finance

To Budgeting, retirement planning, student loan management.

Corporate Organization Chart

Financial ManagerThe top financial manager within a

firm is usually the Chief Financial Officer (CFO) Treasurer – oversees cash management,

credit management, capital expenditures, and financial planning

Controller – oversees taxes, cost accounting, financial accounting, and data processing

Financial Management decisions

What exactly do financial managers/CFOs do in business organizations:

What long-term investments should the firm take on?

Where will we get the long-term financing to pay for the investments?

How will we manage the everyday financial activities of the firm?

Financial Management decisions Capital budgeting

What long-term investments or projects should the business take on?

Capital structure How should we pay for our assets? Should we use debt or equity?

Working capital management How do we manage the day-to-day finances

of the firm?

Forms of Business OrganizationThree main forms of Organizations:

Sole proprietorship

PartnershipGeneralLimited

Corporation

1-Sole Proprietorship

AdvantagesThe easiest to startLeast regulatedSingle owner keeps all

of the profits Income is taxed once

as personal income

DisadvantagesLimited to life of ownerEquity capital limited

to owner’s personal wealth

Unlimited liabilityDifficult to sell

ownership interest

Business owned by one person

2- PartnershipAdvantages

Two or more ownersMore capital availableRelatively easy to start Income taxed once as

personal income

DisadvantagesUnlimited liability

General partnership Limited partnership

Difficult to transfer ownership

Business owned by two or more persons

3- Corporation

Advantages Limited liability Unlimited life Separation of

ownership and management

(attracting better skills) 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)

A legal “person” distinct from owners and a resident of a state