financial management course

financial management course

The Essential Guide to Financial Management: Principles and Practices

1. Introduction to Financial Management

Financial management explores the critical analyses, economic decisions, and financial activities of individuals, institutions, organizations, and governments. Within the very broad context of financial administration, the term financial management most often refers to corporations, companies, or firms. The finance, accounting, legal, and economic concerns of one’s individual or business activities are the focus of personal finance and other business-administration materials. Unless otherwise specified, references to finance, financial, or financial management within this text are referring to the corporate perspective.

This first chapter explores basic concepts, financial decisions, and economic, legal, and tax considerations that affect corporate financial management. Selected principles of finance are introduced, and the role of the financial manager is defined. Company goals and conflicts between shareholders and managers are explored. Major functions of the chief financial officer and the concept of capital market efficiency are discussed. The importance of legal structure and venture capital is presented.

2. Financial Statements and Analysis

In the United States and many other countries, stock exchange authorities and government regulatory agencies require companies to file not only an annual report, but also a quarterly report. Quarterly reports must be reviewed by their accounting firm and filed with the stock exchange and appropriate regulatory agency. These agencies, such as the Corporation Finance Division of the Securities and Exchange Commission, each year report the high, low, and average market price of the shares. Knowing both the number of shares outstanding and the market price allows investors to determine a total market valuation for the business. Since corporate management is under constant pressure for achieving corporate objectives, they have become increasingly oriented toward the end appraisers, the stockholders.

Each year, the corporation must report key financial and other material information to its owners, the stockholders. By law, the corporation must notify its stockholders that its most recent annual report is available, request payment for the printed report, and invite stockholders to attend the annual stockholders meeting. Usually, a separate section of the annual report gives financial information. In most corporations, the accounting firm that reviews the financial records annually also audits stockholder compliance with GAAP. In research, I and business school colleagues annually analyze the contents of all the annual reports for the corporations in the research collection. We examine the reports to obtain financial data on the business in the most recent fiscal year. Our detailed analysis of the text in these documents provides substantive data for addressing the research questions.

3. Budgeting and Forecasting

The budget gives a clear idea of the company’s direction, as well as the reasons for any deviations from it. The purpose and use of budgets can be considered in three time frames. The operating budget covers a period of time of a year or less and is used to establish sales and profit goals, plus the resources needed to achieve these goals. The financial budget is concerned with the revenues, expenses, and capital resources of the enterprise. The long-term capital budget is used for planning expenditures for other than yearly operations over periods extending beyond one year.

Budgeting is a key element in managing a business. A budget is a planning tool for managers. It is used by both profit and nonprofit organizations, agencies, and the government as a plan for future actions and a way to control these actions. In small businesses, the budget is also called a pro forma, projection, or forecast.

4. Capital Budgeting and Investment Decisions

Types of projects: accept or reject There are five basic types of projects: (1) Independent projects, (2) Mutually exclusive projects, (3) Contingent projects, (4) Quantity projects, and (5) Timing options. Independent projects are not dependent on other projects; that is, primarily, they do not share a single hurdle rate. Mutually exclusive projects are those that are alternatives in competing for the same resources; these projects exclude one another. Contingent projects depend on having undertaken other projects first. Quantity projects are those that are replicable. And timing options are those where initial projects are options to make follow-on investments.

The key issue in capital budgeting The primary goal of capital budgeting is to help a business establish or expand its portfolio of assets in a way that maximizes shareholders’ wealth. A company that is able to raise funds can increase its shareholders’ wealth by investing these funds in undertaking projects that offer higher returns than investors could have earned elsewhere with equal amounts of risk.

Capital budgeting and investment decisions generally have a significant impact on an enterprise. After all, the survival of an enterprise depends critically on the decisions it makes with respect to new investments. An investment in new assets exposes the enterprise to many kinds of risk. Clearly, decisions to build new plants, purchase new machines, introduce new products, or engage in rectifying research have major long-term implications for the business.

5. Risk Management and Financial Markets

Risk management may help to eventually reduce the number of financial and external costs of risks connected with too high uncertainty concerning the ability to guarantee dividends. However, traditional methods of risk identification based on the risk-value model are far from ideal. The identification of possible risk triggers for the creation of the initial corporate debts involved in the crisis conflict allows the company to outline the extent and nature of potential risks connected with the investment project, which this financial organization estimates. The identification of interests in the area of debt requires careful organization and accounting, analysis only of potential risks that may be both a sign of high balance transparency and a method to prevent future instability.

According to the standards, risk management constitutes the scope of management operations connected with risk identification, impact assessment, prioritizing and implementing of measures, as well as risk management and risk control not only in the case of negative consequences but in a global context. The use of risk management may allow creating a balance between the evaluation of income and risk; creating a reserve fund for covering possible losses; and forming a stockholder’s capital. If analyzing current contribution margins by variations of production volumes, the curve of maximum net profits, not the curve of maximum gross incomes, has to express the interests of the firm’s owners.

Risk management is the process of measuring or assessing risk and then developing strategies to manage the risk. In general, the concepts of risk management include the allocation of resources to minimize, monitor, or control the probability and/or the impact of unfortunate events or to maximize the realization of opportunities. The fundamental characteristics of risk management are consignment or assignment of some risk measures and authorities to any individual, due to different purposes; focusing on risk lessening and lessening the risk consequences; and decision making based on risk results.