FM112 Student Chapter 1
FM112 Student Chapter 1
Chapter I
Financial Management: An Overview
WARM UP ACTIVITY
Picture yourself as a potential financial manager five years from now, what
should you do now to equip yourself with the necessary tools? Whatever your
answer is…MAKE it your goal!
Lesson 1
Introduction
In order to understand Financial Management, we must first understand
what Finance is.
Finance is a body of facts, principles and theories relating to raising and
using money by individuals, businesses and governments. (E. Cabrera)
Finance is also defined as the art and science of managing money, or simply
the management of money.
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The stated goal considers the fact that the shareholders in a firm are
residual owners. By this, we mean that they are entitled only to what is left
after employees, suppliers, creditors and anyone else with legitimate claim
are paid their due. If any of these groups go unpaid, the shareholder or
owners get nothing. So, if shareholders are benefiting in the sense that the
residual portion is growing, it must be true that everyone else is being
benefited too. Because the goal of Financial Management is to maximize
the value of the shares, there is a need to learn how to identify
investments, arrangements and distribute satisfactory amount of dividends
or share in the profits that favorably impact the value of the shares.
Finally, our goal does not imply that the Financial Manager should
take illegal or unethical actions in the hope of increasing the value of the
equity in the firm. The Financial Manager should best serve the owners of
the business by identifying goods and services that add value to the firm
because they are desired and valued in the free market. Thoughtful
shareholders do not want the maximum possible stock price. They want
the maximum honest stock price.
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Broad Applicability
Any organization whether motivated with earning profit or not
having cash flow requires to be viewed from the angle of financial
discipline. The principles of finance are applicable wherever there is cash
flow. The concept of cash flow is one of the central elements of financial
analysis, planning, control, and resource allocation decisions. Cash flow is
important because the financial health of the firm depends on its ability to
generate sufficient amounts of cash to pay its employees, suppliers,
creditors, and owners.
Financial Management is equally applicable to all forms of business,
like sole traders, partnerships, and corporations. It is also applicable to
nonprofit organizations like trust, societies, government organizations,
public sectors, and so forth.
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gain. Managers should not engage in practices that can damage the
image of the firm but should articulate as much as possible in social
activities to demonstrate that they are cognizant of the importance
of the community and those who buy their products or services.
Lesson 2
8. The Finance Organization
The financial management function is usually associated with
a top officer of the firm as a Vice President of Finance or some other
Chief Financial Officer (CFO). The Vice President of Finance
coordinates the activities of the Treasurer and the Controller. The
Controller’s office handles cost and financial accounting, tax
payments, and management information systems. The Treasurer’s
office is responsible for managing the firm’s cash and credit, its
financial planning, and its capital expenditures.
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Lesson 3
10. Types of Financial Decision
Principal Financial Decisions:
1. Investment Decision
2. Financing Decision
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profits. Second, the company can take the cash flow generated by
its existing assets and reinvest the cash in new assets. In this case
the company is reinvesting on behalf of existing stockholders. No
new shares are issued.
REFERENCES:
1. Cabrera, Ma. Elenita B. and Cabrera, Gilbert Anthony B. (2019-2020 Edition)
Financial Management Comprehensive Volume. GIC Enterprises & Co. Inc.
2. Brealey, Myers and Allen. Principles of Corporate Finance. (2019). South
Western Cengage Learning
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