video 1 Finance and the Financial Manager

Description

Our session is on finance and the financial manager we cover several topics that serve to introduce the material in the course these topics provide context and structure forward follows first we consider several organizational structures that the firm can take next we move to the role of the financial manager as actor between the firm and the financial markets we

Define some common finance terms that we’ll be using throughout the course then we describe the financial analyses and decisions that we’re going to be covering in the course there are three types of organizational structures that firms can take sole proprietorships and partnerships entail unlimited liability for their owners and the owners pay personal taxes on

The profits of the firm corporations provide for limited liability for the owners the corporation itself pays taxes on its profits and if the corporation pays dividends to the shareholders or owners the shareholders will pay taxes on those dividends in addition if the owners sell their stock at a profit they’ll pay capital gains tax on those profits corporations

Can be characterized by principal-agent problems in the case where the interests of the owners diverge from those of the managers the financial principles covered in the course apply to all of these organizational structures and indeed to families and individuals as well while we’ll focus our attention on corporations as the dominant organisational form in our

Economy occasionally we’ll apply these financial principles in the course to the interest and decision-making of individuals the financial manager can be conceived as working between the firm and its operations and the financial markets one assignment for the financial manager is to raise cash from the financial markets that is from either equity or debt investors

Equity investors are shareholders or owners debt investors are lenders once the firm where the financial manager has raised that those funds then the financial manager is charged with advising the firm as to how to invest the cash so as to increase the value of the firm to its owners if the firm generates cash from operations then the financial manager has the

Assignment of deciding how to use that cash and the choices amount to reinvesting the cash in the operations of the firm so as to increase the value of the firm to its owners or paying the cash out to the investors either in the form of dividend payments to the shareholder owners or interest payments and return a principal to the debt suppliers an expanded concept

Or consideration of the role of the financial manager beyond the scope of this course would be just to think of the financial manager as having first the assignment of preparing the financial statements of the firm you can think of the financial statements of the organization as depicting the results of the decisions that are we’re going to be covering in this

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Course a second assignment for the financial manager is to help in developing the strategic financial plan of the organization which is developed to support the overall strategy of the firm you can think of the strategic financial plan as a set of projected financial statements into the future whereas the historical financial statements describe what has happened

Historically the strategic financial plan is a pro forma or projected set of financial statements will cover strategic financial planning toward the end of this course a third assignment for the financial manager is to analyze capital expenditure proposals that might come from senior management or from some other place in the organization a fourth assignment is

To determine the optimal capital structure of the firm by this is meant what is the right mix of debt and equity to support the capital expenditure of the firm and to support the firm’s operations so as to minimize the overall cost of financing a fifth assignment is actually to go and secure the capital financing that the firm needs whether it be securing debt by

Selling bonds to the public or securing equity by selling stock to the public or to other ownership types in this course we’ll focus our attention on these last three assignments for the financial manager that is we’re going to focus our attention on the analysis of capital expenditure proposals on the determination of optimal capital structure and on the securing

Of capital financing but there are some other assignments that the financial manager has that we won’t be covering this in this course one is management of cash cash management actually has several aspects and i’ve listed a couple of them here for your consideration one is working to ensure that the firm collects its receivables from its customers as rapidly as

Possible so as to minimize the cost of money tied up in accounts receivable a second is to invest the cash that the firm has on its in a portfolio of investments that maximizes return and then the last can a general assignment for the financial manager is a big one and that is to control to achieve the financial plan controlling involves cost management systems

Such as budgeting systems and it involves revenue maximization aspects such as price setting and indeed even marketing now some common finance terminology we want to distinguish real assets from financial assets real assets are physical things like equipment buildings sometimes inventories they show up often they show up on the balance sheet of the organization as

Planned property and equipment they represent the physical capital that the firm combines with labour to produce goods and services that the firm sells the contrast financial assets sometimes show up as other assets on the balance sheet and they typically represent cash and the investment portfolio of the firm in this course we’ll use the terms capital markets and

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Financial markets pretty much interchangeably to represent where the firm goes to raise financing we’ll also use the terms investment and capital budgeting or capital expenditure analysis pretty much interchangeably to describe the decision analysis that the firm undertakes to evaluate new programs new businesses the acquisition of new assets and finally financing

Is a term we use to describe the acquisition of funds by the firm to support its investments and operations this course will cover some specific financial analyses and decisions these analyses and decisions are designed to help solve two basic finance problems the first one is the investment decision problem which which can be phrased as how much should we

Invest and what assets should we invest in some examples might be should we purchase a new piece of production equipment a new piece of manufacturing equipment should we invest in a new office building or thinking really big should we purchase a new fir another firm as a new subsidiary in terms of personal investment decisions you might think of whether you should

Purchase a new house or whether you should purchase a car or maybe even whether you should purchase a fancy sailboat the financing decision is often characterized as how should the cash required for the operation of the firm be raised there are essentially two general sources of financing debt financing or borrowed funds and equity financing which is often raised by

Selling stock or retaining earnings both of these decisions are made with respect to one criterion and that criterion is to maximize the wealth of the owners or to make the owners of the firm as well-off as possible that is to maximize the value of the firm to its owners in the corporate world the value of the firm is represented by cash flow that might be used to

Support either an increase in the price of the stock of the firm or an increase in the dividends that are paid out to owners these finance problems have important characteristics that determine how we approach the solution to these problems first in approaching these problems we focus on cash flows instead of accruals now we’re getting into some technical finance

Terms to distinguish cash flows from accruals let’s first think about the difference between expenses and cash outflows okay an example might be the firm purchases a capital asset like a new piece of manufacturing equipment that purchase is not reflected as an expense at the time of purchase they rather there’s a significant cash outflow that will show up on the

Cash flow analysis that we’re going to be doing but no expenses recorded right as the asset is purchased over the life of the asset the cost of that asset are spread out and recognized as depreciation expense and as depreciation expense is recognized it is in fact recorded as an expense on the income statement of the organization but it is not a cash outflow to

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The firm during the period of the depreciation expense recognition we’re going to be focusing in our capital expenditure analysis in particular on cash outflows not expenses let’s also distinguish revenues and cash inflows a good example is when the firm borrows funds from lenders when it does so there’s no recognition of revenues into the firm rather there is

A significant cash inflow as the firm sells bonds to the public or borrows in another way let’s say takes out a mortgage at a bank but there’s no revenue in the financing part of the course we are going to be focusing on the cash inflow associated with borrowing funds and not recognizing that as a revenue so that’s the first important characteristic of these

Decisions is that we focus on cash flows instead of accruals hence this is very different from what’s looked at in a cost accounting course where you’re focusing on revenues and expenses here we focus on cash inflows and cash outflows some other important characteristics of these of these decisions that we’re going to need to keep in mind as we move through the

Course the decisions typically involve consequences for the firm that lasts for several years now several years could be anywhere between three and a hundred so the decisions we’re looking at are decisions that involve or have implications for the cash flows of the firm for some period of time between three and let’s say a hundred years when we do these decision

Analyses there’s typically significant risk in projecting what the future cash flows might be that is to say when we set up a new business we certainly don’t know with any degree of certainty what the future cash flows are going to be associated with that new business we have a projection about what our revenues are i should say our cash inflows are going to be we

Have a projection about what our expenses that is i should say our cash outflows are going to be and we do our best to handle the risk of future cash flows with some important tip risk handling or risk management techniques that we’ll discuss later in the course finally some organizations in their decisions in their financial decisions care about other than cash

Values i want to start by noting that what we’re going to do in this course is just to focus on the cash implications of capital expenditure or investment decision and capital financing decisions and not to deal with the non-cash values i do want to note that there are some firms that take account of social values in their investment decision making but that won’t be part of this course

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video 1 Finance and the Financial Manager By Jack Wheeler