The Role of Financial Management

(Note: This article only serves as short notes and not in no way should be taken as comprehensive. For details please use other online sources)

So, to start with, we will deal with the following questions;

1.       What is Finance?

2.       What is Financial Management?

3.       The Goal of the Firm

4.       Corporate Governance

5.       Organization of the Financial Management Function

What is Finance?

Art and Science of Managing Money.

is concerned with the process, institutions, markets, and instrument involved in the transfer of money among individuals, businesses and government.

What is Financial Management?

Financial management concerns the acquisition, financing, and management of assets with some overall goal in mind.

Most important of the three decisions are.

1. What is the optimal firm size?
2. What specific assets should be acquired?
3. What assets (if any) should be reduced or eliminated?

How do we manage existing assets efficiently?

Financial Manager has varying degrees of operating responsibility over assets.

Greater emphasis on current asset management than fixed asset management.

What is the Goal of the Firm?

Maximization of Shareholder Wealth!

Value creation occurs when we maximize the share price for current shareholders.

The Modern Corporation

Role of Management

Management acts as an agent for the owners (shareholders) of the firm.

·         An agent is an individual authorized by another person, called the principal, to act in the latter’s behalf.

Social Responsibility

·         Wealth maximization does not preclude the firm from being socially responsible.

·         Assume we view the firm as producing both private and social goods. 

·         Then shareholder wealth maximization remains the appropriate goal in governing the firm.

Corporate Governance

·         Corporate governance: represents the system by which corporations are managed and controlled.

o   Includes shareholders, board of directors, and senior management.  

·         Then shareholder wealth maximization remains the appropriate goal in governing the firm.