Introduction to Managerial Finance

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Principal Of Managerial Finance:

Introduction to Managerial Finance:

WHAT IS FINANCE?

  • Finance can be defined as the science and art of managing money.
  • At the personal level, finance is concerned with individuals’ decisions about how much of their earnings they spend, how much they save, and how they invest their savings.
  • In a business context, finance involves the same types of decisions: how firms raise money from investors, how firms invest money in an attempt to earn a profit, and how they decide whether to reinvest profits in the business or distribute them back to investors.

CAREER OPPORTUNITIES IN FINANCE

Careers in finance typically fall into one of two broad categories: (1) Financial services and (2) Managerial finance.

Financial Services: 

  • Financial services are the area of finance concerned with the design and delivery of advice and financial products to individuals, businesses, and governments. 
  • Financial services involve a variety of interesting career opportunities within the areas of banking, personal financial planning, investments, real estate, and insurance. 

Managerial Finance:

  • Managerial finance is concerned with the duties of the financial manager working in a business. 
  • Financial managers administer the financial affairs of all types of businesses—private and public, large and small, profit seeking and not for profit. 
  • They perform such varied tasks as developing a financial plan or budget, extending credit to customers, evaluating proposed large expenditures, and raising money to fund the firm’s operations. 
  • The recent global financial crisis and subsequent responses by governmental regulators, increased global competition, and rapid technological change also increase the importance and complexity of the financial manager’s duties.
  • Increasing globalization has increased demand for financial experts who can manage cash flows in different currencies and protect against the risks that naturally arise from international transactions.

LEGAL FORMS OF BUSINESS ORGANIZATION: 

One of the most basic decisions that all businesses confront is how to choose a legal form of organization. This decision has very important financial implications because how a business is organized legally influences the risks that the firm’s owners must bear, how the firm can raise money, and how the firm’s profits will be taxed. The three most common legal forms of business organization are the sole proprietorship, the partnership, and the corporation.

Matter of fact:

 Although there are vastly more sole proprietorships than there are partnerships and corporations combined, they generate the lowest level of receipts. In total, sole proprietorships generated more than $969 billion in receipts, but this number hardly compares to the more than $17 trillion in receipts generated by corporations.


Sole Proprietorships:

  • A sole proprietorship is a business owned by one person who operates it for his or her own profit. The majority of sole proprietorships operate in the wholesale, retail, service, and construction industries. 
  • A major drawback to the sole proprietorship is unlimited liability, which means that liabilities of the business are the entrepreneur’s responsibility, and creditors can make claims against the entrepreneur’s personal assets if the business fails to pay its debts.

Partnerships:

  • A partnership consists of two or more owners doing business together for profit. . Partnerships are common in the finance, insurance, and real estate industries. Public accounting and law partnerships often have large numbers of partners.
  • Most partnerships are established by a written contract known as articles of partnership. In a general (or regular) partnership, all partners have unlimited liability, and each partner is legally liable for all of the debts of the partnership.

Corporations:

  • A corporation is an entity created by law. A corporation has the legal powers of an individual in that it can sue and be sued, make and be party to contracts, and acquire property in its own name. 
  • The owners of a corporation are its stockholders, whose ownership, or equity, takes the form of either common stock or preferred stock. Unlike the owners of sole proprietorships or partnerships, stockholders of a corporation enjoy limited liability, meaning that they are not personally liable for the firm’s debts. Their losses are limited to the amount they invested in the firm when they purchased shares of stock. 
  • Common stock is the purest and most basic form of corporate ownership. Stockholders expect to earn a return by receiving dividends—periodic distributions of cash—or by realizing gains through increases in share price. The stockholders (owners) vote periodically to elect members of the board of directors and to decide other issues such as amending the corporate charter. 
  • The board of directors is typically responsible for approving strategic goals and plans, setting general policy, guiding corporate affairs, and approving major expenditure.
Corporate Organization:
 The general organization of a corporation and the finance function (which is shown in yellow)

The president or chief executive officer (CEO) is responsible for managing day-to-day operations and carrying out the policies established by the board of directors. The CEO reports periodically to the firm’s directors.

Other Limited Liability Organizations A number of other organizational forms provide owners with limited liability. The most popular are limited partnership (LP), S corporation (S corp), and limited liability company (LLC), and limited liability partnership (LLP).

Strengths and Weaknesses of the Common Legal Forms of Business Organization:



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