The Goals and Functions of Financial Management

The Goals and Functions of Financial Management

We strive to maximize shareholder wealth through solid profitable growth and effective use of capital. Ð"Ð...Specific financial goals are to achieve:Ð"Ð...

Ð"Ð...1.Ð"Ð... at least 30 percent of sales from products introduced during the last four years

Ð"Ð...2.Ð"Ð... growth in earning per share of more than 10 percent per year on average

Ð"Ð...3.Ð"Ð... growth in economic profit exceeding earnings per share growth, and return on invested capital Ð"Ð...among the highest of industrial companies.Ð"Ð...

In order to achieve these goals, the financial manager must:Ð"Ð...

Ð"Ð...1.Ð"Ð... Manage their company's global affairs

Ð"Ð...2.Ð"Ð... React quickly to changes in financial markets and exchange rates flactuations

The field of Finance

The field of Finance is closely related to economics and accounting, and financial managers need to Ð"Ð...understand the relationships between these fields.Ð"Ð...

Economics provides a structure of decision making in such areas as risk analysis, pricing theory Ð"Ð...through supply and demand relationships, comparative return analysis, and many other important Ð"Ð...areas. Economics also provides the broad picture of the economic environment in which corporations Ð"Ð...must continually make decisions.Ð"Ð...

A financial Manager must understand the institutional structure of the Federal Reserve System, the Ð"Ð...commercial banking system, and the interrelationships between the various sectors of the economy.Ð"Ð...

Economic variables such as gross domestic product, industrial production, disposable income, Ð"Ð...unemployment, inflation, interest rates, and taxes must fit into the financial manager's decision model Ð"Ð...and be applied correctly.Ð"Ð...

Accounting is sometimes said to be the language of finance because it provides financial data through Ð"Ð...income statements, balance sheets, and the statement of cash flows.Ð"Ð...

The Financial manager must know how to interpret and use these statements in allocating the firm's Ð"Ð...financial resources to generate the best return possible in the long run.Ð"Ð...

Finance links economic theory with the numbers of accounting, and all corporate managers Ð"Ð...whether in production, sales, research, marketing, management, or long run strategic planning must Ð"Ð...know what it means to assess the financial performance of the firm.Ð"Ð...

Functions followed by financial manager:Ð"Ð...

Ð"Ð...1.Ð"Ð... international cash flow Ð"Ð... Ð"Ð...2. bank relationship Ð"Ð... Ð"Ð...5. acquisition of capital

Ð"Ð...3.Ð"Ð... payroll Ð"Ð... Ð"Ð...4. purchases of plant

Ð"Ð...*Finance moved away from its descriptive and definitional nature and became more analytical. One of Ð"Ð...the major advances was the decision Ð'- oriented process of allocating financial capital (money) for the Ð"Ð...purchase of real capital (Long-term plant and equipment).Ð"Ð...

Financial capital: common stock preferred stock, bonds and retained earnings. Financial capital Ð"Ð...appears on the corporate balance sheet under long Ð'- term liabilities and equity.Ð"Ð...

Real Capital: Long term productive assets (plant and equipment)Ð"Ð...

Recent Issues in Finance

More recently, financial management has focused on risk-return relationships and the maximization of Ð"Ð...return for a given level of risk.Ð"Ð...

Capital Structure Theory: A theory that addresses the relative importance of debt and equity in the Ð"Ð...overall financing of the firm.Ð"Ð...

Inflation: The phenomenon of prices increasing with the passage of timeÐ"Ð...

Disinflation: A leveling off or slowdown of price increases.Ð"Ð...

Ð"Ð...* The effects of inflation and disinflation on financial forecasting, the required rates of return for Ð"Ð...capital budgeting decisions, and the cost of capital are quite significant to financial managers and have Ð"Ð...become more important in their decision making.Ð"Ð...

Ð"Ð...* for a financial manager, e-commerce impacts financial management because it affects the pattern Ð"Ð...and speed with which cash flows through the firm.Ð"Ð...

Functions of Financial Management

Functions financial managers must perform:Ð"Ð...

Ð"Ð...1.Ð"Ð... Allocate funds to current and fixed assets

Ð"Ð...2.Ð"Ð... obtain the best mix of financing alternatives

Ð"Ð...3.Ð"Ð... develop an appropriate dividend policy within the context of the firm's objectives

The daily activities of financial management include:Ð"Ð...

Ð"Ð...1.Ð"Ð... Credit management

Ð"Ð...2.Ð"Ð... inventory control

Ð"Ð...3.Ð"Ð... receipt and disbursement of funds

Less routine functions:Ð"Ð...

Ð"Ð...1.Ð"Ð... sale of stocks and bonds

Ð"Ð...2.Ð"Ð... establishment of capital budgeting

Ð"Ð...3.Ð"Ð... dividend plans

The appropriate risk-return trade-off must be determined to maximize the market value of the firm for Ð"Ð...its shareholders. The risk-return decision will influence not only the operational side of the business( Ð"Ð...capital versus labor or Product A versus Product B) but also the financing mix (stocks versus bonds Ð"Ð...versus retained earnings)Ð"Ð...