Financial Planning: Where we are and where we want to goImportant of Financial Planning: 1. plan out financial future 2. know where we stand 3. so we can get there
The process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. You are thinking about doing a new project to run a new business, so capital budgeting is when we ask ourselves that ”is it worth to put money into this project?” “ is it worth to use money on this machine? How much money do you think this machine will earn? Compare to the cost of getting money to buy this machine” “is it worth to pay money on this business? If You are thinking to run a new business.”
Capital structure refers to the combination or mix of debt and equity which a company uses to finance its long term operations.The financial manager has two concerns in this area. First, how much should the firm borrow? That is, what mixture of debt and equity is the best? The mixture chosen will affect both the risk and value of the firm.
Working capital Management refer to a firm’s short-term assets and liabilities.
An agency relationship exists whenever a principal (owner of a resource) hires an agent to act on their behalf. A common example of an agency relationship is a real estate broker – in particular, if you break it down between a buyer’s agent and a seller’s agent. A classic conflict of interest is when the agent is paid on commission, so they may be less willing to let the buyer know that a lower price might be accepted or they may elect to only show the buyer homes that are listed at the high end of the buyer’s price range.
Direct agency costs – the purchase of something for management that can’t be justified from a risk-return standpoint; monitoring costs.Indirect agency costs – management’s tendency to forgo risky or expensive projects that could be justified from a risk-return standpoint.
• Financial Management is the
management of financial assets in an
• There are 3 stages in the a financial
– Creation of Fund
– Allocation of Fund
– Growth of Fund
• There are three key elements to the
process of financial management:
– Financial Planning
– Financial Control
• Financial Management concern on three
basic type of question:
–Capital Budgeting: refers to a process where
we make decision concerning investment in
a long-term assets of the firm.
• Is it worth to put money into this
• Is it worth to use money to buy a
• Is it worth to pay money on new
– Capital Structure : is the mixture of long-
term debt and equity to finance its firm.
– There are two forms of Capital
• Equity Capital: refer to money of the
• Debt Capital: refer to money that we
borrow to running the Business.
• Working Capital Management: refer to a
firm’s short-term assets, such as
inventory, and it’s short-term liabilities,
such as money owed to suppliers.
• Working capital is the cash needed to pay
for the day--to--day operation of
• Beat the competition
• Maximize sales
• Maximize net income
• Maximize market share
• Minimize costs
• Maximize the value of (stock) shares
• Maximize the value of (stock) shares.
• Why? Shareholders own shares.
Managers, as agents, ought to act in a
way to benefit shareholders; i.e., to
enhance the value of the shares.
• A limitation of this goal is that value is
not directly observable.
• Agency relationship
–Principal hires an agent to represent its
–Stockholders (principals) hire managers
(agents) to run the company
• Agency problem
–Conflict of interest between principal
• Direct costs
(1) unnecessary expenses, such as a corporate jet
(2) monitoring costs.
• Indirect costs
– For example, a manager may choose not to take
on the optimal investment. He may prefer a less
risky project so that he has a higher probability
keeping his .
• Managerial compensation- Particularly at
the top - is often tied to financial
performance and particularly to share value.
• Another reason managers attempt to increase
share value is that it improve their job
prospects. Mangers who pursue stockholders
goals are in greater demand.
• Control of the firm lies with stockholders. They
elect a board of directors who hire and fire
• An important mechanism that stockholders have
to replace existing management is a Proxy fight. A
proxy is the authority to vote someone else’s
• Example: HP-Compaq proxy fight cost over
• A financial market is a market in
which people and entities can trade
financial securities that reflect supply
B. Firm invests
C. Cash flow from
E. Reinvested Cash flows
A. Firm issues securities
E equity shares
Total value of
Total value of the firm
to investors in the
A. Firm issues securities to raise
B. Firm invests in assets.
C. Firm’s operations generate
D. Cash is paid to government as taxes.
Other stakeholder may receive cash.
E. Reinvested cash flows are plowed back
F. Cash is paid out to investors in the form
of interest and dividends.
F. Dividends and
Financial markets function as both primary and secondary
markets for debt and equity securities.
• The primary market is where
securities are created It's in this
market that firms sell (float) new
stocks and bonds to the public for the first time.
• The secondary market is what people are talking about
when they refer to the "stock market".
Ex: Secondary Markets: When you hear about the New York
Stock Exchange or other exchanges that operate on Wall
Street, you are talking about secondary markets.
• What is the Balance Sheet identity ?
– Balance Sheet is a table that show about “Assets”,
“Liability”, and “Equity” and It is a convenient
means of organizing and summarizing what a firm
owns (its assets), what a firm owes (its liabilities),
and the difference between the two (the firm’s
equity) at a given point in time.
• As shown, the left-hand side lists the “Assets”
of the firm, and the right-hand side lists the
“Liabilities” and “Equity”.
• The Left-hand side is Assets and It can
“Current Assets” or “Fixed Assets” (Tangible
Assets) such as Land or Building.
• The Right-hand side is “Liabilities” or
“Equity” of firm such as “Current liabilities”
,like “Current Assets” ,have a life of less than
one year. example: Account payable (money
the firm owes to its suppliers) it is a Current
• Income Statement is a list or report that show
about Revenues, Expenses ,Income of the firm
and they usually make it a quarter of a month
or a year.
• The Income Statement equation is:
• The most important of these is Depreciation.
Suppose a firm purchase car $5,000 are being
depreciation over five-years period.
• then $5,000/5=$1,000 will be deducted each
years as an expenses.