Intro to Financial Management
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This document provides an overview of key concepts in financial management including definitions, decision making, business intelligence, risk management, capital management, and financial planning. It discusses informed decision making using relevant metrics and accounting information. It describes the finance function's role in providing business performance data, accounting reports, and market information for decision making. It also summarizes various types of risks managed by finance like liquidity, market, and credit risk. Capital management and allocating capital to maximize shareholder value is covered. The importance of financial planning for monitoring performance and accountability is highlighted. Recommended reading and videos are included for further reference.
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Intro to Financial Management
- 1. Key elements of Financial Management MAS 010 Financial Management Prof. Enrique Melero Gómez
- 3. Some Definitions Informed Decision Making Business Intelligence Financial Risk Management Capital Management Financial Planning
- 4. “Informed” Decision Making "Decision implies the end of deliberation and the beginning of action." Any Decision has an associated risk, and it has to be estimated https://hbr.org/2006/01/a-brief-history-of-decision-making
- 5. Some Definitions Informed Decision Making Business Intelligence Financial Risk Management Capital Management Financial Planning
- 6. Business Intelligence Finance Function has become the central provider of business information for the organization 1. Business Performance 2. Accounting (Mgmt. and Financial) 3. Market Information
- 7. BI 1 of 3 - Business Performance Finance departments ensure no deviation between internal and externally provided information Finance works with business to ensure metrics are relevant and measures are accurate Main data source for informed decision making process
- 8. BI 2 of 3 - Accounting, Mgmt. and Financial Daily / Monthly / Quarterly / Yearly Measure both Business and Company performance Mgmt. Accounts Examples: Cost accounting, department accounting, business performance, budget execution Financial Accounts Examples: Profit and Loss statement, statutory accounts
- 9. BI 3 of 3 - Market Information Used by the Business function Finance ensure it is aligned with corporate objectives and external measures Examples: customer taxonomy and size, market prices, market taxonomies and volumes, share of market, competitors metrics ...
- 10. Some Definitions Informed Decision Making Business Intelligence Financial Risk Management Capital Management Financial Planning
- 11. Risk Management Finance has a role to managing a number of risks, this may or not include: - Liquidity Risk - Market Risk - Counterparty Credit Risk - Funding Risk The relationship between Risk and Return CAPM We will look at those in details in sessions 3 and 4
- 12. Some Definitions Informed Decision Making Business Intelligence Financial Risk Management Capital Management Financial Planning
- 13. Capital Management How can we best allocate capital of the organization to maximize the shareholder’s value? And ... Which sources of long term funding should we use? Investment vs. funding decisions paradigms We will look at it in sessions 5 to 8
- 14. Some Definitions Informed Decision Making Business Intelligence Financial Risk Management Capital Management Financial Planning
- 15. Financial Planning A key finance function to ensure early identification of problems and allow corrective actions Allows monitoring both management performance as well as corporate performance Key element for incentive management and corporate discipline through ACCOUNTABILITY We will look at it in detail sessions 9 & 10
- 20. Reading A Brief History of Decision Making - Leigh BuchananAndrew O'Connell https://hbr.org/2006/01/a- brief-history-of-decision-making
- 22. Maths and Finance Key Concepts Interest Rates Future and Present Value IRR Internal Rate of Return Value and Price
- 23. Interest Rates “Relationship between the amount of money that is lent (Capital) and the amount that people are ready to pay to use it (Interest)” I = $ Interest / $ Capital Used to calculate the IRR internal rate of return of an investment (or the cost of debt) Annualized interest rates
- 24. How many Interest Rates ? Zero Coupon Discounted Interest Compounded Interest Zero Risk Rate Money Market Rate Prime Rate Libor Rate Euribor 30d / 360 Actual/Actual Liquidity Premium Credit Spread Mortgage Rates Fed Funds Rate Swap Rate
- 25. How many Interest Rates ?
- 26. Only one IRR
- 27. Only one IRR There is no single formula ! Normally Refers to the relation between a series of future cashflows and an initial investment
- 28. Money and Value In economics, money illusion refers to the tendency of people to think of currency in nominal, rather than real, terms. In other words, the numerical/face value (nominal value) of money is mistaken for its purchasing power (real value). This is false, as modern fiat currencies have no inherent value and their real value is derived from their ability to be exchanged for goods and used for payment of taxes. The term was coined by John Maynard Keynes in the early twentieth century. Almost everyone is subject to the "Money Illusion" in respect to his own country's currency. This seems to him to be stationary while the money of other countries seems to change. It may seem strange but it is true that we see the rise or fall of foreign money better than we see that of our own. - Irving Fisher “The Money Illusion”
- 30. Accounting and Finance Profit Statement Balance Sheet Cash Flow Statement
- 31. Profit is not Everything 1
- 32. Profit is not Everything 2
- 33. What do you prefer?
- 35. Recommended Reading http://jeremycripps.com/docs/Summa.pdf Don’t try to read it ! ->
- 36. See you Next class! Prof. Enrique Melero Gómez
Editor's Notes
- Company’s number alone don’t mean much in a competitive environment. Looking at how competition is doing and allowing us to compare the performance of our business with the performance of other similar businesses is often the best way to discover opportunities. But the problem arises when those numbers are wrong or just not usable. For example, measuring revenue without having correct information about the underlying costs may lead to situations in which one part of the company is undermining the efforts of another part. Problems appear as well when the numbers are just not usable to make decisions. For example, measuring the output of a factory in Tons when probably measuring it by produced units would be more intelligent. Or when the production of a given service adds additional financial risks that may get the company our of business One of the most typical problems we observe in finance is the stickiness to legacy issue: “It has always been done this way” . Think that in a changing environment past performance is usually the worst indicator of future performance.
- We will devote a big part of the course to risk management. Not all risks are managed in the same way, not even all of them are managed by the same function within a corporate. We will take some examples, those that are typically managed by Finance, and we will learn how it is done. I will give you practical examples on how risk limits are set and how they are monitored. We will talk about how risks can be hedged and what are the responsibilities of Finance in that regards. We will discuss a little bit about treasury functions, one of the most relevant day to day functions within finance. All this will be extended in sessions 3 and 4 It is important that we understand what Liquidity Risk, Market Risk, Credit Risk and Funding risk is, as some of the typical risks that are monitored and managed by the Finance function. An important part of this is to understand expected return, as a function of risk R = ( riskfree + some additional risk linked to the investment )
- Capital is probably the most scarce resource in a corporate Understanding the cost of capital and be able to compare it to alternatives gives a framework for capital management decisions During 5 to 8 we will look at some of this principles and it will converge in capital budgeting matters that we will examine in the financial planning sessions
- Financial planning is the foundation for the intereaction between the business and the finance function. Challenging forecasts, monitoring budget execution, challeging investing decisions and explaning the numbers is a critical part of the finance function and the reason why it is responsible to produce the numbers for the organization