In finance , the goal of the firm is always described as "maximization of shareholders' wealth".
Profit Maximization - is always used as a goal of the firm in microeconomics. Focus on short term goal to be achieved within a year. It stresses on the efficient use of capital resources. In order to maximize profit, the financial manager will implement actions that would result in maximum profits without considering the consequence of his actions towards the company's future performance.
Drawbacks of Profit Maximization
- Profit maximization is a short-term concept.
- Profit maximization does not consider the timing of returns.
- Profit maximization ignores risk.
Maximization of Shareholders' Wealth
The goal is o maximize the shareholders' wealth for whom it is being operated. It being measured by the share price of the stock, which in turn is based on the timing of returns, the amount of the returns and the risk or uncertainty of the returns.
It also means maximizing the total market value of the existing shareholders' common stock. All financial decisions will affect the achievement of this goal. Shareholders' wealth maximization can be achieved by considering the present and potential future earnings per share, timing of returns, dividend policy and other factors that affect the market price of the company's stock.
Wednesday, January 6, 2010
Saturday, January 2, 2010
Functions of Financial Managers
The functions and responsibilities of financial managers are:-
1) Forecasting and Planning
Financial managers must be able to forecast the company's future performance. It based on factors such as economic performance, customers' preference and the future demand for their products. Then, the financial manager will lay plans, which will shape the company's future position.
2) Investment and Financing Decision
Based on the forecasts and the plans mentioned , financial managers will be able to do :
i) Determine sales growth rates
ii) Determine what specific assets to purchase
iii) Determine the best method of financing those assets, whether to use debt or to
use equity .
3) Coordination and Control
Finance managers have to interact with other departments within the organization. It because the decisions of other departments might affect investment decisions.
4) Dealing with Financial Markets
As finance managers, they will have to deal with money markets and capital markets. The financial manager has to obtain financing either through the money market or capital market.
1) Forecasting and Planning
Financial managers must be able to forecast the company's future performance. It based on factors such as economic performance, customers' preference and the future demand for their products. Then, the financial manager will lay plans, which will shape the company's future position.
2) Investment and Financing Decision
Based on the forecasts and the plans mentioned , financial managers will be able to do :
i) Determine sales growth rates
ii) Determine what specific assets to purchase
iii) Determine the best method of financing those assets, whether to use debt or to
use equity .
3) Coordination and Control
Finance managers have to interact with other departments within the organization. It because the decisions of other departments might affect investment decisions.
4) Dealing with Financial Markets
As finance managers, they will have to deal with money markets and capital markets. The financial manager has to obtain financing either through the money market or capital market.
Important Parties in The Financial Environment
The important parties are made up of:-
1) Financial Managers
Financial managers are responsible for deciding how to invest the firm's funds for expanding its business (investment decision) and how to obtain funds (financing decision) for investment.
As financial managers, thay may have to deal with a wide variety of plans, such as production plans, financial plans, marketing plans and personnel plans.
2) Investors
Investors can be individuals or financial institutions that provide funds to firms, the government, agencies or other individuals who need those funds.
For examples individuals provides funds by purchasing securities of firms. Financial institutions or institutional investors provide funds by giving loans to individuals and firms or by purchasing securities issued by other firms.
3) Financial Markets
Financial markets represents forums that facilitate the flow of funds among investors, firms, government units and agencies. They provide a meeting place where suppliers and demanders of loans and investments can transact business directly.
It can be broken down into Money and Capital markets.
Money Markets are markets dealing with short term securities that have a life of one year or less. These securities are very liquid, and easily be convert into cash without loss of value.
Capital Markets are markets where securities have a life of more than one year. Examples include common stock, prreference stock and bonds.
4) Financial Institutions
Financial institutions serve as intermediaries that channel the savings of individuals, businesses and governments into loans or investments. They include commercial banks, saving institutions, insurance companies, pension funds, finance companies and mutual funds.
1) Financial Managers
Financial managers are responsible for deciding how to invest the firm's funds for expanding its business (investment decision) and how to obtain funds (financing decision) for investment.
As financial managers, thay may have to deal with a wide variety of plans, such as production plans, financial plans, marketing plans and personnel plans.
2) Investors
Investors can be individuals or financial institutions that provide funds to firms, the government, agencies or other individuals who need those funds.
For examples individuals provides funds by purchasing securities of firms. Financial institutions or institutional investors provide funds by giving loans to individuals and firms or by purchasing securities issued by other firms.
3) Financial Markets
Financial markets represents forums that facilitate the flow of funds among investors, firms, government units and agencies. They provide a meeting place where suppliers and demanders of loans and investments can transact business directly.
It can be broken down into Money and Capital markets.
Money Markets are markets dealing with short term securities that have a life of one year or less. These securities are very liquid, and easily be convert into cash without loss of value.
Capital Markets are markets where securities have a life of more than one year. Examples include common stock, prreference stock and bonds.
4) Financial Institutions
Financial institutions serve as intermediaries that channel the savings of individuals, businesses and governments into loans or investments. They include commercial banks, saving institutions, insurance companies, pension funds, finance companies and mutual funds.
Friday, January 1, 2010
The Decision Functions of Financial Management
The Decision Functions of Financial Management
It can be categories into THREE:-
1) Investment Decision - The most important decision. It begins with the firm determining the total amount of assets needed to be held by the firm. There are 2 types of investment decision:
a) Capital Investment Decision - Involves large sums of money. The impact is critical. examples acquire a new machine or to set up a new plant.
b) Working Capital Investment Decision - a more routine or schedule form of decision . Examples are determination of the amount of inventories, cash and account receivables to hold within a certain period.
2) Financing Decision - The second major decision. After deciding on what assets to buy or what securities to invest in, the financial manager would have to decide on how to finance these assets.
Sources of Finance - 2 sources ; Borrowings and/ or Capital
3) Assets Management Decision - The third and last decision. Once the assets have been acquired and appropriate financing provided, these assets must be managed efficiently. By managing currents assets effectively and efficiently, the company can increase its returns and minimizes its risk of illiquidity.
It can be categories into THREE:-
1) Investment Decision - The most important decision. It begins with the firm determining the total amount of assets needed to be held by the firm. There are 2 types of investment decision:
a) Capital Investment Decision - Involves large sums of money. The impact is critical. examples acquire a new machine or to set up a new plant.
b) Working Capital Investment Decision - a more routine or schedule form of decision . Examples are determination of the amount of inventories, cash and account receivables to hold within a certain period.
2) Financing Decision - The second major decision. After deciding on what assets to buy or what securities to invest in, the financial manager would have to decide on how to finance these assets.
Sources of Finance - 2 sources ; Borrowings and/ or Capital
3) Assets Management Decision - The third and last decision. Once the assets have been acquired and appropriate financing provided, these assets must be managed efficiently. By managing currents assets effectively and efficiently, the company can increase its returns and minimizes its risk of illiquidity.
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