Introduction to Financial Management

What is Finance?

• Finance is the art and science of managing money.
  • Art: Based on feelings (e.g., dancing, singing).
  • Science: Based on facts and figures, requiring experiments and theories.
• Key focus: Managing money.

What is Financial Management?

• Important aspect for companies.
• Involves the maintenance and creation of economic value or wealth.
  • Wealth Example:
    • Market value of Company A: $100 billion
    • Total investment: $30 billion
    • Wealth created: $100 billion - $30 billion = $70 billion

Types of Finance

1. Personal Finance

   • Managing individual financial resources.
   • Goals include:
     • Buying a house or car
     • Saving for education or retirement
   • Involves budgeting, emergency savings, debt repayment, and investments.

2. Corporate Finance

   • Managing a company's money.
   • Focuses on strategic decisions for resource allocation to achieve goals.
   • Important considerations:
     • How to raise and invest funds
     • Profit reinvestment vs. distribution to investors.

Finance vs. Accounting

• Similarities: Some overlapping functions.
• Differences:
  • Focus:
    • Accounting: Recording and reporting financial transactions
    • Finance: Managing and allocating resources
  • Time Orientation:
    • Accounting: Past and present
    • Finance: Future-oriented
  • Methods:
    • Accounting: Accrual method
    • Finance: Cash method
      • Example of differences in profit/loss recognition.

Goals of a Company

1. Profit Maximization

   • Focused on dollar profit, short-term benefits.
   • Long-term issues:
     • Customer loyalty
     • Timing and magnitude of returns
     • Social responsibility.

2. Shareholder Wealth Maximization

   • Focuses on maximizing company value (share price).
   • Long-term approach to increase financial assets' value.
   • Investment strategies to enhance value.
   • Profit is a subset of value; creating value leads to profit.

3. Stakeholder View

   • Consideration of all economic links to the firm.
   • Focus on preserving stakeholder well-being (employees, customers, environment).
   • Corporate Social Responsibility (CSR) as an important consideration.
   • Improving financial performance through CSR initiatives.

Conclusion

• Financial management combines both art and science in the context of managing money.
• It is essential for both personal and corporate finance to create, manage, and maximize wealth.