Introduction to Financial Management

Definition of Finance

• Finance: Art and Science of managing money.
  • Art: Based on feelings (e.g., dancing, singing).
  • Science: Based on facts and figures; involves experiments and theories.
• Key Concept: Managing money is the essence of financial management.

Importance of Financial Management

• Objective: Maintenance and creation of economic value or wealth.
• Example:
  • Market value of Company A: $100 billion.
  • Total investment by investors: $30 billion.
  • Wealth created: $100 billion - $30 billion = $70 billion.

Types of Finance

1. Personal Finance

• Focus: Managing personal financial resources.
• Goals:
  • Buying a house or car.
  • Saving for children's education.
  • Retirement savings.
• Key Activities:
  • Budgeting.
  • Emergency savings.
  • Paying off debt.
  • Investing for the future.

2. Corporate Finance

• Focus: Managing a company's money.
• Objectives: Strategic decisions on resource allocation to achieve company goals.
• Key Questions:
  • How to raise money from investors?
  • How to invest for profit?
  • Reinvestment vs. distribution of profits.

Finance vs. Accounting

• Overlap: Some functions are closely related.
• Differences:
  • Focus: Accounting records transactions; Finance manages and allocates resources.
  • Perspective: Accounting looks at past/present; Finance focuses on future predictions.
  • Methods:
    • Accounting: Accrual method.
    • Finance: Cash method.

Example of Accounting vs. Finance

• Scenario:
  • Sales = $100,000 (uncollected).
  • Cost = $80,000 (paid).
  • Accounting (accrual): Profit = $20,000.
  • Finance (cash): Loss = $80,000.

Goals of a Company

1. Profit Maximization

• Definition: Focus on short-term profit.
• Risks:
  • May ignore long-term effects on customer loyalty and sales.
  • Overlooks risk and timing of returns.

2. Shareholder Wealth Maximization

• Focus: Increase value of the company (stock price).
• Long-term approach: Considers risk, timing, and magnitude of returns.
• Strategies:
  • Invest in new projects.
  • Improve product quality.
• Example: Google's initial strategy with Gmail to increase market share.

3. Stakeholder View

• Definition: Consider the interests of all groups linked to the firm.
• Stakeholders: Employees, customers, suppliers, creditors, community, environment.
• Corporate Social Responsibility (CSR):
  • Focus on preserving stakeholder well-being.
  • Examples: Donations, pollution prevention, employee welfare.

Conclusion

• Importance of considering both profit and value.
• Creating value leads to profit; profit alone doesn’t necessarily create value.

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Closing

• Thank you for watching! See you in the next video.