Financial Management

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Financial Management (F.M.)

• What is FM? FM is the management of financial resources – how best to find and use investments and financing opportunities in an ever-changing and increasingly complex environment.

• Why should CS majors study FM?– Core Life Skill – need to understand finance to manage your

business & personal life.– “Money Makes the World Go Round” – even healthy companies

and good CEO’s “die” because of poor FM– MIS and IT are just a part of the overall corporate strategy which

runs on financing, the major resource. – Financial Engineering is an upcoming field that requires people

with CS, math/science, and finance background

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FM 1-2

• Major Areas & Concepts of FM– Analysis of Financial Statements– Investment Decisions & Capital Budgeting

• Interest, Time Value, Cash Flows, NPV– Risk & Return

• Uncertainty, Risk, Portfolio Theory, Capital Asset Pricing Model (CAPM).

– Corporate Financing & Capital Structure• Cost of Capital, Leverage, Dividend Policy

– Valuation• Share, Bond, Option, Corporate

– Working Capital & Inventory Management– International Finance & Foreign Exchange

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Organizational Structure (FM 1-3)(Who does the FM work?)

Chief Executive Officer (CEO)

Chief Financial Officer (CFO)

Treasurer Controller

Cash & Investment Accounts

AuditCapital Budgeting

Capital Structure

Inventory

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FM 1-5

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Business Legal Entities (FM 1-4)• Proprietorship (80% of total number of businesses worldwide)

– Single owner is the company. The legal entity is the person who is the owner.– Disadvantages: Unlimited liability. In case of bankruptcy, owner can lose the business and

his personal belongings. Difficult to get financing.– Limited life. Proprietorships die with the owner.– Advantage: Easy to set up, Individual (personal) income tax only

• Partnership– Similar to Proprietorship except many owners– Can be Registered or Unregistered

• Corporation (control 80% of global sales of products and services)– Separate legal entity registered by the government.– Can be Private Limited (Pvt. Ltd.) or Public Limited (which may be listed on Stock Exchange)– Possibly thousands of owners / shareholders. Separation of shareholders and managers.– Limited liability and unlimited life (perpetual, going-concern)– Disadvantages: Double-taxation (Corporate Tax & Dividend Tax). Difficult to set up and

costly to maintain.

• Hybrids (Mixed)– S-Type Corporation: Corporation without double taxation – LLP: Limited Liability Partnership without double taxation– PC: Professional Corporation ie. doctors, limited liability

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FM 1-6

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Financial Markets (FM 1-7)

• Capital Markets– Stock Exchange (listed shares, unit trusts, TFC)

• Money Markets– Bonds

• Government of Pakistan: FIB, T-Bill• Private Sector: Corporate Bonds, Debentures

– Call Money, Inter-bank short-term and overnight lending– Loans, Leases, Insurance policies, Certificate of Deposits (CD’s)– Badlah (money lending against shares), Road-side money

lenders• Real Assets Markets

– Cotton Exchange, Gold Market, Kapra Market– Property (land, house, apartment, warehouse)– Computer hardware, Used Cars, Wheat, Sugar, Vegetables,etc.

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FM Course Details (FM 1-8)

• Text: – Financial Management – Theory and Practice (8th Edition) by

Brigham and Gapenski. (Lecture-wise outline of chapters is available with VU)

• Grading:– Homework / Quizzes 20%

2 Hourly Examinations 40% Final Exam 40%• Skills Required:

– Financial Accounting (financial statements, cash-flows, value…)– Mathematics (algebra, equations, graphical analysis, statistics) –

“Finance is a game of numbers!”– Excel Spreadsheet– Business common sense. Read newspapers & visit markets.