Type of Business and The Role of Financial Management
Organizing a Business Types of Business Organizations Sole Proprietorships Partnerships Corporations
Organizing a Business Who owns the business? Are managers and owners separate? What is the owner s liability? Are the owner & business taxed separately? Sole Proprietorship Partnership Corporation The manager Partners Shareholders No No Usually Unlimited Unlimited Limited No No Yes
Corporate Structure Sole Proprietorships Partnerships Unlimited Liability Personal tax on profits Limited Liability Corporations Corporate tax on profits + Personal tax on dividends
What is the Goal of the Firm? Maximization of Shareholder Wealth! Value creation occurs when we maximize the share price for current shareholders.
The Role of The Financial Manager (2) (1) Firm's operations Financial Manager (4a) Investors Real assets (3) (4b) (1) Cash raised from investors (2) Cash invested in firm (3) Cash generated by operations (4a) Cash reinvested (4b) Cash returned to investors
Investment Decisions Most important of the three decisions. What is the optimal firm size? What specific assets should be acquired? What assets (if any) should be reduced or eliminated?
Financing Decisions Determine how the assets (LHS of balance sheet) will be financed (RHS of balance sheet). What is the best type of financing? What is the best financing mix? What is the best dividend policy? How will the funds be physically acquired?
Asset Management Decisions How do we manage existing assets efficiently? Financial Manager has varying degrees of operating responsibility over assets. Greater emphasis on current asset management than fixed asset management.
Goals of The Corporation Shareholders desire wealth maximization Do managers maximize shareholder wealth? Mangers have many constituencies stakeholders Agency Problems represent the conflict of interest between management and owners
Role of Management Management acts as an agent for the owners (shareholders) of the firm. An agent is an individual authorized by another person, called the principal, to act in the latter s behalf.
Agency Theory Jensen and Meckling developed a theory of the firm based on agency theory. Agency Theory is a branch of economics relating to the behavior of principals and their agents.
Agency Theory Principals must provide incentives so that management acts in the principals best interests and then monitor results.
Irwin/McGraw-Hill Financial Markets Issue Debt Company Cash Investors
Irwin/McGraw-Hill Financial Markets Company Banks Insurance Cos. Brokerage Firms Depositors Policyholders Investors Obligation s Obligation s Intermediary Investor Funds Funds
Irwin/McGraw-Hill Financial Markets Company Loan $2.5 mil Banks Intermediary Deposits Cash Depositors Investor
Financial Public Relations and Investor Relations
WHAT IS PR? PR Involves a Variety of Programmes Designed to Promote or Protect a Company,s Image or its Products
The Role of Public Relations Evaluate public Attitudes Executes programs to gain public acceptance Identifies issues of public concern
Functions of Public Relations Press Relations Product Publicity Corporate Communication Public Affairs Lobbying Employee and Investor Relations Crisis Management
Investor Relations Investor relations is defined as a strategic management responsibility that integrates finance, communication, marketing and securities law compliance to enable the most effective two way communication between a company, the financial community, and other constituencies, which ultimately contributes to a company s securities achieving fair valuation.
Benefits of Investor Relations 1. Investor relations is responsible for raising shareholder capital to enable corporations to implement their vision into reality. 2. Investor relations helps companies survive through various stages of their development by enabling access to shareholder capital. 3. Investor relations ensures corporate executives are doing everything they can to lead corporations to long-term sustainable growth, while simultaneously benefiting the society and providing financial returns to shareholders.