An Overview of Financial ManagementAn Overview of Financial Management

Class ObjectivesClass ObjectivesRead, interpret, and analyze

financial reportsManage working capital and

profitsUnderstand the importance of

growthKnow how to finance growth

Class Objectives cont.Class Objectives cont.Sources, types, and costs of

capitalRisk, reward, and value

creationInvestment analysisStructure and negotiate a new

hospitality venture

Hospitality Financial Hospitality Financial ChallengesChallenges

Labor intensive

Fluctuating sales volume

Low profitability

Capital intensive

Reliance on discretionary incomes

A multi-faceted industry

What is Finance?What is Finance?

money or other liquid resources of a government, business, group, or individual

the system that includes the circulation of money, the granting of credit, the making of investments, and the provision of banking facilities

What is Finance?What is Finance?

the science or study of the management of funds

the obtaining of funds or capital

Areas in Finance Areas in Finance Markets and institutions

– Money market & Capital market– Financial institutions; Banks, Insurance compan

y, Finance company etc. Investment

– Decision making of investors Financial management

– Maintenance and creation of economic value or wealth

Use of computers and electronic transfers of information

The globalization of business

Financial Management Issues

Forecasting and planningInvestment and financing decisionsCoordination and controlTransactions in the financial marketsRisk management

Responsibilities of the Financial Staff

Sole proprietorshipPartnershipCorporation

Alternative Forms ofBusiness Organization

Advantages:– Ease of formation– Subject to few regulations– No corporate income taxes

Disadvantages:– Limited life– Unlimited liability– Difficult to raise capital

Sole Proprietorship

A partnership has roughly the same advantages and disadvantages as a sole proprietorship.

Partnership

Advantages:– Unlimited life– Easy transfer of ownership– Limited liability– Ease of raising capital

Disadvantages:– Double taxation– Cost of set-up and report filing

Corporation

The primary goal is shareholder wealth maximization, which translates to maximizing stock price.Do firms have any responsibilities to soci

ety at large?Is stock price maximization good or bad

for society?Should firms behave ethically?

Goals of the Firm

SurviveAvoid financial distress and bankruptc

yBeat the competitionMaximize sales or market shareMinimize costsMaximize profitsMaintain steady earnings growth

Possible financial Goals

is to maximize the current value per share of the existing stock

Because we consider stockholders of the firm are true owner.

The Goal of financial management

Projected earnings per shareTiming of the earnings streamRiskiness of the earnings streamUse of debt (capital structure)Dividend policy

Factors Influenced by Managers that Affect Stock Price

Ten Axioms that Form the Basics of FinTen Axioms that Form the Basics of Financial Managementancial Management

1. The Risk- Return Tradeoff: We won’t take on additional risk unless we expect to be compensated with additional return

2. The time value of money: A dollar received today is worth more than a dollar received in the future.

3. Cash-not profits- is King.4. Incremental cash flow: It’s only what cha

nges that counts.

5. The curse of competitive markets: Why it’s hard to find exceptionally profitable projects.– Differentiate products– Minimize cost

6. Efficient capital market: The markets are Quick and the prices are right.

7. The Agency problem: Managers won’t work for the owners unless it’s in their best interest.

Ten Axioms that Form the Basics of FinanTen Axioms that Form the Basics of Financial Managementcial Management

8. Tax bias business decisions9. All risk is not equal: Some risk can be diversified away, and some can not.10.Ethical behavior is doing the right thing, and Ethical dilemmas are everywhere in finance.

Ten Axioms that Form the Basics of Financial Management

Business EthicsBusiness Ethics

BriberyPersonal gainInsider informationProduct safetyEmployee practices

An agency relationshipagency relationship exists whenever a principal hires an agent to act on his or her behalf.

Within a corporation, agency relationships exist between:– Shareholders and managers– Shareholders and creditors

Agency Relationships

Managers are naturally inclined to act in their own best interests.

But the following factors affect managerial behavior:– Managerial compensation plans– Direct intervention by shareholders– The threat of firing– The threat of takeover

Shareholders versus Managers

Shareholders (through managers) could take actions to maximize stock price -high risk project for higher returns- that are detrimental to creditors.

Creditors has bankruptcy threat. In the long run, such actions will raise the cost of

debt(when a company takes part in more risky business) and ultimately lower stock price (while risk has been increased dramatically).

Shareholders versus Creditors