What Is Financial Management? • Financial management is the job of

managing a firm’s resources so that the firm can meets its goals and objectives.

• Financial management considers all activities concerned with obtaining money and using it effectively.

• Financial managers examine the financial data prepared by accountants and make recommendations to top executives regarding strategies for improving the financial strength (also known as health) of the organization.

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• Without financing there would be little business. Poor financial management is one of the principal reasons for business failure.

• 1. undercapitalization

• 2. poor control over cash flow

• 3. inadequate expense control

• A “financial plan” is a plan for obtaining and using the money needed to implement an organization’s goals. The three steps are:

o 1. forecasting both short-term and long-term financial needs

o 2. developing budgets to meet those needs

o 3. establishing financial control to see how well the company is doing what it set out to do

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As you can see, a key responsibility is to obtain money and

then control the use of that money effectively. Put another

way, financial managers are responsible for seeing that the

company pays its bills.

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The Canadian Securities Industry

• The Canadian securities industry raises capital for start-up and existing businesses and governments and allows investors to trade with confidence in open and fair capital markets.

• Investment dealers play an essential role in the Canadian securities industry by

o Providing financial advice to investors

o raising all forms of capital for new and expanding businesses

o underwriting and acting as primary distributors for government debt

o creating markets by trading in their own accounts

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• The industry provides investors with a wide variety of

choices within a very competitive market.

• more Canadians are turning to the securities industry to

ensure their financial security

• Canada’s provinces and territories are responsible for the

securities regulations within their respective borders but this

framework is being reevaluated.

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Functions of Securities Markets

• A securities market provides long-term funding for

businesses and it also creates a place to buy/sell securities

(investments).

• It is divided into primary markets (e.g., initial public offerings

– sale new securities) and the secondary market (e.g., stock

exchange)

o a stock exchange is an organization whose members can

buy and sell (exchange) securities for companies and

investors

• a security is a transferable certificate of ownership of

an investment product

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Different Types of Investments

• bonds

• term deposits / guaranteed investment certificates (GICs)

• stocks (e.g., common and preferred shares)

• mutual funds

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Mutual Funds o a fund that buys a variety of securities and then sells units

of ownership in the fund to the public

• investment portfolios provide o growth

o income

o combination

• advantages include professional management and diversification

• disadvantages

• not covered by the Canada Deposit Insurance Corporation (CDIC)

• principal and return is not guaranteed

• possible load

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The Investment Funds Institute of Canada (Source: http://www.ific.ca, March 15, 2012)

• as of February 2012:

o net sales = $7.1 billion

o assets under administration = $810.4 billion

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Investment Criteria

risk tolerance

yield

Duration of investment

Liquidity

Tax Consequences

Average Expenditure Per Household, 2009 Average Household Spending = $71,120

Area %

Personal Taxes 20.2

Shelter 19.8

Transportation 13.7

Food 10.2

Clothing 4.0

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Registered Retirement Savings Plan (RRSP)

• Ottawa introduced a tax-sheltered and tax-deferred investment vehicle in 1957 to encourage people to start saving for retirement.

• An RRSP is a plan that is registered with the Canada Revenue Agency (CRA) to allow Canadians to save for retirement.

• An RRSP is designed to give you income after you retire

• Money deposited into an RRSP can be deducted from earned income for tax purposes.

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• Investments within a plan can earn money tax-free and as a result, they have the potential to grow at a faster rate than funds saved outside of a registered plan.

• Earned income includes salary or wages, alimony received, and rental income, but does not include items such as investment income.

• When you put money into the RRSP, you get a tax break. But when you take money out, you will charged withholding taxes. This amount must be held back by the plan administrator and remitted to the Government on your behalf.

o Any withdrawals less than $5,000 in Ontario will be subject to a withholding tax rate of 10%. For example, if you take out $4,000 from your RRSP, you will only get $3,600 because $400 (or 10%) will be sent to CRA.

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• Since contributions are tax-deductible, they'll be more valuable to those with higher incomes. Once inside the tax-sheltered environment, the investments can grow faster than they would outside an RRSP, where they would face tax on their gains.

• You can put your money into a wide variety of investments including GICs, mutual funds, bonds, stocks, etc.

• It is suggested that you keep fixed-income investments (e.g., GICs and bonds) inside the RRSP and equities (e.g., stock) outside the RRSP.

o That's because the interest on fixed-income investments is fully taxable while the capital gains on equities is tax preferred because only 50% of the growth is taxable.

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Why An RRSP? • We are living longer and we have to plan to support

ourselves for longer.

• As of January 2012, the maximum yearly income from OAS and CPP (assuming no monthly increases during the year and no claw back based on income) for an eligible 65 year-old totaled $18,321.48. The average for both, however, is $12,458.04 per year. o maximum of $540.12 per month for OAS = $6,481.44 per year

o maximum of $986.67 per month for CPP = $11,844.04

• Government pensions were designed to replace only 40% of pre-retirement income for individuals who were earning the average national wage.

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• Some financial planners says that you will need about 70% of your pre-tax earnings to maintain your standard of living in retirement.

o If one earns $60,000 now, one might aim for $42,000 of income in retirement; therefore, one will need about $23,679 ($42,000 - $18,321) from a private pension plan or one’s own savings.

• Registered Pension Plans (RPPs) are provided to about 39.2%of all employees in 2009.

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The Three-Legged Resources Stool

Leg #1: Government Sources

Old Age Security (OAS)

Canada Pension Plan (CPP)

Estimated Income

15%

25%

Leg #2: Employer Sources

Company Sponsored Plan

30 to 50%

Leg #3: Personal Resources

RRSPs / Annuities / RRIFs

Savings and Investments

Employment or Business Income

20%

to

60% (no employer sources)

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RRSP Benefits • There is so much more to it than just the tax deduction.

• 1. Tax Benefits

o taxable income is reduced by the amount of your RRSP contribution

o your money earns income tax-free as long as it is in the RRSP

o when the time comes to start to draw down on your RRSP savings, your tax rate will probably be lower than it is during your working years, therefore reducing your tax burden

• Despite the immediate tax break and the tax-free compounding of interest in RRSPs, Canadians have contributed less than 10% of the allowable amount.

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• 2. The Home Buyers Plan

o you can borrow up to $25,000 from your RRSP to buy your first home

• 3. The Lifelong Learning Plan

o you can borrow up to $20,000 for full-time education

• 4. source of funds during periods of low income

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Tax Free Savings Account (TFSA)

• Effective January 1, 2009, TFSAs became another savings instrument for Canadians over the age of 18 to consider.

• Anything that might go into an RRSP can go into it up to the maximum of $5000 a year. The interest and income from investment gains accumulates tax-free.

• Money can be withdrawn at any time without penalty but replacing it must wait until the following calendar year.

• Young investors are putting money into a TFSA rather than an RRSP as this is an ideal long-term savings plan until the day when their salaries rise and the higher tax bracket that will put them in means an RRSP makes more sense for tax savings. CHAPTER 14 (2)