Working capital management

• Introducing yours truly
• Moodle, Class forum & webinar hub
• Why financial management?
• Module 1: Introduction to financial management
• Exploring some activities
Topic 1: Introduction to Financial Management
Finance
Investments to make?
Capital budgeting
How to finance the firm?
Capital structure
How to ensure the business
day to day operations?
Working capital management
Organisations of any kind
(profit and not for profit)
Sole
proprietorship
Partnership
Corporation
Goal of the financial manager
• Money has a time value
• There’s a risk-return trade-off
• Cash flows are the source of value
• Market prices reflect information
• Individuals respond to incentives
Maximisation of
shareholder’s wealth
Activity 1.1
Explain the three types of business decisions that a financial manager faces.

  • What long-term investments should the firm undertake?
    (capital budgeting)
  • How should the firm raise money to fund those investments?
    (capital structure)
  • How can the firm best manage its cash flows as they arise in its day-today
    operations?
    (working capital management)
    Activity 1.2
    List the three main forms of business organisations and describe their
    advantages and disadvantages.
    If you were to consider starting up a lawn-care business for the summer,
    what type of business organisation might you use?
    Pros Cons
    Sole proprietorship Easy to set up Unlimited liability;
    Limited source of
    financing.
    Partnership Financing from multiple
    owners.
    Unlimited liability;
    Potentially conflicts on
    the division of profits
    between partners.
    Corporation Limited liability;
    unlimited life;
    easy to transfer
    ownership
    Conflict of interest
    between managers and
    shareholders (agency
    problem)
    Activity 1.4
    Why do you think many companies compensate executives with options
    based on long-term increases in the value of the company’s stock?
    This aligns the interest between mangers and shareholders and mitigate the
    conflict of interest (agency problem). In this way, the goal of financial
    management (maximising shareholder’s wealth) can be better achieved.

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