introduction to finance department of finance and operations management instructor :martha edith...

Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini

Pg. 1

INDEX

1. Finance Overview.2. Defining Finance.3. Corporate Finance.4. Investment: Assets.5. Resources: Equity and Liabilities.6. Relationships between Investment and

Financing7. Functions of the Financial Manager.


Pg. 2

• To manage your personal resources.

• To set up a new business.

• To pursue interesting and rewarding career opportunities in Finance.

Reasons to study Finance:


Pg. 3

Defining Finance

Finance….• is analytical.• is based on economic principles.• uses accounting information as an input for decision-making.• is global in perspective.• is constantly changing.• is the study of how to invest and raise money productively.

The field of Finance deals with the concepts of time, money, and risk and how they are interrelated. It also deals with how money is spent and budgeted.


Pg. 4

Defining Finance

Concept of Finance:

Finance Theory is the study of the behaviour of individuals in the intertemporal allocation (over time) of their resources in an uncertain environment, and the study of the function of economic institutions and markets in making these allocations possible.

EconomíaFinancieraMarín, José M. / Rubio, Gonzalo

Antoni Bosch, Editor, Barcelona, 2001


Pag 5

Finance can be divided into three main related areas:

Corporate finance: Refers to the acquisition, financing and investment management. Require the use of knowledge of economics, accounting, law, financial mathematics and statistics, among others.

Financial Markets and Institutions: Includes the study of the banking system and markets.

Assets evaluation: Estimating the value of assets through models. Very useful for making financial decisions.

Defining Finance


Pag 6

Is about financial decisions made by corporations.

Corporations face two broad financial questions:

•What investments should the firm make?•How should it pay for those investments?

•Financial managers are concerned with:

- Investment Decisions (use of funds): The buying, holding or selling of types of assets.

- Financing Decisions (acquisitions of funds).

Corporate Finance


Pag 7

The discipline can be divided into long-term and short-term decisions and techniques (according the time horizon)

•Long-term decisions: Which projects receive investment. Whether to finance that investment with equity or debt when or whether to pay dividends to shareholders.

•Short-term decisions: Deals with the short-term balance of current assets and current liabilities. The focus here is on managing cash, inventories, and short-term borrowing and lending.

Corporate Finance


Pg. 8

Corporate Finance: Real Assets and Financial Assets

The financial manager needs real assets and financial assets:

Real assets: These are used to produce the firm's products and services. They include tangible assets such as Machinery, Factories, Vehicles, and Offices. Furthermore, real assets include intangible assets such as Technical knowledge (intellectual property IP), Trademarks, and Patents.

Financial assets: The firm finances its investments in real assets by issuing financial assets (bonds, shares, etc) in the financial market for investors. A share or stock is a financial asset which has a value as a claim on the firm's real assets and on the income those assets may produce.


Pg. 9

Corporate Finance

Firm's

operations

(real

assets)

Financialmanager

Financialmarkets

(investorsholding

financialassets)

The financial manager stands between the firm’s operations and the financial (or capital)

markets, where investors hold the financial assets issued by the firm.


WorkingCapital

Shares

Loans

Bonds

MANAGER

FINANCINGASSETS

€

FINANCIAL ASSETS ENABLE FINANCING TO BE DIVIDED INTO AFFORDABLE PRODUCTS FOR INVESTORSPg.

10

FINANCIAL ASSETS

Corporate Finance


Quiz

Fit each of the following terms into the most appropriate space: financing, real, shares, airplanes, financial, investment, brand names.

Companies usually buy ________ assets. These include both tangible assets such as ____________ and intangible assets such as __________________. In order to pay for these assets, they sell ______________ assets such as _________.The decision regarding which assets to buy is usually termed the __________ decision . The decision regarding how to raise the money is usually termed the _____________ decision.


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TangibleIntangibleFinancial

Inventories

Accounts Receivable

Cash

ASSETS

Fixe

d A

ssets

Curr

ent

Ass

ets

ASSETS INVESTMENTS

Investment or Assets.


Pag 13


ASSETS INVESTMENTS

Assets are resources (money, properties or rights) of the business enterprise.

Assets fall into one of two categories:• Current assets• Fixed or non-current assets

Current assets are assets that can be turned into cash in one operating cycle.

Non-current assets are all other assets; that is, assets that cannot be liquidated quickly.


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Current assets are likely to be used or turned into cash in the near future.

Fixed assets have a gross and a net value. The Gross Value is what the assets originally cost, but they are unlikely to maintain their value. Accountants must estimate the depreciation in the value of these assets.

The company also has valuable intangible assets, such as its brand name or skilled management and is called goodwill.


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Investment and Assets.

Example:

ASSETS

Non- Current Assets:

Property and equipment

Minus accumulated depreciation

Net- Non Current Asset (fixed assets)

Net intangible assets

Other fixed assets

Current Assets

I nventories

Accounts receivable

Other current assets

Cash and equivalent

Total Assets


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FINANCIAL STATEMENT RESOURCES

Common StockRetained EarningsLong Term Debt

Bank LoansOther long term

liabilities

RESOURCES

Long

Ter

m L

iabi

litie

sS

hort

Ter

m

Liab

ilitie

s Short Term LoansAccounts Payable

Other Current Liabilities

Resources: Equity and liabilities


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Equity = ownership of the business enterprise.

The difference between assets and liabilities represents the amount of the shareholders´equity.

Every corporation has common equity.

Equity also includes retained earnings or capital in excess .


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Liabilities are obligations of the business enterprise. They are either current liabilities or long-term liabilities.

Current liabilities are obligations due within one year.

1. Accounts payable are amounts due to suppliers for purchases on credit.

2. Wages and salaries payable are amounts due to employees.

3. Short-term bank loans or current portion of long-term debt.


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Long-term liabilities are debts that last more than one year.

There are different types of long-term liabilities, including:

1. Payable notes and bonds, which are loans in the form

of securities.

2. Bank loans.


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Example:

EQUITY & LIABILITIES

Equity

Common stock (shareholder equity)

Retained earnings

Non- Current Liabilities

Long-term debt

Bank loans

Other long-term liabilities

Current Liabilities

Short-term loans

Accounts payable

Accrued income taxes

Other current liabilities

Total Equity & Liabilities



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Balance Sheet

ASSETS EQUITY & LIABILITIES

Non- Current Assets: Equity

Property and equipment Common stock (shareholder equity)

Minus accumulated depreciation Retained earnings

Net- Non Current Asset (fixed assets) Non- Current Liabilities

Net intangible assets Long-term debt

Other fixed assets Bank loans

Other long-term liabilities

Current Assets Current Liabilities

I nventories Short-term loans

Accounts receivable Accounts payable

Other current assets Accrued income taxes

Cash and equivalent Other current liabilities

Total Assets Total Equity & Liabilities

• The balance sheet is a report of the assets, liabilities, and equities of a firm at a point in time (generally at the end of a fiscal quarter or fiscal year).

• The balance sheet is made up of assets, equity, and liabilities.


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If R(%) > K(%) or r(%) = or >0 then the project is feasible

Profitability and Costs of Capital

ProfitabilityRate of Return: R(%)

Cost of Capital (dividends + interest)

K (%)

ASSETS

BALANCE SHEET

EQUITY

LIABILITIES

R (%) - K(%) =Net Return: r (%)


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Two different points of view in Finance

Both want to maximize Net Profit = dividends + retained earnings.

Their opinions differ about the allocation of Net Profit.

ASSETS

EQUITY

LIABILITIES

Point of viewof Shareholders

Point of viewof the manager


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Functions of the Financial Manager

The financial manager faces three decision areas, which define the content of Corporate Finance.

- First, how much money should the company invest? What kind of assets must be acquired? What cash flows are expected? These are the investment decisions.

- Second, which financing structure is the best? Which is the length of time that funds will be needed? These are the financing decisions.

- Third, the financial manager stands between the firm’s operations and the financial (or capital) markets, where investors hold the financial assets issued by the firm.

The function of the financial manager is the management of cash flows to make a profit for the firm´s owners.



Financial management requires the coordination of all areas of a business to effectively benefit the owners. Within a company, financial decision-making is usually managed by the Chief Financial Officer The Controller and the Treasurer.

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CHIEF FINANCIAL OFFICER (CFO)Responsible for:

• Financial policy• Corporate Planning

TREASURER Responsible for:

• Cash Management• Raising capital• Banking Relationships

CONTROLLER Responsible for:

• Financial Statements• Accounting• Taxes


Pg. 26

REALASSETS

CASH CASH

CASH CASH

INVESTORS

FINANCIALMANAGER

ACTIVITY OFTHE COMPANY

FINANCIALASSETS

Remuneration and repayment

of funds


introduction to finance department of finance and operations management instructor :martha edith...

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