Introduction to Financial Management【Dr. Deric】 #Finance

hey guys I am Derek welcome to my channel in this CashNews.co I’m gonna make a short introduction to financial management the first question is what is Finance

Finance can be defined as the Art and Science of managing money art is like dancing singing and drawing something which is based on feeling but science is more about facts and figures you

have to do experiment come out with theories to explain what you believe so Finance is basically a mix of Art and Science of managing money the key word here is managing money that’s

what we call financial management financial management is a very important aspect for companies it is because financial management is about maintenance and creation of economic value or wealth what is wealth let’s take an example let’s say the market value of company a is 100 billion

dollars investors of company a altogether invested 30 billion dollars so taking 100 billion dollars minus 30 billion dollars you will get 70 billion dollars this amount of money is what we call Wealth created for investors shareholders only paid 30 billion dollars to buy the Shares

but the company created extra 70 billion dollars for the shareholders of course this is going to be a good sign for investors as the value of the company has increased for none;">Finance it has two broad topics personal Finance and corporate text-decoration: none;">Finance personal Finance is about managing your own money this is the process of planning and managing your personal financial resources

to achieve your short-term and long-term financial goals these goals may include buying a house or a car saving money for your child’s education saving for retirement and so on personal none;">Finance involves creating a budget saving for emergencies and future expenses paying off Debt and investing for your future it’s about making smart choices with your money so that you can live the life you want today and have peace of mind for tomorrow it

would answer the questions such as how much you spend how much you save and how you invest your Savings in short this is about doing individual Financial Planning but for corporate #1a73e8; text-decoration: none;">Finance it is more on how to manage companies money corporate financial management is the process of making strategic decisions about how to allocate a company’s Financial Resources in order to achieve its goals and objectives it is like a game of

chess where each move you make with your financial resources like cash Investments and Credit is a strategic decision that can lead to a win or a loss so it is about making smart decisions with the firm’s money in order to reach the firm’s long-term

goals and stay competitive in the market it would answer the questions such as how firms raise money from investors how firms invest money to earn a Profit whether to reinvest Profits in the business or distribute them back to investors alright another question is

Finance the same as Accounting the answer can be yes and no yes because some functions of Accounting and

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance are closely related and overlapping no because they have some distinct differences in terms of their focus responsibilities and goals Accounting people are the

controllers while Finance people are basically the treasurers Finance people always

focus on how to invest and how to make more money for the company they’re just like the accelerator of a car to make a car move you have to press on the accelerator the harder you press the faster the car can move but at the same time you need to have a break this is the function of

Accounting which we call them the controllers when Finance people are moving too fast investing too much money in too many projects Accounting people the

break will slow them down for safety purpose one thing to take note only in big corporations we will have two separate Accounting and Finance departments but

in smaller firms generally the financial manager will perform both Accounting and Finance functions another aspect Accounting is focused on

recording and Reporting Financial transactions while Finance is focused on managing and allocating Financial Resources Accounting involves the preparation of

Financial Statements such as the Balance Sheet Income statement and Cash Flow statement however Finance managers are using

the information prepared by Accounting department to make business decisions such as investing in new projects or to pay off the outstanding Debt of the company on the other hand Accounting is focused on the past and present while

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance is focused on the future Accounting deals with historical financial data and provides information about what has happened in the past however

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance uses that information to make predictions about what will happen in the future and to make decisions about how to allocate resources in terms of information recording method

Accounting applies accrual method while Finance recognizes cash method how to differentiate these two methods let’s take an example company a experience the following

activity last year company sales was one hundred thousand dollars with one car sold but customer has not made the payment yet that’s why it is one hundred percent still uncollected the cost of the car is eighty thousand dollars the company has already paid in full amount under supplier terms

if you were to prepare an Income statement under Accounting record which is using the accrual method you would recognize a sales of one hundred thousand dollars costs of eighty thousand dollars so the company made a Profit of twenty thousand

dollars but under Finance record which is using the cash method since you had not received cash from the customer you would recognize a sales of zero dollars but you’d already paid the

supplier so there would be a cost of eighty thousand dollars eventually the company made a net loss of eighty thousand dollars for selling the car a loss position could happen when company recognized the Cash Flows of the transaction this example shows us the difference between

Accounting and Finance records next we will talk about the goals of a company it is about what Target a company wants to achieve the first one

Profit maximization Profit maximization refers to how much dollar Profit the company makes how to make the most Profits from the business some companies May focus on cutting costs and increasing prices in the short term to boost

Profits such method is a short-term approach mostly concerned about short-term benefits only but in the long term this strategy may lead to a decrease in Customer Loyalty lower sales and a decrease in overall Profits another problem with Profit

maximization is that it ignores the timing of returns magnitude of returns and risk when will you receive the money how much money will you receive and how much is the risk these questions are not answered if companies only focus on Profits third fulfilling objective of earning

Profit may not help in creating wealth in the long run Profit should not be the only target of a company rather companies should look at how to create wealth wealth means value in fact companies should focus more on creating value for the company lastly it does not

consider the social responsibility if the goal of a company is just to make Profit it may not make donation it may not care about air pollution but nowadays social responsibility is very important for company to survive in the long run another goal of a company is about shareholder

wealth maximization it focuses on maximizing the value of a company when we say the value of a company it means the value of the stock or share so it is a long-term approach mostly concerned about the value of financial Assets Financial Assets include

Bonds Shares and so on next it considers the timing of returns magnitude of returns and risk it will answer the following questions like when will you receive the money how much money will you receive and how much is the risk these are the important criteria of

doing a business how to increase the value of a company for examples company May invest in new projects or it may think of how to improve the quality of the products not to cut the cost but to control the cost by improving the production process probably the old way of production is to take 10

steps to manufacture a product but if you can come out with a better way of production reduce the process to Five Steps only then you can control the cost and create value another good example is Google initially Google offered its Gmail service for free as it tried to grab the market share this

strategy has helped increase the value that is the share price of Google in short shareholder wealth means the share price or the firm’s value maximizing shareholder wealth means maximizing the share price and also maximizing the firm’s value in fact some companies focus on

Profit whilst some companies focus on value Profit versus value which one is more important to company well Profit is a subset of value which means that Profit is only a small part of the value as shown in the graph under value we

have Profit quality branding market share r d and culture of company these are the factors that contribute to the value of a company that’s why Profit is not everything Profit is just a small part of the value in other words creating value

will help create Profit but making Profit does not necessarily create value for a company another goal of a company is a stakeholder View stakeholders include all groups of individuals who have a direct economic link to the firm such as employees customers

suppliers Creditors Community environment and so on companies should not only take care of the shareholders but also others in the process of making Profit companies should avoid actions that could harm the interest of their stakeholders taking care of the

stakeholders is not to maximize but to preserve stakeholder well-being for example to donate money to the community to build schools or hospitals to prevent pollution of environment to take good care of the employees these are some examples of taking care of the stakeholders such a view is

considered to be socially responsible we usually call this as Corporate social responsibility CSR more and more companies are contributing in CSR which they believe that CSR would improve the financial performance of the company alright that’s all for this CashNews.co thanks for watching see

you in the next one bye thank you