BUSINESS FINANCE to individuals, businesses, and governments.

It involves a
variety of interesting career opportunities within the
LECTURE NOTES 1: INTRODUCTION TO FINANCE
areas of banking, personal financial planning,
investments, real estate, and insurance.

Managerial Finance
The field of finance is broad and dynamic. Finance
influences everything that firms do, from hiring Managerial finance is concerned with the duties of the
personnel to building factories to launching new financial manager working in a business. Financial
advertising campaigns. Because there are important manager administers the financial affairs of all types of
financial dimensions to almost any aspect of business, businesses- private and public, large and small, profit
there are many financially oriented career opportunities seeking and not for profit. They perform such varied tasks
for those who understand the basic concepts and as a developing financial plan or budget, extending credit
principles of finance. Even if you do not see yourself to consumers, evaluating large expenditures, and raising
pursuing a career in finance, you’ll find that an money to fund the firm’s operations. In the recent years,
understanding of a few key ideas in finance will help a number of factors have increased the importance and
make you a smarter consumer and a wiser investor with complexity of the financial manager’s duties. These
your own money. factors include the recent global financial crisis and
subsequent responses by regulators, increased
competition, and technological change.
Finance
Professional Practice in Finance
It can be defined as the science and art of managing
In finance, there are a variety of professional certification
money. At the personal level, finance is concerned with
programs that are widely recognized I the field.
individual’s decisions about how much of their earnings
they spend, how much they save, and how they invest Chartered Financial Analyst (CFA) – Offered by the CFA
their savings. In a business context, finance involves the Institute, the CFA program is a graduate-level course of
same types of decisions: how firms raise money from study focused primarily on the investments side of
investors, how firms invest money in an attempt to earn finance. To earn the CFA Charter, students must past
a profit, and how they decide whether to reinvest profits series of three exams, usually over a 3- year period, and
in the business or distribute them back to investors. The have 48 months of professional experience. Although this
keys to good financial decision are much the same for program appeals primarily to those who work in the
businesses and individuals, which is why most students investments field, the skills developed in the CFA
will benefit from an understanding of finance regardless program are useful in a variety of corporate finance jobs
of the career path they plan to follow. Learning the as well.
techniques of good financial analysis will not only help
you make a better financial decision as a consumer, but Certified Treasury Professional (CTP) – the CTP program
it will also help you understand the financial requires students to pass a single exam that is focused on
consequences of the important business decisions you the knowledge and skills needed for those working in the
will face no matter what career path you follow. corporate treasury department. The program
emphasizes topics such as liquidity and working capital
Career Opportunities in Finance management, payment transfer systems, capital
structure, managing relationships with financial service
Careers in finance typically fall into one of the
providers, and monitoring and controlling financial risks.
two broad categories: (1) financial services and (2)
managerial finance. Workers in both areas rely on a Certified Financial Planner (CFP) – to obtain CFP status,
common analytical “tool kit,” but the types of problems students must pass a 10-hour exam covering a wide
to which that tool kit is applied vary a great deal form one range of topics related to personal financial planning. The
career path to the other. CFP program also requires 3 years of full-time relevant
experience. The program focuses primarily on skills
Financial Services
relevant for advising individuals in developing their
Financial Services is the area of finance concerned with personal financial plans.
the design and delivery of advice and financial products

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 Money Market

American Academy of Financial Management (AAFM)- The money market is created by a financial relationship
The AAFM administers a host of certification programs between suppliers and demanders of short-term funds.
for financial professionals in a wide range of fields. Their
Most money market transactions are made in marketable
certifications include the Chartered Asset Manager,
securities which are short-term debt instruments, such as
Certified Risk Analyst, Certified Cost Accountant,
U.S. Treasury bills, commercial paper, and negotiable
Certified Credit Analyst, and many other programs. See
certificates of deposit issued by government, business,
the AAFM website for complete details on the AAFM
and financial institutions, respectively.
educational programs.
The international equivalent of the domestic (U.S.)
Professional Certifications in Accounting - Most
money market is the Eurocurrency market.
professionals in the field of managerial finance need to
know a great deal about accounting to succeed in their The Eurocurrency market is a market for short-term bank
jobs. Professional certifications in accounting include the deposits denominated in U.S. dollars or other marketable
Certified Public Accountant (CPA), Certified Management currencies.
Accountant (CMA), Certified Internal Auditor (CIA),
Certified Accounting Technician (CAT), and many other The Eurocurrency market has grown rapidly mainly
programs. because it is unregulated and because it meets the needs
of international borrowers and lenders.
Finance and Financial Management
Capital Market
Finance may be defined as the science of managing and
creating money, administration and operations of The capital market is a market that enables suppliers and
institutions like banks, investment companies, demanders of long-term funds to make transactions.
cooperatives, lending groups that facilitate credits and a
The key capital market securities are bonds (long-term
unit or department that directs the organizations’ assets,
debt) and both common and preferred stock (equity, or
liabilities and equities (Gitman, Joehnk, Billengsley, Besley
ownership).
& Brigham 2017).
Bonds are long-term debt instruments used by
Financial Management is the broadest of the Money and
businesses and government to raise large sums
Capital markets including the Investment area, and the
of money, generally from a diverse group of
one with the most job opportunities.
lenders.
 Job opportunities: making decisions regarding
Common stocks are units of ownership interest
plant expansions, financing decisions and
or equity in a corporation.
dividend decisions. Some of the career
opportunities in the field of finance are Financial Preferred stock is a special form of ownership
Analyst, Fund Manager, Stockbroker, Banker, that has features of both a bond and common
Bond Dealer, Treasury or Trust Manager, stock.
Investment researcher, business consultant,
forex trader, trust agent, risk management  The three main functions in the investment area
associate, finance officer and credit appraiser. are sales, analyzing individual securities, and
determining the optimal mix of securities for a
Two Types of Financial Market given investor.

Money and Capital Market Financial institutions,  Possible career opportunities are found in the
including banks, insurance companies, mutual funds, and brokerage houses, security firms, banks, mutual
investment banking firms. These institutions need funds, insurance companies, financial
valuation techniques, factors that interest rates to rise consulting firms, investment banks etc. The
and fall, regulations of financial institutions and types of investment area focuses on the decisions made
financial instruments. The money and the capital market by both individual and institutional investors as
deal with securities markets and financial institutions. they choose securities for their investment
portfolios

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  Finance as a dynamic field is categorized with Marketing helps in the continuous sales and flow of
three branches, personal finance, public finance revenue. These activities need control, supervision,
and corporate finance. Personal finance deals recording, budgeting, and reporting which the finance
with the individual’s investment decisions. group performs.
Public finance deals with efficient management
Human resource management is about maintaining the
of public funds. Corporate finance deals with
quality of manpower and force. It maximizes the
management of the firm’s resources.
employee’s performance towards the attainment of
Finance Interrelated Business Discipline management’s strategic objectives. The unit is involved
with the recruitment, selection, trainings and even
Finance
related policies of available resources of the firm.
(Prescription)
Finance deals with the movement of cash flow within the
unit.

Production and Operation is efficient if products are

Economics (Description) Accounting (Presentation) produced efficiently at a good quality. The management
of inventory management, cost of capital techniques and
the use of capital budgeting techniques help in
Figure 1: Finance Interrelated Business Discipline monitoring capital expenditures like inventories and
(Gitman, Joehnk, Billengsley, Besley & Brigham 2017). long-term asset therefore the financial aspect of costing
is relevant.
Finance used in this context is a branch of economics, a The interrelated areas need information technology to
social science that explains the factors of production, organized financial information for management’s
distribution, and consumption of every service or decision making.
product.
Finance within the Organization
Accounting deals with measuring, processing, and
communicating information, for internal and external
users. It specializes in effective presentation of data and
quantified reports. The financial records are usually in
Board of Directors
accordance to the Generally Accepted Accounting
Principles.

Function of Finance in the Business Organization

Chief Executive Officer
( CEO)

Chief Executive
Officer

Marketing Finance Human Resource

Production and Management and Chief Operating Officer Chief Financial Officer
Operation Information
( COO) ( CFO)

Marketing, Production, Accounting, Treasury,

Figure 2: Function of Finance in the Business Human Resources, and Credit, Legal, Capital
Other Operating Budgeting, and Investor
Organization (Gitman, Joehnk, Billengsley, Besley & Departments Relations
Brigham 2017).

Finance as a management function is at par with other

line units of the business organization. Each of the areas The Chief financial Officer is a subordinate of the chief
has a role in executing decisions to achieve the goals and executive officer. The chief financial officer is in charge
objectives of the firm. of the finance and accounting departments. He is the

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chief officer that handles Accounting, Treasury, Credit,
Legal, Capital Budgeting and the Investor Relations.

Responsibility of the Financial Staff

Maximize stock value by:

◼ Forecasting and planning

◼ Investment and financing decisions

◼ Coordination and control

◼ Transactions in the financial markets

◼ Managing risk

The Goal of the Firm

The primary goal for management decisions is

stockholder wealth maximization. It considers the risk
and timing associated with expected earnings per share
in order to maximize the price of the firm’s common
stock. It also considers the value of cash flows the firm’s
asset is expected to produce.

In order to achieve these, most firms would give

managerial incentives to financial managers. These
incentives are in a form of managerial compensation,
performance shares, executive stock options, direct
intervention by shareholders, threat of firing and the
threat of takeover. The primary role of the financial
manager is to make operating, investment, financing and
dividend decisions in line with maximimizing the wealth
of the owners and other related goals of the firm.

Other Goals of the Firm:

Social Responsibility - The concept that business should

be actively concerned with the welfare of society at large.

Ethical Responsibility - A company’s attitude and conduct

toward its employees, customers, community, and
stockholders

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