Overview of Financial Management

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Overview of Financial Management
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Financial activities

• Financial transactions are undertaken for the
  purpose of exchanging a sum of money today for
  the expectation of obtaining more money in the
  future
• FV PV(1i)n

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Economics Finance

• The free enterprise system is a brutal beast that
  takes no prisoners

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Economics Finance

• Primary suppliers (savers) of funds in U.S.
• Households
• Primary users of funds
• Businesses and government
• Economics is all about scarce resources
• You have to outbid others, including govt., to
  obtain control of scarce economic resources
• You have to have financial resources to obtain
  control of scarce economic resources

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Economics Finance

• Categories of scarce economic resources
• Natural
• Human
• Labor
• Entrepreneurial
• Capital
• Scarce financial resources

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Economics Finance

• Opportunity costs
• Entrepreneurial resources
• You can substitute someone elses entrepreneurial
  skills for your own, at a cost

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Economics Finance

• Opportunity costs
• Financial resources
• If you spend 1 today, you (generally) have given
  up the opportunity to spend more than 1 one year
  from now
• Pub II vs. bank CD?
• Value of consumption (savings) now vs.
  consumption (savings) in future

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Economics Finance

• Interest rates ration financial resources
• High interest rates encourage savings (discourage
  spending) and discourage borrowing (high cost to
  business)
• Low interest rates discourages savings (encourage
  spending) and encourage borrowing (low cost to
  business)
• Federal reserve policy influences interest rates
  and the supply of loanable funds

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Economics Finance

• Goals of Fed policy are to 1) promote "maximum"
  sustainable output and employment and 2) promote
  "stable" prices
• Tightening to cool inflation is generally
  associated with higher real interest rates
• Loosening to reduce unemployment is generally
  associated with lower real interest rates

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Economics Finance

• Fed policy can influence your profit
• Demand for your product(s) ? revenue
• Demand for and supply of resources you buy (incl.
  financial resources) ? expenses

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Economics Finance

• Risk the possibility that one or more
  undesirable events will occur
• Insurance companies analyze and attempt to
  quantify the possibilities
• Jump from an airplane with a parachute
• risky
• Jump from an airplane without a parachute
• stupid
• Buy 100 worth of stock vs. deposit 100 into a
  savings account

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Economics Finance

• Systematic risk
• Macro events
• Economic, political, and social changes or
  shocks
• You cant control such changes. but you can plan
  responses to them (what can you do about shocks?)
• Unsystematic risks
• Micro events
• Unique to an individual, firm, or industry
• More likely to be influenced by management
  decisions

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Economics Finance

• You dont want this to be your business, do you?