The Goals and Activities of
Financial Management
Author’s Overview
The major thrust of this chapter is to establish the objectives of financial management and the
importance of the financial manager to the organization. The introduction focuses on the
financial decisions that a company like 3M makes and allows the instructor to bring the real
world into the classroom immediately. Although the financial crisis might not be at the forefront
of the student’s mind, it provides a good example of the risk that management and investors face.
The Dodd-Frank Act can be used to discuss legislative reaction to the behavior of financial
institutions and to talk about the unintended consequences that often come out of such
regulations. The various forms of organizations should be developed, and the Finance in Action
Box “The Endangered Public Company” points out the problems of public companies and
discusses state owned enterprises (SOEs) found in many foreign countries. This provides a good
place to start the discussion of the various forms of organization. The instructor should highlight
the importance of owner wealth maximization as a goal and briefly relate it to valuation concepts
Chapter Concepts
LO2. A firm can have many different forms of organization.
LO3. The relationship of risk to return is a central focus of finance.
LO4. The primary goal of financial managers is to maximize the wealth of the shareholders.
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LO5. Financial managers attempt to achieve wealth maximization through daily activities
LO6. The financial turmoil that roiled the markets between 2001 and 2012 resulted in more
regulatory oversight of the financial markets.
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Annotated Outline and Strategy
I. The Field of Finance
A. Finance is a link between accounting, economics, and other related fields of
study. A financial manager must understand the Federal Reserve System, the
commercial banking system, and the interrelationships between various sectors of
the economy.
B The financial manager must know how to interpret and use financial
II. Evolution of the Field of Finance
A. The field of finance is closely tied to economics and accounting but achieved
recognition as a separate field of study in response to the mergers, acquisitions,
and growth of corporations in the early 1900s.
B. As a result of the Great Depression, emphasis shifted from raising capital, to
C. By the mid-1950s the field of finance had become more decision oriented with an
emphasis on the analysis of resource utilization within the firm. This decision-
making focus was manifested in the increased study of:
1. Fixed asset management: capital budgeting.
2. Efficient utilization of current assets.
4. Dividend policy.
D. For the past 30 years, emphasis has been placed on the risk-return relationship.
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III. Risk Management and a Review of the Financial Crises
A. Risk management will assume an even greater role as the economy recovers
from the housing mortgage crisis that began in the early part of the new
B. The Dodd-Frank Act, officially known as the Wall Street Reform and
Consumer Protection Act of 2010, is the first major financial regulatory
C. Impact of Information Technology: The question for the 21st century is how
technology will impact financial decision making. The Internet has changed
the way businesses interact with consumers (B2C) and with other businesses
(B2B) and will have a major impact on financial management.
IV. Activities of Financial Management. A financial manager is responsible for the
proper allocation of funds between current and fixed assets, for achieving the best mix of
financing alternatives, and for developing an appropriate dividend policy within the context
of the firm’s objectives.
A. Daily financial management activities
PPT Functions of the Financial Manager (Figure 1-1)
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2. Inventory control
B. Less routine or occasional activities
1. Sale of stocks and bonds
3. Dividend decisions
C. Forms of organization: The finance function may be carried out within a number
of different forms of organizations.
1. Impact of 2017 Tax Cuts and Job Act on Organizations
a. Corporate tax rate goes from 35 percent to 21 percent
b. U.S. companies on competitive footing with other countries.
Finance in Action: The Endangered Public Company
2. Sole proprietorship
a. Single ownership
3. Partnership
a. Two or more partners
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At least one partner must be a general partner.
4. Corporation
a. Most important form of business in terms of revenue and profits
b. Legal entity
5. Limited Liability Company (LLC)
a. Popular for its highly flexible structure
V. Corporate Governance.
A. Enron and other failures of corporate governance are discussed.
B. During the last decade much attention has been devoted to the relationship
between the owners of the firm and the managers of the firm. In large
C. Included in agency theory is a trend that developed in the 1990s for large
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D. The Sarbanes-Oxley Act imposed greater accountability on corporate executives
and independent auditors. It has also created additional compliance burdens on
publicly traded companies.
VI. Goals of Financial Management.
A. The integration of the external investor point of view with the internal
management orientation is evidenced by the goal of financial management: To
B. The goal of maximizing profits is not the same as maximizing shareholder
wealth.
E. While not all managements focus on maximizing shareholder wealth, ignoring
wealth maximization for publicly traded firms can result in hostile takeovers or
Finance in Action: The 3M Company—Good Corporate Citizen
Balancing wealth maximization and social responsibility is difficult. You may want to focus
on the 3M Company as a way of showing that good management can accomplish the goals of
both wealth maximization and social responsibility.
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VII. The Role of Financial Markets. Wealth maximization depends on the perception and
expectations of the market. Through daily price changes in the common stock of each
publicly traded company, the market provides managers with a performance report card.
A. Structure and Functions of the Financial Markets. Money markets (Chapter 7)
B. Allocation of Capital. Students need to understand how the market price reflects
risk and return expectations and how a company’s ability to raise funds is
influenced by its financial performance and corporate behavior.
C. Reemphasize the impact that institutional investors have on publicly owned
D. Internationalization of the Financial Markets. Emphasize the globalization of the
capital markets and the worldwide pool of capital available to many companies.
Use the international companies highlighted in the text to get across the point that
the search for capital is global.
VIII. Format of the Text: The text is divided into the following parts:
1. Introduction: This section examines the goals and objectives of financial
Perspective 1-3: Mention that U.S. and foreign firms often trade on each other’s financial
markets.
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McGraw-Hill Education.
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2. Financial Analysis and Planning: Includes a review the basic principles of
accounting, which is required for understanding major financial topics.
3. Working Capital Management: A discussion of the short-term assets and
liabilities of the firm and the related analysis of risk-return issues.
4. The Capital Budgeting Process: This section begins with a discussion of “time
5. Long-Term Financing: This section discusses the U.S. financial markets as they
6. Expanding the Perspective of Corporate Finance: This section addresses