Financial Management

‫االدارة المالية‬

Lecture 1:Organisation Structures

‫الهيكل التنظيمي للشركات‬

Dr. Hatem El Shreif

Learning Objective
‫االهداف التعليمية‬
By the end if this lecture student will understand:
• What is Financial Management?
• 10 principles of financial management.
• What are the Decisions that Financial Manager must be
Concern?
• The Goal of the Firm.
• The nature and status of organisations
• Ownership and control of different business organisations (to
include sole traders, partnerships, limited companies and third
sector organisations)
• Long-term and short-term financial options
• Differences in Financial Reporting by Business Organisations
• The importance of control over cash flow
What is Financial Management?
‫ما هي االدارة المالية‬

• Financial Management means planning,

organizing, directing and controlling the
financial activities of the organization.
• ( ‫اإلدارة المالية يعني التخطيط والتنظيم و التوجيه‬
‫)والسيطرة على األنشطة المالية للمنظمة‬
• It refers the efficient and effective
management of money (funds) in such a
manner as to achieve the goals of the
organization.
Principles of Financial Management
‫مبادئ اإلدارة المالية‬

• “It is necessary to understand these principles in

order to understand finance.”
Principle 1: The Risk-Return Trade-off
‫ المقايضة بين المخاطر والعائد‬:1 ‫المبدأ‬

• We won’t take on additional risk unless we

expect to be compensated with additional
return.
• Investment choices have different amounts of
risk and expected returns.
• The more risk an investment has, the higher its
expected return will be.
Principle 2: The Time Value of Money
‫ القيمة الزمنية للنقود‬:2 ‫المبدأ‬

• A dollar received today is worth more than a

dollar received in the future.
• Because we can earn interest on money
received today, it is better to receive money
earlier rather than later.
Principle 3: Cash—Not Profits—Is King
‫ النقد – وليس األرباح – هو الملك‬:3 ‫المبدأ‬

• Cash Flow, not accounting profit, is used as our

measurement tool.
• Cash flows, not profits, are actually can be
reinvested.
Principle 4: Incremental Cash Flows
‫ التدفقات النقدية اإلضافية‬:4 ‫المبدأ‬
• The incremental cash flow is the difference
between the projected cash flows if the project
is selected, versus what they will be, if the project
is not selected.
Principle 5: The Curse of Competitive
Markets‫ لعنة األسواق التنافسية‬:5 ‫المبدأ‬
• It is hard to find exceptionally profitable projects
• If an industry is generating large profits, new entrants
are usually attracted. The additional competition
and added capacity can result in profits being
driven down to the required rate of return.
• Product Differentiation, Service and Quality can
separate products from competition
Principle 6: Efficient Capital Markets
‫ أسواق رأس المال الفعالة‬:6 ‫المبدأ‬

• The markets are quick and the prices are right.

• The values of all assets and securities at any
instant in time fully reflect all available
information.
Principle 7: The Agency Problem
‫ مشكلة الوكالة‬:7 ‫المبدأ‬

• Managers won’t work for the owners unless it is in

their best interest
• A agency problem resulting from conflicts of
interest between the manager/agent and the
stockholder/owners.
• Managers may make decisions that are not in
line with the goal of maximization of shareholder
wealth.
Principle 8: Taxes Bias Business
Decisions ‫ القرارات التجارية المتحيزة‬:8 ‫المبدأ‬
‫تجاه الضرائب‬

• The cash flows we consider are the after-tax

incremental cash flows to the firm as a
whole.
Principle 9: All Risk is Not Equal
‫ جميع المخاطر ليست متساوية‬:9 ‫المبدأ‬

• Some risk can be diversified away, and some

cannot
• The process of diversification can reduce risk,
and as a result, measuring a project’s or an
asset’s risk is very difficult.
Principle 10: Ethical Behavior is Doing
the Right Thing, ‫ السلوك‬:10 ‫المبدأ‬
‫األخالقي هو فعل الشيء الصحيح‬

• Each person has his or her own set of values,

which forms the basis for personal judgments
about what is the right thing
Decisions of Financial Manager
‫قرارات المدير المالي‬

• Investment Decisions (Capital Budgeting)

• (Investment decisions revolve around how to best
allocate money to maximize their value.)
• Financing Decisions (Capital Structure)
• (Financing decisions revolve around how to pay for
investments and expenses)
• Asset Management Decisions (Working Capital
Management Decisions)
Investment Decisions
‫القرارات االستثمارية‬
• how, when, where and how much money will be
spent on investment opportunities.
• A firm has many options to invest their funds but
firm has to select the most appropriate assets for
investment which will bring maximum benefit for
the firm.

• What specific assets should be acquired?

• What assets (if any) should be reduced or
eliminated?
Investment Decisions
‫القرارات االستثمارية‬

• What specific assets should be acquired?

• What assets (if any) should be reduced or
eliminated?
 Financing Decisions
‫القرارات المالية‬

• Determine how the assets will be financed.

• A company can raise finance from various sources such

as by issue of shares, debentures or by taking loan and
advances. These sources of finance can be divided into
two categories: owners fund (no risk involve) and
borrowers fund (risk involve).
• Find the least expensive sources of fund.
Financing Decisions
‫القرارات المالية‬

• What is the best type of financing?

• Mix type financing.
• What is the best financing mix?
• Mixer debt and equity.
• What is the best dividend policy?
• Paying a consistent percentage of net earnings.
• How will the funds be physically acquired?
Asset Management Decisions
‫قرارات ادارة االصول‬

• How do we manage existing assets efficiently?

• Financial Manager has varying degrees of operating
responsibility over assets.
• Greater emphasis on current asset management
than fixed asset management.
Interrelationship of the decisions made by a
Financial Manager ‫العالقة المتبادلة بين القرارات‬
‫التي يتخذها المدير المالي‬
What are the Goals of the Firm?
(General Goals) ‫ما هي أهداف الشركة؟‬
)‫(األهداف العامة‬
• Survival
• Avoid financial distress and bankruptcy
• Beat the competition
• Maximize sales or market share
• Minimize costs
• Maximize profits
• Maintain steady earnings growth.
 Shortcomings of these General
Goals‫عيوب هذه األهداف العامة‬
Problems
• These goals are either associated with increasing
profitability or reducing risk.
• Could increase current profits while harming firm (e.g.,
defer maintenance, issue common stock to buy Treasury-
bills, etc.).
• Does not specify timing or duration of expected returns.
• Calls for a zero payout dividend policy.
• They are not consistent with the long-term interests of
shareholders.

• So it is necessary to find a goal that can encompass

both profitability and risk.
The Real Goal of the Firm
‫الهدف الحقيقي للشركة‬

• Maximization of Shareholder Wealth!

• Shareholders’ wealth can be measured
as the current value per share of
existing shares.
 Strengths of Shareholder Wealth
Maximization‫قدرات تعظيم ثروة المساهمين‬

• Takes account of: current and future profits and EPS;

the timing, duration, and risk of profits; dividend policy;
and all other relevant factors.
• Thus, share price serves as a barometer for business
performance.
Starter Activity
‫سؤال تنشيطي‬

 ‘Organisations appear in many forms’.

In five minutes:
List as many forms of organisation as you can think
of.
Organisational Structures –
‫الهيكل التنظيمي‬

Sole proprietor or sole trader

Partnership
Private limited company
Public limited company
Third Sector Organisation - Charity or voluntary
organisation
Local government body
National government body
What is an Organisation?
‫ما هي المؤسسة؟‬

 There have been many attempts at defining the term

‘organisation’. For example “groups of people brought
together for a common purpose” (Anthony, 1965, p.8).
 However, March & Simon make the valid point that “the
world has an uncomfortable way of not permitting itself
to be fitted into clean classifications” (1958, p.1).
Ownership
‫الملكية‬
 Ownership of organisations depends
on their form, for example:
 Sole traders – one single owner
 Partnership – usually two to twenty
owners
 Company – shareholders
 Government bodies – elected members
 Voluntary sector – arguably none, assets
and funds held in trust (trustees)
 What Do Owners Need?
‫ماذا يريد صاحب العمل‬
 Owners need:
 Security for their assets
 Efficient use of assets
 A share of any surplus or profits
 Periodic accounts to confirm the above
How Do Owners Exercise Control?
‫كيف يمارس صاحب العمل السيطرة‬

 For a small business, proprietors and partners can

intervene directly to give instructions
 For larger businesses this can be more problematic
 For businesses with many owners, some form of collective
decision-making process is necessary
 The Company
‫الشركة‬
A company is owned by the shareholders
in proportion to the number of shares they
own.
There may be many thousands of
shareholders.
Shares in public companies may be
bought and sold on a ‘stock market’ or
‘stock exchange’.
Thus, the shares of a company may
change hands frequently.
 Company Democracy
‫ديموقراطية الشركة‬
Typically, shareholders vote at an
Annual General Meeting (AGM) to
decide issues of raising capital,
appointing auditors and the
remuneration of Executive Directors.
The AGM (or an Extraordinary
General Meeting) would also vote
on potential takeover bids.
Company Records and Accounts
‫سجالت وحسابات الشركة‬
 Shareholders meetings would be arranged and recorded by the
executive board of directors who would also arrange for shareholder
collective decisions to be implemented
 However, the value of shares in open market transactions does not
appear in company accounts
Groups of Companies
‫مجموعة الشركات‬

 Larger enterprises are often formed

into groups of companies with
perhaps ultimate ownership by an
overseeing ‘holding company’.
 Groups may comprise of hundreds of
subordinate companies.
Ownership/controlling arrangements
within the group are often extremely
complex.
Task
‫مهمة‬
You have been employed as a Business Adviser for a Private Limited
Company. They are planning to expand and require both long term
and short term finance.
Discuss what possible sources of funds might be available to the
business?
 Sources of Finance
‫مصادر التمويل‬
 Savings  Share issues
 Family / friends support  Bank loans
 Sponsorship  Informal loans
 Potential business partners  Venture capital
 Retained profits  Grants
 Trade payables (creditors)  Leasing
 Debt factoring  Hire purchase
Ordinary Shares
‫األسهم العادية‬

 Entitle holders to ownership of the company

and to a share of profits by way of dividends.
 Ordinary shares have a ‘nominal value’ which is
the amount the company receives on their
initial issue i.e. £1.00.
 A limited company, may not issue all of its
available shares. For example, Company A
declared ‘issued’ 10 pence shares of 68 000 000
against ‘authorised’ shares of 90 000 000.
 When preparing annual accounts, a limited
company only records the number and nominal
value of the issued share capital.
Preference Shares
‫األسهم الممتازة‬

 Issued on specific terms

 Do not confer ownership
 Provide an entitlement to a dividend prior to any
Ordinary Shareholder dividend
Business Reporting – 1
‫التقارير‬

 Most organisations, however small, will produce a set

of financial accounts. These are used:
 To support applications for loans
 For tax purposes
 In the event that the owners decide to sell
Business Reporting – 2
‫التقارير‬
Whenever an organisation prepares a
business financial report, there is the
potential for conflict. Consider how
conflict could occur in the following
situations:
Loan applications will require a strong and
secure business
Tax purposes might suggest minimising profit
and liability to tax
A potential buyer will be interested in asset
value, volume of business and potential profit.
Company Reporting – 1
‫تقارير الشركة‬

 Company reporting will tend to be more

structured and in a standard format as
required under regulation
 Public companies will publish their reports
that are therefore available for open
scrutiny
 The company objective is therefore to
present as positive a picture as possible
to encourage customers, lenders,
creditors, investors and potential investors
Company Reporting – 2
‫تقارير الشركة‬

 Company reports will therefore typically contain four

elements:
 A statement of profit or loss
 A statement of assets and liabilities
 A statement of cash flow
 A narrative report
 Dr. Hatem El Shreif
 hatemelshreif@gmail.com