Chapter Summary: Chapter 16

Understanding Financial Management and Securities Markets

This chapter focuses on the financial management of a firm and the securities markets in which firms raise funds. The chapter begins with an overview of the role of finance and of the financial manager in the firm’s overall business strategy.

Financial management is the art and science of managing a firm’s money so that it can meet its goals. The financial manager must decide how much money is needed and when, how best to use the available funds, and how to get the required financing. The financial manager’s responsibilities include financial planning, investing (spending money), and financing (raising money).

A firm invests in short-term expenses to support current production, marketing, and sales activities. The financial manager manages the firm’s investment in current assets so that the company has enough cash to pay its bills and support accounts receivable and inventory. Long-term expenditures are made for fixed assets such as land, buildings, machinery, and equipment.

Firms raise money by borrowing money, selling ownership shares, and retaining earnings. The financial manager must assess all these sources and choose the one most likely to help maximize the firm’s value. Finance managers must match the term of the financing to the period over which benefits are expected to be received from the associated outlay. Short-term items should be financed with short-term funds, and long-term items should be financed with long-term funds.

Equity refers to the owners’ investment in the business. In corporations, the preferred and common stockholders are the owners. A firm obtains equity financing by selling new ownership shares, by retaining earnings, or for small and growing, typically high-tech, companies, through venture capital.