• Finance Business function of planning, obtaining, and managing a company’s funds in order to accomplish its objectives effectively and efficiently.

THE ROLE OF THE FINANCIAL MANAGER• Financial manager

• Chief financial officer

• Vice president for financial management or planning

• Treasurer

• Controller

• Risk-return trade-off

The Financial Plan• Specifies the funds a firm will need for a period of time,

the timing of inflows and outflows, and the most appropriate sources and uses of funds.

CHARACTERISTICS AND FUNCTIONS OF MONEY

Characteristics of MoneyMoney Anything generally accepted as payment for goods

and services.• To be efficient, money must have certain

characteristics:• Divisibility• Portability• Durability• Difficulty in counterfeiting• Stability

Functions of Money

3 Basic Functions of Money:

1. medium of exchange

2. common measure of the value of goods and services

3. acts as a temporary store of value

THE MONEY SUPPLY

• M1 and M2

• Use of credit cards growing rapidly.

WHY ORGANIZATIONS NEED FUNDS

• Variety of reasons, both short-term and long-term.• Use financial planning process to determine how to

address shortfalls and surpluses.

Generating Funds from Excess Cash• Most excess cash balances are invested in marketable

securities.

SOURCES OF FUNDS

• Debt capital Funds obtained through borrowing.• Equity capital Funds provided by the firm’s owners.

Short-Term Sources of Funds• Trade credit, short-term loans, commercial paper.

Long-Term Sources of Funds• Loans, bonds, and equity financing; public sale of stocks

and bonds; private placements; and venture capitalists.• Leverage Using borrowed funds to increase investment

returns.

FINANCIAL SYSTEMS AND FINANCIAL INSTITUTIONS

• Financial system System by which funds are transferred from savers to users.

• Depository institutions Accept deposits that can be converted into cash on demand.

• Nondepository institutions • Life insurance companies• Pension funds• Government-sponsored financial institutions.

Commercial Banks• Offer a wide range of services.

• Banks operate by pooling funds from checking and savings deposits to offer loans.

Bank Regulation

• Federal deposit insurance

Savings Banks and Credit Unions• Cooperative financial institutions owned by their

members.

Nondepository Financial Institutions

• Insurance Companies

• Pension funds

• Finance companies

THE FEDERAL RESERVE SYSTEM

• Federal reserve system U.S. central bank.

Organization of the Federal Reserve System• Nation divided into 12 federal districts.• Governed by a board of directors.• Federal Open Market Committee sets monetary and

interest rate policies.

Check Clearing and the Fed• Improves the efficiency of the financial system.

Monetary Policy• Monetary policy Used to control the supply of money and

credit in the economy.

U.S. FINANCIAL INSTITUTIONS: A GLOBAL PERSPECTIVE

• Major U.S. banks have extensive international operations.

• Only 3 of the 20 largest banks in the world (measured by total assets) are U.S. institutions

• Other nation’s central banks play roles much like the Fed.