Module objectivesIn this module we take financial mathematics inside the company. The objectives are to:understand financial decision-making in the business environment;carry out short- and long-term financial planning;learn about financial statements and how to analyze them.BibliographyFor the student:ROSS, Stephen A. et al. Administração financeira (Portuguese edition of Corporate Finance). Porto Alegre: AMGH, 2015.For the teacher:LEMES JÚNIOR, Antônio Barbosa; CHEROBIM, Ana Paula Mussi Szabo; RIGO, Cláudio Miessa. Administração financeira: princípios, fundamentos e práticas brasileiras. Rio de Janeiro: Elsevier, 2010.ROSS, Stephen A. et al. Administração financeira (Portuguese edition of Corporate Finance). Porto Alegre: AMGH, 2015.Financial managementThe goal of financial management is to maximize the wealth of the company's shareholders. The financial manager is primarily responsible for creating value and reducing risk and, to do so, is involved with the business as a whole.To maximize shareholder wealth, the financial manager makes three fundamental decisions: the investment decision, the financing decision and the results decision. Each one answers a question:Which long-term investments should the company make?Where will it get the financing to make those investments possible?How will it obtain results that meet the shareholders' requirements?Financial managers contribute to the company's success when they give adequate answers to these questions. In investment decisions, for example, they create, receive and develop long-term business alternatives with favorable returns for shareholders, always seeking to increase the value of the company.Financial decisions also differ by time horizon. Those related to the company's normal activities, linked to day-to-day payments and receipts, are short-term financial decisions, also known as working capital management. Long-term financial decisions are the investment, financing and results decisions with horizons longer than one year.The goal of financial managementFinancial management is the art and science of managing financial resources to maximize shareholder wealth. This maximization depends on the three decisions we have just seen: investment, financing and results.Profit maximization, long considered the company's main goal, is an imprecise goal, because actions taken to increase today's profit may reduce future profit, and vice versa. Examples: cutting advertising or skipping maintenance of facilities and equipment improves this year's profit, but may cost sales and idle machines in the following years.Wealth maximization is a more precise goal because it rests on the concept of net present value, which takes into account when each amount enters or leaves the cash flow, the risk and the cost of capital. These concepts will be covered throughout the lessons.To increase shareholder wealth, the manager works with the concept of value, which has several measures: a) book value; b) real (adjusted) asset value; c) net present value; d) market value; e) liquidation value. The ones most used in decisions are those based on discounted cash flow. The financial manager's duties also include managing the relationship with the company's stakeholders (customers, suppliers, employees, creditors, government and community), on whom the company's value depends.A manager cuts the entire machine maintenance budget and, as a result, the year's profit rises by 10%. From the standpoint of financial management, this decision:Answer: May destroy value, because it raises today's profit at the expense of future profits, and the goal is to maximize shareholder wealth — wealth takes into account all future cash flows brought to present value; idle machines tomorrow may cost more than today's savings. The option about maximizing the period's profit describes exactly the goal the text calls imprecise.Functions of financial managementIn general, the finance function is organized into two areas: treasury (financial management proper) and controllership.Treasury functions:Cash managementCredit and collection managementRisk managementForeign exchange managementFinancing decisionInvestment decisionFinancial planning and controlShareholder and investor relationsBank relationsControllership functions:Cost and price managementInternal auditPerformance evaluationAccountingBudgetingAsset controlTax planningManagement reportsFinancial information systemsThere is an administrative principle behind this division: whoever executes does not control, and whoever controls does not execute. It is a practice that protects shareholders. Note, however, that activities that do not move cash belong to controllership, such as cost and price management.In a company, the person who negotiates loans with banks is also the one who audits those contracts. Which principle of the division between treasury and controllership is being violated?Answer: Whoever executes does not control, and whoever controls does not execute — negotiating with banks is a treasury function, and internal audit belongs to controllership; concentrating both in the same person removes the protection this separation gives shareholders.The questions behind each decisionInvestment decisionWhere are the financial resources invested?How much is invested in current assets?How much is invested in non-current (fixed) assets? In which ones?What is the best mix of assets?What is the risk of the investment?What is the return on the investment?What are the new investment alternatives?Which new assets should be acquired?How can the profitability of existing investments be maximized?What should be discarded, reduced or eliminated because it adds no value?Results decisionAre sales targets being met?Are the prices charged adequate?What results have been achieved? How can they be maintained or improved?How much have sales grown? And costs? And expenses?What percentage of revenue do costs and expenses represent?What is the net profit margin on sales?Which costs and expenses can be reduced?Are the revenues obtained consistent with the investments?Have profits met the established targets? How do they compare with those of the best companies in the industry?Long-term sources of financingUsed to finance investments that take years to pay off, such as machinery, buildings and expansion:Going public (issuing shares on the stock exchange)Issuing debentures (corporate bonds)Long-term bank loans and financingFinancing from BNDES (Brazil's national development bank), such as BNDES Finame (machinery and equipment) and the Cartão BNDES (a BNDES credit card for installment purchases by micro, small and medium companies)Credit lines funded by the FAT (Brazil's Workers' Support Fund), such as those of Proger (Employment and Income Generation Program), when availableLeasingExport financing, such as Proex Financiamento (a Brazilian government export financing program)Short-term sources of financingUsed for working capital, that is, to cover the gap between when the company pays and when it gets paid:Receivables advancesDiscounting of duplicatas (Brazilian trade bills)Discounting of checksIssuing promissory notes and commercial notes (commercial papers)ACC (Adiantamento sobre Contrato de Câmbio, an advance on a foreign exchange contract) and ACE (Adiantamento sobre Cambiais Entregues, an advance on delivered export bills), for exportersBusiness overdraftSecured revolving credit account (conta garantida)Vendor financeThe term of the source should match the term of its use: financing a machine that will produce for ten years with an overdraft, for example, forces the company to roll over expensive debt every month.A manufacturer needs funds to buy a machine that will produce for 10 years. Which source is the most suitable?Answer: BNDES Finame — it is a long-term credit line aimed precisely at machinery and equipment. The other three are short-term sources, suited to working capital; using them for a ten-year asset would mean rolling over expensive debt for that entire period.An exporter wants to receive today, in reais, part of the value of a foreign sale that has not yet been shipped. Which short-term operation meets this need?Answer: ACC (advance on a foreign exchange contract) — the bank advances the reais corresponding to the export's foreign exchange before shipment. Debentures and going public are long-term sources, and leasing is for using an asset, not for advancing revenue.Questions1) How does the financial manager work to achieve better operating results for the company? Base your answer on the Income Statement.2) Define use value and exchange value. How is the value of a company increased? What are the various ways used to express the value of a company?3) Why do conflicts arise between managers and owners? Which goals should prevail? Why is it so important to look after stakeholders?4) Which sciences is financial management most closely related to? Show the importance of each of them to finance. In your opinion, which one contributes most to the financial area?
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