Financial management

An Overview of Financial Management and the Financial Environment

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Visit http://www.fortune. com for updates on the U.S. ranking. Fortune also ranks the Global Most Admired.

n a beauty contest for companies, the winner is . . . Wal-Mart. Or at least Wal-Mart is the most admired company in America, according to Fortune magazine’s annual survey. The other top ten finalists are SouthwestAirlines, Berkshire Hathaway, Dell Computer, General Electric, Johnson & Johnson, Microsoft, FedEx, Starbucks, and Procter & Gamble. What do these companies have that separates them from the rest of the pack? According to more than 10,000 executives, directors, and security analysts, these companies have the highest average scores across eight attributes: (1) innovativeness, (2) quality ofmanagement, (3) employee talent, (4) quality of products and services, (5) long-term investment value, (6) financial soundness, (7) social responsibility, and (8) use of corporate assets. These companies also have an incredible focus on using technology to reduce costs, to reduce inventory, and to speed up product delivery. For example, Wal-Mart’s success is driven by the three S’s: scale, scope, and speed.Wal-Mart’s scale is truly astounding, with more than $240 billion in sales, giving it the largest U.S. market share in many products. Wal-Mart’s wide scope of products and state-of-the-art information systems allow it to tailor its product mix to fit demand, so its shelves are always full of the products that people currently want. But products don’t stay on its shelves very long. Wal-Mart movesmerchandise so fast that it sells 70 percent of its goods before it has paid the suppliers. Many companies have a difficult time attracting employees. Not so for the most admired companies, which average 26 applicants for each job opening. These companies are on the leading edge when it comes to training employees and providing a workplace in which people can thrive. In a nutshell, these companiesreduce costs by having innovative production processes, they create value for customers by providing high-quality products and services, and they create value for employees through training and fostering an environment that allows employees to utilize all of their skills and talents. Do investors benefit from this focus on processes, customers, and employees? During the most recent five-yearperiod, these ten companies posted an average annual stock return of 11.9 percent, which is quite impressive when compared with the 1.9 percent annual decline in the S&P 500. These superior returns are due to superior cash flow generation. But, as you will see throughout this book, a company can generate cash flow only if it also creates value for its customers, employees, and suppliers.

TheFive-Minute MBA

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This chapter should give you an idea of what financial management is all about, including an overview of the financial markets in which corporations operate. Before getting into details, let’s look at the big picture. You’re probably back in school because you want an interesting, challenging, and rewarding career. To see where finance fits in, here’s a five-minute MBA.

TheFive-Minute MBA
Okay, we realize you can’t get an MBA in five minutes. But just as an artist quickly sketches the outline of a picture before filling in the details, we can sketch the key elements of an MBA education. In a nutshell, the objective of an MBA is to provide managers with the knowledge and skills they need to run successful companies, so we start our sketch with some commoncharacteristics of successful companies. In particular, all successful companies are able to accomplish two goals. 1. They identify, create, and deliver products or services that are highly valued by customers—so highly valued that customers choose to purchase them from the company rather than from its competitors. This happens only if the company provides more value than its competitors, in the form of...