PACE Academic IG

Introduction

Financial Management, or Corporate Finance, is a course that has given me personal and professional satisfaction.  Professionally, my work in the course opened the door to teach MBA courses.  Personally, the course allowed me to organize its presentation.  My organization of its presentation relied on my expertise in accounting.  In this article, I will describe how my organization of the course through expertise in accounting provides accounting majors with opportunities to have fulfilling and rewarding careers in management accounting.

Organization

My organization of the course is divided into the 3 activities within a statement of cash flows:

1.     Financing Activities

2.     Investing Activities

3.     Operating Activities

My organization is to establish systemic thinking.  I define financing activities as a system of raising money.  I define investing activities as a system of acquiring assets.  I define operating activities as a system of earning incomes.  I combine each activity to provide one perspective about the course: A system of raising money to acquire assets that earn income.

Financing Activities

The topic in Financial Management courses most appropriate for financing activities is the Weighted Average Cost of Capital (WACC), which simply stated, is the most appropriate combination of debt and equity that would minimize the cost of financing investing activities.

Chapters in Financial Accounting covering long-term liabilities and stockholders’ equity provide an excellent foundation for WACC.  When teaching long-term liabilities, I put an emphasis on bond pricing because of the relationship between a bond’s coupon rate and the market rate of interest.  When teaching long-term liabilities, I also put an emphasis on the cost of borrowing, interest, providing a tax benefit for borrowers that results in a decrease in the cost of debt.  When teaching stockholders’ equity, I put an emphasis on the importance of dividends in common stock and especially preferred stock.  Also, I put an emphasis on how the issuance of common stock is connected to investing and operating activities that affect the portfolios of stockholders.

For accounting majors, the more you understand the nature of debt and equity, the transactions that result, and the effect on the accounting equation, the more prepared you will be when studying WACC.  The cost of financing, especially for startups and turnarounds, cannot be overstated.  Great opportunities exist for accounting majors in not only startups but also turnarounds, opportunities that will lead you to fulfilling and rewarding careers as management accountants.

Investing Activities

The topic in Financial Management courses most appropriate for investing activities is capital budgeting, which simply stated, is a system of proposing and evaluating long-term investment proposals.

Both Financial Accounting and Managerial Accounting provide excellent foundations for capital budgeting.  In Financial Accounting, the chapter that covers long-term assets provides a very strong connection to capital budgeting.  Understanding expenditures that can be recorded to the balance sheet versus the income statement provides an understanding in determining the total cost of an investment proposal.  In Managerial Accounting, an even stronger connection to capital budgeting can be made when studying differential analysis.  The connection is stronger because differential analysis establishes an understanding of what costs are relevant in the evaluation of the proposal.

For accounting majors, the more you understand the elements of long-term assets from various perspectives as well as the differences between relevant and irrelevant costs, the more prepared you will be when studying capital budgeting.  Capital budgeting represents a bridge between financing activities and operating activities, a bridge that accounting majors can make even stronger.  Great opportunities exist for accounting majors who can build stronger bridges,  bridges resulting in opportunities leading accounting majors to fulfilling and rewarding careers as management accountants.

Operating Activities

The topic in Financial Management courses most appropriate for operating activities is working capital management, which simply stated, is a system of organizing effort to collect and pay cash in a timely manner.

The chapters in Financial Accounting covering cash, receivables, inventory, and current liabilities provide an excellent foundation for understanding working capital management.  When covering cash, I emphasize the importance of bank reconciliations because, on the job, I have seen how failing to reconcile cash led to working capital management problems.  When covering receivables, I emphasize the importance of average collection periods, taking the number of days in a year and dividing it by the receivables turnover ratio.  I emphasize a similar approach with inventory through the average age of inventory, taking the number of days in a year and dividing it by the inventory turnover ratio.  When covering current liabilities, I emphasize the distinction between a current ratio and a quick ratio, because a current ratio can indicate a strong working capital position, but the position may be weak due to an increase in slow moving inventory.

For accounting majors, the more you understand the elements of current assets and current liabilities, the more prepared you will be when studying working capital management.  Working capital management measures the quality of investing activities and rewards those who provided the monies necessary for these investments.  Great opportunities exist for accounting majors who can strengthen the relationship among operating, investing, and financing activities through leadership,  leadership that results in opportunities for accounting majors having fulfilling and rewarding careers as management accountants.

Purpose

Besides the organization of the course, I want to establish a purpose of financial management.  The purpose I established is based on my definition of finance, the study of wealth, and my definition of management, the study of effort.  The combination of definitions provides a purpose for accounting majors to connect their education to financial management: To create and protect wealth.

I hope to write more about the purpose of financial management in a future article.

Conclusion

In the textbooks I have used when teaching financial management, chapter 1 describes accounting as a foundational element for financial management understanding and use.  For accounting majors, financial management represents another branch in the management accounting tree.  This branch is very important for not only an educational perspective but also a professional perspective.  The professional perspective, because of accounting’s influence on the financial health of companies, provides accounting majors with yet another opportunity for fulfilling and  rewarding careers as management accountants.   To obtain this type of career, one cannot overstate the importance of a finance education for a management accountant.