Financial management is a key aspect of management any form of business. Leaders and managers need to develop relevant skills in financial management, from bookkeeping to cash management for effective management. This report will define finance and financial management, basic forms of business ownership, agency relationships and problems, the importance of ethical behavior and explain the concept of shareholder wealth maximization.
Finance and Financial Management
Finance refers to the acquisition, proper management and utilization of funds in order to achieve profits that sufficiently compensate for the risks and costs borne by the business. Financial management is the organization, planning, management, and controlling financial activities like utilization of funds and procurement in the enterprise. The main sub-areas of finance include investments, financial institutions, financial management international finance, and market.
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Forms of Business Ownership
Business ownership is classified into three chief forms; corporations, partnerships and sole proprietorship.
Sole Proprietorship
This is the simplest business form. The owner of the business is not legally separate from the business, therefore, is personally responsible for its debts.
Advantages
Some of its advantages include single control and decision making of the business and the ease of starting it up since it does not involve much paperwork.
Disadvantages
The disadvantages of a sole proprietorship include unlimited liability. This makes the owner personally liable for the debt incurred by the business.
Partnership
This basically refers to a form of business often owned by two or more people. The business is not taxed separately as income tax is paid to individual partners who personally claim it on their tax returns.
Advantages
Partnerships too are fairly easy to start and maintain. Partners can fund the company collectively hence increasing the pool of capital. Partners can also share the losses of the company.
Disadvantages
The partners may differ when it comes to decision making thus threatening the business. The profit generated by the company is shared by each partner. Moreover, partners are responsible not only for their actions but also for actions made by other partners.
Corporations
A corporation refers to a legal entity distinct and separate from its owners. The personal assets of shareholders are not affected in the case of corporate liabilities.
Advantages
Corporations protect shareholders from legal liability. Corporations are also able to issue stock as a selling point thus attracting investors (Martinez, 2017). They are also well organized and established from shareholders, directors, and officers
Disadvantages
Corporations are expensive and time consuming to form due to document preparations that are involved. They are also hard to form and maintain compared to other forms.
Agency Relationships and Problems
Agency relationships emerge when an agent is hired by a principal to perform specific services such as decision making. Agency problems occur when conflicts of interests between the principal’s needs and agent’s needs arise (Curran, 2000). Agency problems can be minimized through the following;
Managerial Compensation
This should be conducted in order to retain competent managers and align the interest of managers with those of the stakeholders. This can be done through bonuses in annual salary and company shares.
Threat of Firing
The threat of firing may arise when the stakeholders are not satisfied with their existing management. The board of directors can decide to change the existing management or re-appoint another board of directors that will effectively perform the task.
Threat of Takeovers
This may be conducted by stakeholders or competitors who may control the company by employing their own managers when stock price deteriorates due to poor management.
Importance of Ethical Behavior in Finance
Ethical principles and effective professional standards should always be maintained in order to achieve positive outcomes. This involves avoiding decisions that may lead to short-term profits. When proper business ethics are employed, employees work comfortably knowing decisions made are for the good of the entire company (De Cremer, 2009). This way, a business will attract and maintain employees, customers, and even investors.
The Concept of Shareholder Wealth Maximization
Managers maximize their firm’s wealth by trying to increase their stock price. This increases the firm’s value and eventually the individual stock shareholder wealth. Shareholder wealth maximization is majorly accomplished by financial manager’s ethical behavior in the business. This helps the financial manager to align his decisions to the benefit of the company at large instead of his own.
Conclusion
To sum up, financial management is important in most businesses when it comes to decision making and maximization of profits. In the event, agency problems may arise due to the lack of ethical behavior by the financial managers. This can be minimized through managerial compensation, a threat of takeover and a threat of firing.
References
Curran, C., & Schrag, J. (2000). Optimal agency relationships in search markets [electronic resource] / Christopher Curran and Joel Schrag . Washington, D.C. : Bureau of Economics, Federal Trade Commission, 2000. Retrieved from http://165.193.178.96/login?url=http%3a%2f%2fsearch.ebscohost.com%2flogin.aspx%3fdirect%3dtrue%26db%3dedsgpr%26AN%3dedsgpr.000598230%26site%3deds-live
De Cremer, D. (2009). Psychological Perspectives on Ethical Behavior and Decision Making . Charlotte, NC: Information Age Publishing. Retrieved from http://165.193.178.96/login?url=http%3a%2f%2fsearch.ebscohost.com%2flogin.aspx%3fdirect%3dtrue%26db%3dnlebk%26AN%3d470163%26site%3deds-live
Martinez, R. (2017). Gaining efficiency by centralizing the corporate business resiliency process. Journal of Business Continuity & Emergency Planning , 10 (4), 320–327. Retrieved from http://165.193.178.96/login?url=http%3a%2f%2fsearch.ebscohost.com%2flogin.aspx%3fdirect%3dtrue%26db%3dbth%26AN%3d123709305%26site%3deds-live
Sherman, E. H. (2011). Finance and accounting for nonfinancial managers (3rd ed.). New York, NY: American Management Association.
Weaver, S. C., & Weston, J. F. (2001). Finance and accounting for nonfinancial managers. New York, NY: McGraw-Hill.
