Question

What are the three basic questions Financial Managers must answer?

What are the three major forms of business organization?

What is the goal of financial management?

What are agency problems, and why do they exist within a corporation?

What major regulations impact public firms?

Answer 1

What are the questions Financial Managers must answer?

The financial manager is concerned with the financial structure and implementation through the structure. the basic questions the financial manager should answer are:

1. How long is the company planning to manage its investments. This is related to Capital Budgeting. It requires the manager to search for opportunities which can help him/ her generate more than the cost she/ he has to incur to generate those returns. This involves a more detailed planning as to how much is the cost going to be, how long will it take to recover that big amount, what are the possible risk the project is exposed to?

2. What is the structure the financial manager should opt for. What should be the components from equity and debt, if both are used, then in what proportion? This helps the managers to analyse the cost of capital attached to it which includes the dividend and interest payments. Besides this, the financial managers can also use the leverage that is, work on outsiders capital if the firm finds it own resources insufficient for it growth in operations.

3. What is the ideal working capital required for day to day operation. This is an important question as the business requires finances everyday to operate which could be wages, amount payable to suppliers and so on. It is viewed in a short term which could be a year on an operation cycle.

What are the 3 major forms of business organisations?

The 3 major forms of business organisations are sole proprietorship, partnership firm, and joint stock company. They are explained below.

1. The Sole Proprietorship is a business own by a single or sole person. It is the simplest form of organisation. Besides the complete ownership the owner is entitled to all the profits and losses of the business. The decision making process in sole proprietorship is comparatively easier. however the is form of business organisation suffers from limited capital and even unlimited liability of its owner.

2. Partnership Firm is a type of business organisation which is owned by more than one person who collectively make decisions, and are entitled to receive profit or even bear losses depending on the type of partnership. The most important document in the firm is the Partnership deed.The firm benefits from having a bigger pool of people to manage business compared to sole proprietorship and have a comparatively larger capital to employ. It has its own cons, the decision making is divided into more number of people which makes process cumbersome. The partnership can cease due to many reasons which may includes dispute among partners.

3. Joint Stock Company or Corporation is the most complex business organisation. It is a business that can be owned by a large number of shareholders. The company enjoys many benefits of being a separate entity. The Company has the most legalities due to its huge stature. The company has board of directors who are elected by the shareholders and they manage and run the company. The corporate has a huge pool of resources in both financial and physical.

What is the goal of financial management?

The goal of financial management is to serve as a dual edged sword for the organisation. On one hand the management need to find out ways of generating more revenues by employing the available resources in the most optimal way. The other objective is to reduce the cost of operation without reducing the quality of services or goods to the consumers. The resources conserved could be used in reinvestment purpose and also depict the efficiency by having a good benefit to cost ratio.

What are agency problems, and why do they exist within a corporation?

Let us look at this question in this way, while there was a sole proprietorship, the owner himself took all the decisions and was exposed to the consequences of her/his own decisions. But in corporation there is a division in authority and owners. On one people who own shares have their concerns and people who run the company have their set of problems to cater to. It is always seen that there exist a conflict of interest which is also called agency problem. The problem exists as the resources available by the company are limited and they may not be enough to meet all objectives of several stakeholders of the company which leads to agency problems.

What major regulations impact public firms?

1. The public enterprises are regulated through the way they account their activities, their financial position, with the help of financial statements. the public companies have to compulsorily show their financial to public as they stand to be the owners.

2. The public organisation needs to act within its two doctrines which is memorandum of association and articles of association. It includes the capital structure, activities, duties and responsibilities of the organisation.

3. There can be amendments in the Act that lays down rules for the companies or even imposing new Acts and taxation regimes to promote the business the companies are into.

3. Regulation in relation to change in the capital structure can have a deep impact in the organisation. This could include debt funding, split, sell off etc.

These regulations ensure the sole goal of ensuring the interest of the shareholders remains protected. The regulations tighten the internal checks within the company and can even impose severe penalties if regulations and rules are not being adhered to.