For sole proprietorship, the firm has a single owner who runs the firm, the goal and vision is clear because the goal of the firm is what the owner desires. In contrast, problems tend to arise when it comes to organizational form of business. A large public organization has hundreds of thousands of shareholders in the firm who owes the business. And each of them will have different preference to wealth, risk tolerance, investment decisions, strategy and so on. They cannot possibly manage or have control over the business directly, therefore a separation of ownership and control is needed. A managing team will run the corporation and this will easily lead to conflicts between the interest of the management and the shareholders. In this …show more content…
Financial manages will use the cash from banks or rose by selling securities to investors in the financial market to pay for different investment projects. Then as the business runs it will generate cash. Cash will be then either be reinvested or paid back to the shareholders as dividend. In this case, it explains that for shareholders despite the fact that they might have different preferences as mentioned, but mainly they have the same financial goals; they want the financial manager to maximize the current market value of shareholders’ investment in the firm. There is only one single way for managers to maximize the value of the firm, which is to increase firm’s market value and current price of shares.
Leading to the problem, some managers have different goals and objectives, for example some manages may want to maximize profits, maximize profits does not equally means maximize firm’s market value. Firstly, this is because maximize profits might need to cutting back on investing on intangible assets. Such as staff trainings, maintenance, research and development etc, but these add long-term value to the firm. Surely shareholders will not be happy when these add short-term value to the firm but causing damages to long-term profits. Also companies might be able to increase their future profit by cutting this year’s dividend and investing the freed-up cash for the firm. This might not be what the shareholders want as well since they get paid
| A sole proprietorship is easy to create; there is minimal creation cost and time.The single owner has autonomy in decision making; sole owner makes all decisions related to the business and has complete ownership of business’s finances.
Financial Management is an important aspect of how a business operates efficiently. The way that the finances are controlled can determine how successful the company is. The finances of a business allows for the growth of the company. The five practices of financial management: capital structure decision, investment appraisal techniques, dividend policy, working capital management and financial performance assessment are critical when assessing a company. The performance of a company plays a key role on how successful the company is on meeting goals. There are different strategies and tools that a company can implement and if they are used to effectively the company can meet their goals. If a company has good finances, a good
The primary objective of the manager is to please the stockholder by maximizing stockholder wealth.
After reading this book, I realized that I already use a lot of the things that Focazio focuses on. I decided I would use this assignment to reveal what I do when I’m not being a fulltime student. Since I can remember, I was raised to be a super hero. I was raised in a life where magic wasn’t a myth and extraordinary powers were a common everyday thing. I decided to go through things in the book I liked a lot and relate them to things I’ve learned from becoming the hero that I am today. I’ll begin with Focazio’s first of the three keys to unlock the problem of job dissatisfaction. You have to have fun to become successful. Being a superhero isn’t all the hype it’s made up to be. There is a lot of hard work that goes into training
The finance function and its relation to other decision-making areas in the firm; the study of theory and techniques in acquisition and allocation of financial resources from an internal management perspective.
b. As a financial manager, my focus would be on improving the firm’s cash flow and cash return on investments by determining which units in the business are generating or depleting the firm’s cash.
This situation can lead to negative consequences for a business when its executives or management direct the organization to act in the best interest of themselves instead of the best interest of its owners or shareholders. Stockholders of the enterprise can keep this problem from arises by attempting to align the interest of management with that of themselves. This normally occurs through incentive pay, stock compensation, or other similar incentive packages that now cause the managers financial success to be tied to that of the company (Garcia, Rodriguez-Sanchez, & Fdez-Valdivia, 2015; Cui, Zhao, & Tang, 2007; Bruhl, 2003; Carols & Nicholas,
A company has to find a way to achieve a balance between rewarding managers to the point that it is detrimental to the company and finding a way to maximize the wealth of the shareholders.
The flip side of this issue is really the same thing. Management has a fiduciary responsibility to keep the company operational and profitable. While the ultimate decision lies in the hands of upper management, they would be wise to listen before making their final
In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the directors of the corporation, who in turn appoint the firm’s management. This separation of ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone else’s best interests, rather than those of the shareholders. If such events
The moment the investment begins to yield profit the financial payouts are shared. The capital investment will be removed from the total revenue generated and the profits shared according to each investors. It is th option of such companies to decide to invest the profit or share them among the shareholders. The ratio of the amount shared among the investors and reinvested will have a positive effect on the company's growth. The investors that want a high current income
After the creation of a business plan, the next step to operating a business is the selection of an appropriate business structure. Different legal forms of business ownerships affect different managerial and financial factors from the business names to the tax obligations (Gregory, n.d.). The most common forms are sole proprietorship, partnership, cooperatives, and corporations. There are different types of corporations in the business world, but the two most general corporation types are S Corporation and Limited Liability Company (LLC) (Ferrell et al., 2013). The sole proprietorship is the easiest and most basic form of business ownership. It is owned and run by one individual, which is the proprietor. The individual is entitled to all profits and is responsible for all the business’s
Financial Management is a critical aspect of any business in order to achieve a sustainable and efficient cash flow. It is essential in maintaining the link between a business’s future financial goals (profit maximization) and the resources that it has in order to achieve its objectives. Businesses demand certain common goals that increase a bussiness's all around achievement, Some of which involve; growth amongst assests, An increase in efficiency in all areas of the business whether it be management or not. And the ability to meet short term and long term debts. Finacial management undertakes the responsibility to implement and acheive these goals for the business using a range of strategies shaped to meet the needs of the business and
Economic science teaches us that due to their subjective needs, individuals have subjective preferences, and hence different interest. Occasionally different subjective interests give rise to conflicts of interest between contracting partners. These conflicts of interest may result in turn, in one or both parties undertaking actions that may be against the interest of the other contracting partner. The primary reason for the divergence of objectives between managers and shareholders has been attributed to separation of ownership (shareholders) and control (management) in corporations. As a consequence, agency problems
Nevertheless if companies operate in weak markets and fail to create growth and profit the concept of maximization of shareholder wealth is also an opportunity for self-regulation and security against threats for a company. This approach is in particular useful for safeguarding against difficulties arising from wrong or misguided leadership within a corporation. Shareholders of a company have the strongest interest in a company’s success because they often invest a lot of capital in the business and require revenues for their deposit (Moore, 2002). As a matter of fact, they become more