BUSINESS
Business is an organization or economic system where goods
and services are exchanged for one another or for money.
Every business requires some form of investment and
enough customers to whom its output can be sold on a
consistent basis in order to make a profit.
Businesses can be privately owned, not-for-profit or state-
owned.
FORMS OF BUSINESS
Sole Traders: owned and run by one person only. Even though he
Sole Traders: owned and run by one person only. Even he can employ
people, he is still the sole proprietor of the business.
Pros:
•There are so few legal formalities are required to operate the business.
•The owner is his own boss, and has total control over the business.
•The owner gets 100% of profits.
•Motivation because he gets all the profits.
•The owner has freedom to change working hours or whom to employ, etc.
•He has personal contact with customers.
•He does not have to share information with anyone, thus he enjoys
complete secrecy.
Cons:
Nobody to discuss problems with.
Unlimited liability.
Limited finance/capital, business will remain small.
The owner normally spends long hours working.
Some parts of the business can be inefficient because of
lack of specialists.
Does not benefit from economies of scale.
No continuity, no legal identity.
PARTNERSHIP
A partnership is a group consisting of 2 to 20 people who run
and own a business together. They require a Deed of
Partnership or Partnership Agreement, which is a written
agreement of the partners about the terms and condition.
Pros:
More capital than a sole trader.
Responsibilities are split.
Any losses are shared between partners.
Specialization in management
Cons:
Unlimited liability.
No continuity, no legal identity.
Partners can disagree on decisions, slowing down decision
making.
If one partner is inefficient or dishonest, everybody loses.
Limited capital, there is a limit of 20 people for any
partnership.
COMPANY
Indian Company law 1956’s section 3(1) (i) define company,
“Company is the organisation which is formed and registered under this
law or any previous law”.
Features:
•Separate legal entity
•Limited Liability
•Perpetual Succession
• Transferability of Shares
•Common Seal
•Capacity to sue and being sued
•Separate Management
TYPES OF COMPANIES
•Private limited Company
•Public limited Company
•Govt. Company
• Holding & Subsidiary Company
Meaning of Financial Management
Financial management refers to the efficient and effective
management of money (funds) in such a manner as to
accomplish the objectives of the organization. It is the
specialized function directly associated with the top
management.
Financial Management means planning, organizing, directing
and controlling the financial activities such as procurement
and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the
enterprise.
Definition of Financial
Management
Financial Management is the Operational Activity of a business
that is responsible for obtaining and effectively utilizing the
funds necessary for efficient operation.” By Joseph Massie
“Business finance deals primarily with rising, administering
and disbursing funds by privately owned business units
operating in non-financial fields of industry.”– By Kuldeep Roy
“Financial management is the area of business management
devoted to a judicious use of capital and a careful selection of
sources of capital in order to enable a business firm to move in
the direction of reaching its goals.” – by [Link]
“Financial management is the application of the planning and
control function to the finance function.” – by K.D. Willson
Scope/Elements of Financial Management
Some of the major scope of financial
management are as follows:
1. Investment Decision
2. Financing Decision
3. Dividend Decision
4. Working Capital Decision.
1. Investment Decision:
The investment decision involves
Risk Evaluation
Measurement of cost of capital and
Estimation of expected benefits from a project.
Capital budgeting and liquidity are the other two
major components of investment decision.
Financing Decision:
Financing decision is related to financing mix or
financial structure of the firm. The raising of funds
requires decisions regarding:
Methods and sources of finance
relative proportion and choice between alternative
sources
Time of floatation of securities, etc.
Long Term Sources of Finance:
In order to meet its investment needs, a firm can raise funds from various
sources.
Long Term Sources of Finance:
Share Capital or Equity Shares
Preference Capital or Preference Shares
Retained Earnings or Internal Accruals
Debenture / Bonds
Term Loans from Financial Institutes, Government, and Commercial Banks
Venture Funding
Asset Securitization
International Financing by way of Euro Issue, Foreign Currency Loans,
ADR, GDR etc.
Medium Term Sources of Finance
Preference Capital or Preference Shares
Debenture / Bonds
Medium Term Loans from
Financial Institutes
Government, and
Commercial Banks
Lease Finance
Hire Purchase Finance
Short Term Sources of Finance:
Trade Credit
Short Term Loans like Working Capital Loans from
Commercial Banks
Fixed Deposits for a period of 1 year or less
Advances received from customers
Creditors
Payables
Factoring Services
Bill Discounting etc.
Dividend Decision:
One feature of dividend policy is to decide whether
to distribute all the profits in the form of dividends
or to plough back the profit into business
Investment opportunities available to the firm
Plans for expansion and growth,
Dividend stability
Form of dividends, i.e., cash dividends or stock
dividends, etc.
Working Capital Decision:
Working capital decision is related to the FINANCING
in current assets and current liabilities. Current assets
include cash, receivables, inventory, short-term
securities, etc. Current liabilities consist of creditors,
bills payable, outstanding expenses, bank overdraft, etc.
Current assets are those assets which are convertible into
cash within a year. Similarly, current liabilities are those
liabilities, which are likely to mature for payment within
an accounting year.
Objectives of Financial Management
Two major objectives of financial management are:
1. Profit Maximization
2. Wealth maximization
Profit Maximization
The main purpose of any kind of economic activity is earning
profit. A business concern operates mainly for the purpose
of making profit. Profit has become the yardstick to measure
the business efficiency of a concern. Profit maximization is
also the out-moded and narrow approach, which aims at,
maximizing the profit of the concern. Profit maximization
consists of the following important features.
Favorable Arguments for Profit Maximization
Main aim is earning profit.
Profit is the parameter of the business operation.
Profit reduces risk of the business concern.
Profit is the main source of finance.
profitability meets the social needs also.
Unfavorable Arguments for Profit
Maximization
Profit maximization leads to exploiting workers
and consumers.
Profit maximization may lead to unethical
practices, unfair trade practice, etc.
Profit maximization objectives leads to inequalities
among the stake holders such as customers,
suppliers, public shareholders, etc.
Drawbacks of Profit Maximization:
It is vague: Profit is not defined precisely or correctly.
It ignores the time value of money: Profit maximization
does not consider the time value of money or the net
present value of the cash inflow. It leads to certain
differences between the actual cash inflow and net present
cash flow during a particular period.
It ignores risk: Profit maximization does not consider
risk of the business concern. Risks may be internal or
external which will affect the overall operation of the
business concern.
Wealth Maximization
Wealth maximization is one of the modern
approaches, which involves latest innovations and
improvements in the field of the business concern.
The term wealth means shareholder wealth or the
wealth of the persons those who are involved in the
business concern.
Wealth maximization is also known as value
maximization or net present worth maximization.
This objective is a universally accepted concept in
the field of business.
Favorable Arguments for Wealth Maximization:
Wealth maximization is superior to the profit maximization
because the main aim of the business concern under this concept
is to improve the value or wealth of the shareholders.
Wealth maximization considers the comparison of the value to
cost associated with the business concern. Total value detected
from the total cost incurred for the business operation. It provides
exact value of the business concern.
Wealth maximization considers both time and risk of the business
concern.
Wealth maximization provides efficient distribution of resources.
It ensures the economic interest of the society.
Unfavorable Arguments for Wealth Maximization:
Wealth maximization may not be suitable to present day
business activities which are oriented towards profit
derivation.
Wealth maximization is nothing, it is also profit
maximization, and it is the indirect name of the profit
maximization.
Wealth maximization creates ownership-management
controversy.
Management alone enjoys certain benefits.
The ultimate aim of the wealth maximization objectives is to
maximize the profit.
Wealth maximization can be triggered only with the help of
the profitable position of the business concern.
