Financial Management

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<p style=”line-height:200%”><b>&nbsp;&nbsp; &nbsp;Finance and Finance Management</b></p>
<p style=”text-indent:.5in;line-height:200%”>Finance can be defined as a discipline of economics that deals with acquisition, allocation, management and investment of financial resources (Berk &amp; DeMarzo, 2007). Finance, therefore, is an art and a science of managing money. Financial management refers to how the business acquires and efficiently utilize the funds in carrying out the organization&#39;s goals (Berk &amp; DeMarzo, 2007). It involves harmonizing motives of financial managers with the aims of the enterprise. Finance is further classified into two major branches; Private finance that deals with all financial activities of individual entities such as firms, businesses or corporate bodies. Public finance is broader and deals with how the government acquires and disburses revenues in the different sectors of the economy.</p>
<p style=”text-indent:.5in;line-height:200%”><b>&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>&nbsp;<b>Basic Forms of Business Ownership </b></p>
<p style=”line-height:200%”><b>Sole proprietorship</b>; is a form that is operated and owned by a single individual known as a &quot;sole trader.&quot;&nbsp; It is advantageously such that it is simple to start because it requires little capital to start and also few legal requirements. The disadvantages are that its liabilities are unlimited.</p>
<p style=”line-height:200%”><b>Partnership business;</b> is owned and managed by a minimum of two partners. They contribute capital to start the business. Its advantages are; since capital is provided by partners, they can have a large source of capital than a sole proprietorship. The disadvantage is that continuous disagreements among partners may lead to dissolution.</p>
<p style=”line-height:200%”><b>Private Corporation</b>; is a legal entity created by the state. Its merit is that the liabilities are limited. The demerit is that it has very many legal formalities to start.</p>
<p style=”line-height:200%”><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Agency Relationship and Agency Problem</b></p>
<p style=”line-height:200%”><b>Agency relationship;</b> is a business relationship between the principal or the owner and the agent. The principal gives legal authority to an agent to act on the principal&rsquo;s behalf when transacting with a third party.</p>
<p style=”line-height:200%”>&nbsp;<b>Agency problem</b>; arises when there exist a conflict of interest between the agent and the principal.</p>
<p style=”text-indent:.5in;line-height:200%”>To minimize agency problem, there is need to provide good incentives to agents, go for agents who are intrinsically motivated and finally employ monitoring of mechanisms. Also, one can alter the structure of compensation to reflect the efforts of the managers and directors (Besley &amp; Ghatak, 2014). Agency problems can be minimized by independence, equity, and the market for corporate control approaches. The independence approach enhances execution of roles as well as couching of decisions without the influence of any authority. Thus the agent can make decisions without the influence of the principal. This approach allows compensation and other rewards for agents to be based on the profit or firm performance. Lastly, the market for corporate control approach advocates for stellar performance and disciplines managers to work extremely hard for good results, or else the company will not attract more stakeholders (Latin American Companies Circle, 2009). The continued need for creation of value motivates managers and agents to remain focused.</p>
<p style=”text-indent:.5in;line-height:200%”>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Ethical Behavior</b></p>
<p style=”text-indent:.5in;line-height:200%”>Ethics refers to what the society believe is morally right or wrong. Ethical behavior is important in finance because good corporate ethical behavior creates a good reputation for the business and also minimizes agency problems (Baker et al., 2006). Ultimately, it results in good business performance. For a finance professional, it enhances integrity and transparency.</p>
<p style=”text-indent:.5in;line-height:200%”><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Shareholder Maximization</b></p>
<p style=”text-indent:.5in;line-height:200%”>Shareholder wealth maximization refers to an objective by managers to ensure that in all their dealings in the business, the wealth or value of the owners of the firm is maximized. It is concerned with ensuring that the result of the decisions will make shareholders happy regarding their net worth (Jobst, 2006). However, there is a conflict between this goal and that of financial managers to act ethically in a way that the management is also concerned with profit maximization as well as social responsibilities of any business. In pursuit of shareholder wealth maximization, other stakeholders might be treated unethically.</p>

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