BUS 3062 Unit 1 Assignment 1 Introduction to Financial Management
Proficient-level: Define the terms finance and financial management.
Finance is a multifaceted field that encompasses the management of money and financial resources. It involves various activities related to acquiring, allocating, and utilizing funds. On the other hand, financial management focuses on effectively and efficiently handling financial resources to achieve the financial goals and objectives of individuals, organizations, or groups.
Identify and provide a brief description of the four significant sub-areas of finance.
The four significant sub-areas of finance can be described as follows:
- Investments: Managing various financial instruments like stocks, bonds, and real estate to optimize returns and manage risks.
- Financial institutions: Entities like banks, insurance companies, and pension funds that provide financial services and facilitate the flow of funds.
- Markets: Platforms where buying and selling of financial instruments occur, connecting investors, traders, and institutions.
- International finance: Dealing with financial transactions and risks across borders, considering factors like exchange rates and global economic stability.
Proficient-level: “What are the three primary forms of business ownership? Advantages and disadvantages?” (Cornett, Adair, & Nofsinger, 2016)
The three primary forms of business ownership are sole proprietorship, partnerships, and corporations. Each form has advantages and disadvantages, influencing the decision-making process for entrepreneurs and investors.
- Sole proprietorship: In this form, a single individual owns and operates a business. Advantages include the ease of starting the business, minimal regulations, complete control over decision-making, and the ability to retain all profits. However, sole proprietors are personally liable for the business’s debts and actions, and there is no legal separation between personal and business assets. It can be challenging to raise capital, and the owner’s income is subject to taxation.
- Partnerships involve two or more individuals sharing ownership and management responsibilities. Advantages include pooling resources and expertise, making it easier to raise funds. Partnerships can benefit from diverse skills and knowledge brought by each partner. However, partners have unlimited personal liability for the partnership’s debts, and unanimous consent may be required for significant decisions. Disagreements among partners can also arise, leading to potential conflicts.
BUS 3062 Unit 1 Assignment 1 Introduction to Financial Management
- Corporations: A corporation is a legal entity separate from its owners, known as shareholders. It offers advantages such as limited liability, meaning shareholders’ assets are protected from the corporation’s debts. Corporations can raise capital by issuing shares and can attract investors. However, corporations face more complex legal and regulatory requirements. Double taxation can be a disadvantage, as the corporation is taxed on its profits, and shareholders are taxed on dividends received.
It is crucial for entrepreneurs and investors to carefully consider the advantages and disadvantages of each form of business ownership before making a decision. Factors such as personal liability, control, taxation, and the ability to raise capital should be thoroughly evaluated to choose the most suitable form for their specific circumstances and objectives.
An agency relationship occurs when one party hires another to work on their behalf. The agent is expected to act in the principal’s best interest in this relationship. On the other hand, an agency problem arises when the manager’s claims do not align with the shareholders’ goals. This can create conflicts of interest. Three approaches can be adopted to minimize such conflicts: BUS 3062 Unit 1 Assignment 1 Introduction to Financial Management.
- Ignore it: If the issue is relatively small, it may be best to overlook it and not take action.
- Monitor actions: This approach involves actively monitoring the agent’s activities to ensure they act in the principal’s best interest. However, this can be costly and may only sometimes be effective in resolving conflicts.
- Make managers owners: By providing managers with ownership stakes in the company, their interests align with those of other owners. This can help mitigate the agency problem by giving managers a stronger incentive to act in the best interest of the shareholders.
Corporate governance plays a significant role in addressing the agency problem. It focuses on the structure and processes through which a company is directed and controlled. Corporate governance ensures that the board of directors, who shareholders appoint, effectively oversees the organization’s management. This separation between the board and day-to-day management and proper governance practices facilitates the company’s long-term success.
Ethical behavior is of paramount importance in the field of finance due to the nature of managing other people’s money. Finance professionals often have access to sensitive financial information and face temptations to make decisions that may benefit themselves more than their clients or stakeholders. Ethical conduct helps build trust, maintain integrity, and protect the interests of investors and the overall financial system. BUS 3062 Unit 1 Assignment 1 Introduction to Financial Management
Examples of financial scandals include the Ponzi scheme orchestrated by Bernie Madoff in the 1980s. Madoff used new investors’ money to pay returns to previous investors, resulting in significant financial losses when the system collapsed. Another well-known scandal is that of Enron, where the company manipulated its financial statements, leading to its eventual bankruptcy in 2001. These scandals highlight the severe consequences of unethical behavior in finance.
The goal of shareholder wealth maximization does not necessarily conflict with behaving ethically. While shareholder wealth maximization prioritizes the interests of shareholders, managers and owners who pursue their interests also tend to promote the welfare of their community. Acting ethically can contribute to a company’s long-term success and reputation, benefiting the shareholders.
Adam Smith’s term “invisible hand” refers to the concept that individuals, while pursuing their self-interests, unintentionally contribute to the greater good of society. Smith argued that market forces and competition guide economic activities, leading to efficient outcomes and societal benefits. The invisible hand suggests that actions that benefit the community are also the most profitable for individuals. BUS 3062 Unit 1 Assignment 1 Introduction to Financial Management
Cornett, M., Adair, Nofsinger. (01/2015). M: Finance, 3rd Edition. [Bookshelf Online]. Retrieved
Survivor, T. W. (2017, February 24). The 7 Biggest Financial Scandals of All-Time. Retrieved
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