Cash flows and financial management

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What three questions does financial management seek to answer.

The finance functions can be divided into three broad categories: (1) investment decision, (2) financing decision, and (3) dividend decision.
In other words, the firm decides how much to invest in short-term and long-term assets and how to raise the required funds and also how to appropriate the profit.

What are the alternative forms of business organizations? What are their advantages and disadvantages

Sole proprietors are the simplest forms of organizations. They are unincorporated businesses. No legal formalities are required to start this form. They can be consultants, freelancers or small manufacturing organizations. This is the easiest form of business to set up, and the easiest to dissolve. This form has got the single owner. Thus it may have succession problems. Moreover the owner has unlimited liability.

Partnership

A partnership (also referred to as a general partnership) is a business arrangement where two or more people (who are not husband and wife) are owners of a business. Unlike a corporation, you do not need to file any documents with the state to make your business a partnership. A partnership is created by default, unless the business is specifically formed as some other type of business entity, such as a corporation, a limited liability company, or a limited partnership.

A general partnership is one in which all of the partners have the ability to actively manage or control the business. This means that every owner has authority to make decisions about how the business is run as well as the authority to make legally binding decisions. Unless the partners have a partnership agreement, each partner will have equal authority.
Each partner can bind the others in the ordinary course of business. There is no need in a partnership for any formal grant of authority to the partners. Each partner is personally liable for the excess debts of the firm. Accordingly, each partner owes a fiduciary duty to the partnership and each other partner. Partnership interests cannot be transferred at least insofar as they carry control rights. Finally, and perhaps most importantly, it is easy to get out of a partnership through dissolution, or now, disassociation.

Partners in a general partnership don't have any limit on their personal responsibility for the debts of the business. This means that the partner could lose more than just his investment in the business - personal assets would have to be used to pay business debts if necessary. Each partner in a general partnership is also "jointly and severably" liable for debts of the business. Joint and severable liability means is that each partner is equally liable for the debts of the business, but each is also totally liable. So if a creditor can't get what he is owed by one or more of the partners, he can collect it from another partner, even if that partner has already paid his share of the total debt. If someone sues your partnership and obtains a large judgment, and your partner doesn't have the money to pay his share of it, you will have to pay the entire amount.

A limited partnership is different from a general partnership in that it requires a partnership agreement. Some information about the business and the partners must be filed with the appropriate state agency (usually the secretary of state).

Additionally, a limited partnership has both limited and general partners. A limited partner is one who does not have total responsibility for the debts of the partnership. The most a limited partner can lose is his investment in the business. The trade off for this limited liability is a lack of management control: A limited partner does not have the authority to run the business. He is really more or less an investor in the business.

A limited partnership must have at least one general partner. The general partner or partners are responsible for running the business. They have control over the day-to-day management of the business and have the authority to make legally binding business decisions. The partnership agreement will specify exactly which partner or partners have certain responsibilities and which have certain authority. General partners are also subject to unlimited personal liability for the debts of the business. The general partners of a limited partnership are also jointly and severally liable for the debts of the business, just like partners in a general partnership.

Corporation

Corporations are incorporated businesses. The benefit of the corporation is limited liability and the insulation of assets from unrelated liabilities. But limited liability aside, forming a corporation (for example) may give the business more legitimacy than doing business under one's own name as a sole proprietor.
There is also separation of business from participants is what allows a corporation to raise equity capital from outside investors. It also often provides a measure of legal and financial protection for the shareholders. The shareholders of corporations have limited liability protection, and corporations have full discretion over the amount of profits they can distribute or retain.

In a corporation, ownership interests are represented by shares that may be owned by active participants or passive investors in any proportion, but usually in proportion to financial contribution (though this may be changing with the increasing use of stock options). Thus, the firm is owned by the shareholders, and each shareholder is entitled to a pro rata share of the financial returns. Shareholders have no management authority.

Rather, they are entitled to vote on a limited number of issues. Only the board of directors, acting as a group, has inherent authority to manage the corporation. . Although limited liability does not technically extend to management as management, it does so in practice. The directors and officers owe a fiduciary duty to the corporation and presumably the shareholders. And they may be liable to the corporation for a breach of duty But they are not ordinarily liable to creditors.
Finally, shares of a corporation are freely transferable, both as to financial rights and control rights, but it is very difficult to get out of a corporation other than by selling one's shares.

What is the primary goal of the corporation? Do firms have any responsibility to society at large? Is stock price maximization good or bad for the society? Should firms behave ethically?

In making financial decisions, the financial manager should aim at increasing the value of the shareholders' Stake in the firm. This is referred to as the principle of Shareholders' Wealth Maximization (SWM). Hence Firms' primary objective is maximizing the welfare of owners. Here Wealth is precisely defined as net ...