Finance is the study of how people and businesses evaluate investments and raise capital to fund them. Knowledge of financial tools is critical to making good decisions in both the professional world and personal lives. Finance is an integral part of the corporate world. Many personal decisions require financial knowledge (for example: buying a house, planning for retirement, leasing a car)
The goal of the financial manager must be consistent with the mission of the corporation.
There are three types of Business Organizations.
Sole Proprietorship is a business owned by one person, hence the word sole, meaning one and only. Starting a sole proprietorship is easy. Unlike other business structures, starting a sole proprietorship requires less paperwork and time to create a legal sole proprietorship.
It is cheap to start a sole proprietorship.
Where other business structures have increased fees and filings to open for business, sole proprietorships tend to be affordable models to start and maintain. There are some tax benefits for a sole proprietorship. Instead of the business having to file its own tax return, sole proprietors claim businesses gains and losses on their own individual tax return. Also, the sole proprietorship is taxed using individual income tax rates rather than corporate making it simpler and cheaper to comply with your tax obligations.
Sole proprietors can employ others and grow their business. Sole proprietorships can hire others and enjoy the tax benefits from doing so. Additionally, spouses of the owner can work for the sole proprietorship without being declared as an employee.
Owners have complete and direct control over all decision making. Because the owner is the business, the owner makes all decisions for the business rather than sharing power with a partner or corporate board. This allows owners the freedom to drive the business in the direction they desire.
Proprietors are completely at risk. On the off chance that business obligations end up overpowering, the individual proprietor’s funds will be affected. At the point when a sole proprietorship neglects to pay its obligations, the proprietor’s home, investment funds, and other individual resources can be taken to fulfill those obligations.
Independent work charges apply to sole proprietorships. Proprietors must make good on independent work regulatory expenses on the business salary. Business progression closes with the passing or flight of the proprietor. Since the proprietor and the sole proprietorship are one, in the event that the proprietor bites the dust or ends up debilitated, the business bites the dust with them and the cash and resources of the business turn out to be a piece of the person’s bequest. The benefits and cash are exposed to legacy impose and can greatly affect representatives of the sole proprietorship.
Raising capital is troublesome. Beginning assets of the business are produced by the proprietor and raising assets for the business can be hard since they can’t issue stocks or other venture salaries. Advances may likewise be troublesome if the proprietor does not have enough credit to anchor extra cash.
A partnership is a business owned by two or more people. A cooperative is a business organization owned by a group of individuals and is operated for their mutual benefit. The persons making up the group are called members.
If you are having a partnership business, your business is easy to establish and start-up costs are low. You have more capital is available for the business, you’ll also have greater borrowing capacity and high-caliber employees can be made partners. There is an opportunity for income splitting, an advantage of particular importance due to resultant tax savings. Partners’ business affairs are private and there is limited external regulation. But it’s easy to change your legal structure later if circumstances change.
There is also a downside of partnership businesses like the liability of the partners for the debts of the business is unlimited. Each partner is ‘jointly and severally’ liable for the partnership’s debts; that is, each partner is liable for their share of the partnership debts as well as being liable for all the debts. There is a risk of disagreements and friction among partners and management. Each partner is an agent of the partnership and is liable for actions by other partners if partners join or leave, you will probably have to value all the partnership assets and this can be costly.
Cooperatives may be incorporated or unincorporated. Some examples of cooperatives are water and electricity (utility) cooperatives, cooperative banking, credit unions, and housing cooperatives.
Its main advantage is that it exists and operates for the benefit of its patron members. At the same time, since the members are also the owners, they have a financial interest in the success of the cooperative which sways them toward giving it their full support and patronage. Cooperative members also have a voice in the control of the organization, and, within the limits of majority rule, it, therefore, supplies the kind of service they want.
These advantages, which tend to tie the patrons to the organization by making them full partners, help build an assured volume of business. This in turn is favorable to the efficient operation of the cooperative. A commercial business, on the other hand, has no claim on its patrons except the goodwill built up through past service.
Cooperatives have the weaknesses of democratic organizations. The manager must always remember that he is responsible to a membership group, and this may put a brake on the initiative and flexibility he can use in operating the co-op. He may be at a real disadvantage in competition with a commercial business whose manager is concerned primarily with making a profit and who has a relatively free hand or can consult the owner quickly and frequently.
Sometimes cooperative businesses show an unwillingness to pay the kind of salary needed to attract and hold competent managers and other employees. In consequence managers and good workers are often drawn to higher-paid jobs in commercial businesses.
Another weakness of cooperation is that the mass of members may lose interest in running the organization and let a small group take it over and manage it for their own benefit.
Finance has its four basic principles.
The first one is ‘Money Has a Time Value. ’This principle states that the value of money today is not the same in the future. It will increase as time goes by.
The second principle is ‘There is a Risk-Return Trade-off.’ We only take risks when we expect to be compensated for the extra risk with additional return. The higher the risk, the higher will be the expected return.
The third principle is ‘Cash Flows Are The Source of Value’ (of a Company). Cash flow is the amount of cash that can actually be taken out of the business over this same interval over an interval of time. • Profit is an accounting concept designed to measure a business’s performance over this same interval.
The fourth principle is ‘Market Prices Reflect Information.’ Investors respond to new information by buying and selling their investments. The speed with which investors act and the way that prices respond to new information determines the efficiency of the market. Inefficient markets like the United States, this process occurs very quickly.
As a result, it is hard to profit from trading investments on publicly released information. Investors in capital markets will tend to react positively to good decisions made by the firm resulting in higher stock prices. Stock prices will tend to decrease when there is bad information released on the firm in the capital market.
All in all, basic finance covers an overview of finance, three types of business organizations, the goal of the financial manager and the four basic principles of finance. It is important to yield important information about these before digging deeper into Financial Management to fully understand the different decisions a financial manager does. It will also help us to be more aware of what an accountant must do in a situation that will be based on what are their principles as one.
(2011) Keown, Martin, Petty ‘Basic Finance’ Pearson Prentice Hall
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