Importance of Corporate Finance for Managers
In any corporate business, the main goal or responsibility of the managers is to maximize the worth of shareholder’s investment in the business. Therefore, all the actions and planning of the managers must be focused on the benefits for the business and their shareholders. There are two sources of finance for the managers of any business. These sources of finance are debt and equity. Both debt and equity finance has their specific importance for the managers and advantages for the business and shareholders. (Tatum)
The importance of corporate finance for managers becomes more vital when they have to maintain a good ratio between equity finance and debt finance. For example, if the business is in good shape and earning good returns, then the management of the business will declare enough dividends on time. In these circumstances, the shareholders will not raise any issue with the workings of managers because the worth of the shareholder's shares is increasing and any right issue offer of shares to the existing shareholders will be taken immediately. Therefore, when the business is making good returns and shareholders are showing confidence in the decision making of management, then managers of the business always look for the more business opportunities to maximize the worth of shareholder’s equity. (Silberstein)
On the other hand, if the business is not performing well and returns are not enough, then the management of a business can face the financial problems in future. Poor financial performance of the business will impact on the shareholder’s trust and they may not reinvest in the business. This attitude of shareholders will cause failure to the right issue of the company. In these circumstances, the first thing management must do is to retain earnings before declaring the dividends to the shareholders. Management must consider debt financing which is cheaper and quicker than raising funds from the equity. Moreover, it also provides management with the tax deduction amount of interest paid to debt holder. However, too much debt financing in business can make business too risky for debt holders and shareholders as well. (Grice, 2010)
There are many ownership types for the business from the beginning of the business of the corporation. At the start of the business, sole proprietorship is the best form of business. The main advantage of this form of business is that it allows the owner of the business to take look into every operation of the business. All the decision makings and planning are done by the owner of the business and the owner is the only shareholder of the business. There is one on one connection with the organization and all the problems are informed to the owner by the employees quickly. However, there are few disadvantages of the sole proprietorship form of business. First disadvantage is that this form of business is good for small scale businesses and it does not suit for larger businesses. Another disadvantage can be a shortage of finance because the owner is the only financer and shareholder, then it will be difficult to raise finance in case of business enhancement. In case of no payments for liabilities, owner of the business is personally liable for the repayments not his business. (Ramos, 2011)
Another important form of business is a partnership in which two or more individuals agree on the specific terms and runs the business as owners. These specific terms are written in the legal papers and normally known as partnership deed. At the start of a partnership, the partners decide the profit sharing ratios, interest income from the capital or even the salaries if applicable. Every aspect of partnerships is written in the deed. By adopting partnerships, business can get more professionals to run the business and more sources of finance are available as compared to sole proprietors. However, the main disadvantage of partnership is that partners are liable for the actions of their partners. This means that poor decision making of any partner or a fraud can cause problems for all other partners. Another disadvantage is that partnerships have limits which keep business into a limited revenue generation. Moreover, conflicts between partners cause damage to the business. There is another form of partnership called Limited Liability Partnership (LLP) which is similar to a normal partnership expects that the partners are not personally liable for the carelessness of their partner. (Waters)
Before corporation, Limited Liability Company (LLC) is another form, a business may experience. The advantage of adopting the status of LLC is that it develops the interest and trust of investors when the business is listed or registered on the stock exchange. Any business listed on the stock exchange is required to perform audits. Another advantage of an LLC is that the owners of the business or manager control the business and distributes the profit according to the business interest. Better business performance of an LLC is the sign of a good Corporate because good LLC companies are in the good books of investors and once the change their status to corporations, then the investors buys their shares quickly. The main disadvantage of an LLC is that the business cannot sell their shares in the open market. (Kay, 2011)
The less common form of business is joint ventures, association and trust. The advantage of joint venture is that two groups join their hands in a similar project and complete it accordingly. No long paper work is needed for joint ventures. It automatically ends after the completion of specific project. Association means the group of people with the similar interest of making a profit. In association, the group members can be different professionals such as financer, lawyer or broker who binds together and perform business. Trust is a group of individuals which runs the business on the behalf of the real owners. If real owner is minor or not capable of performing business, then trust can be used for running the business on the behalf of the beneficiary. ("Types of business," )
References
Tatum, M. What is corporate finance?. Retrieved from http://www.wisegeek.com/what-is
corporate-finance.htm
Silberstein, A. Alternative equity financing for small and mid-cap companies. Retrieved from
http://www.venturestreet.com/articles/Alternative-Equity-Financing-for-Small-and-Mid-Cap-Companies-1222
Grice, R. (2010, January 11). What is business debt management?. Retrieved from
http://www.helium.com/items/1707609-business-debt-management
Ramos, J. (2011, January 31). Advantages and disadvantages of a sole proprietorship. Retrieved
Types of business structures. Retrieved from http://bls.dor.wa.gov/ownershipstructures.aspx
Kay, O. (2011, November 7). The benefits of forming a limited liability company. Retrieved from
http://www.helium.com/items/2251013-limited-liability-company
Waters, S. Business structures: Partnership. Retrieved from
http://retail.about.com/od/insurancetaxeslegal/p/partnership.htm
