FINANCE: ITS OPERATION AND THE OVERALL MANAGEMENT OF CORPORATION

INTRODUCTION
Financial Management is the skill put forward by the managerial planning and control of financial resources of an organisation to achieve the objectives of the business. Before now, it was considered to be as aspect of economics, now it is considered a separate discipline. However, it still draws aspiration from economics for its theoretical framework.

Financial Management deals with the instrument, institutions and procedure in the capital market. It also has biasness in accounting records and reports, monitoring cash position and paying of bills in an organisation. Thus, because of the importance of financial management in business, and its rigorousness in analysis, it is now more concerned with strategic financial decision-making within an organisation. The subject matter of financial management has grown to encompass rigorous analysis of investment of organisation’s funds in assets and obtaining the best mix of financing and dividend in relation to overall market valuation of a firm.

OBJECTIVES

At the end of this unit, you should be able to:

• discuss corporate objectives 
• discuss roles of finance 
•  explain finance as a discipline in corporate governance. 

The Corporate Objectives

The key thing in business success is the definition of the objectives, which sets in motion the target to be achieved. Business firms are profit seekers, thus their goal objectives need cannot be the same with organisation, which are run to provide social services to humanity, like Federal, State, and Local governments activities, which are meant to satisfy their subjects.

Maximisation of Profit

The ultimate aim of an investment is to maximise profit at a minimised cost. Therefore, businesses believe that as long as they are increasing in revenue while keeping cost at a minimum level, they are achieving their objective. In business, there are varying interests in the objectives of an organisation, the shareholders, society, and mangers of the organisation.

Shareholders and Management Wealth Maximisation

One of the most important goals of business is maximisation of the owners’ interest in the firm. Maximisation of value of the corporation share and social corporate responsibility can also be an important objective of the company. For instance, assisting to save energy or minimising pollution in the host community. The goals and policies of an organisation are determined theoretically by the owners of the business, like the shareholders or stockholders, who are represented by the board of directors. However, the executions of these policies or goals are in the hands of the management team. The management is delegated by the board of directors to run the company. The management of a company has its own interest; this conflict of interest sometimes ruins or causes a fall or winding-up of the organisation.

Owners’ Wealth Maximisation and Social Responsibility

The goals of the owners of the business are wealth maximisation, which provide for efficient allocation of society’s economic resources. Any deviation will lead to sub-optimal allocation of resources that have implication on the growth of an economy. When owners of businesses are pursuing wealth maximisation objective, does not necessary implies fulfillment of their social responsibility as a firm. The social responsibility of a firm to its means is it profit. Since the firm needs to provide quality goods at low prices maintaining sound industrial relations, paying fair wages, maintaining fair recruitment practices, supporting education and sports activities and the host of others would erode its profit, firms are nonchalant about their provisions. There is, therefore, a conflict of interest between the shareholders wealth maximisation and the society’s welfare, which might call for disagreement between the organisation owners and the host communities as the case in the Niger Delta region of Nigeria.

SELF-ASSESSMENT EXERCISE 1

• Mention and discuss the company’s corporate objectives. 

Roles of Finance

The function of a financial manager must be evaluated in view of the overall objective of shareholders’ wealth maximisation. Finance functions involve three main types of managerial decisions: investment decision, financing decision, and dividend decision. These decisions are interrelated and have impact on the market viability and price of a company’s shares.

Investment Decision

Every company aspires to grow and make profit now and in future. Therefore, the company’s decision to allocate funds to investment proposals to yield future benefits is paramount. The future of business is uncertain as such, investment proposal must necessary involve risk. Investors have to be critical in evaluating the overall objective of shareholders’ wealth maximisation; they should be evaluated in relation to expected return and risk.

Apart from selecting new investments, a firm must also manage its existing assets. Financial managers should be concerned with current assets apart from fixed assets. The working capital of a company has more implication on the firm liquidity than its fixed asset; therefore, it needs to be managed efficiently in such a way to maximise profitability relative to the amount of funds tied up.

Financial Decision

This involves determining the best financial mix that could yield the net profit for the company. The financial manager should be able to source for fund for the company at the lowest cost such that there is a profit level of liquidity it maintains.

Dividend Decision

The decision on what should be given out as dividend out of the company’s earnings and what to should be ploughed back into the business ought to be evaluated in the context of maximising the wealth of shareholders; their opportunity cost of returned earnings must be balanced with any dividend to investors.

SELF-ASSESSMENT EXERCISE 2

• Discuss roles of finance in corporate decisions. 

Finance as a Discipline in Corporate Governance

The difference between income on consumption and investment is very vital. How to choose from among available investment opportunities and how to raise money to provide for increased consumption or investment is important.

Just as the individual seeks to maximise his or her happiness, the firm also seeks to maximise the wealth of its owners’ shareholding. In both the individual and the company, the financial discipline will entail the prudency in the usage of the available resources at their disposal such that there is no surplus or deficit in any sector of or the corporate existence of a firm.

CONCLUSION

The prime motive of shareholders and management organisation is generally maximisation of the value of the owners’ interest in the company (maximisation of the value of the firm’s shares. The differences between shareholders and management can be minimised by various factors such as stock option plan, that make managers part owners or the possibility of the company’s takeover by dissatisfied parties who would replace the existing management. In the case of social responsibility, the law encourages the prodding from the shareholders to provide for the host community with essential services.