Financial Management
FINANCIAL MANAGEMENT
INTRODUCTION
Business firms exist because they satisfy a human need by providing a product or service. No business firm can be established without sufficient financing. The owner(s) therefore put personal loans they have entered into, and/or their hard-earned savings, at stake to partially finance the firm.
The owner's or owners' contribution is referred to as owners' equity. Normally, owners' equity is not sufficient
Borrowed funds (loans) have to be repaid through regular installments. These installments consist of interest and capital payments. Should the business firm not be able to repay these installments, it may be forced to cease its operations once it is declared insol¬vent. The assets of an insolvent business firm may be repossessed and sold (liquidated) by the creditors (the persons or organisations to whom the money is owed) in order to recover as much as possible of the amount of the loan. This will result in the loss of owners' equity.
When investing in a firm, the owners run the risk of losing their money and they also incur an opportunity cost. The owners could have earned interest at the bank (say 16% per annum) on the amount invested in the firm. The owners must therefore receive compensation for this opportunity cost and the risk they are accepting.
In the case of a sole proprietorship, one person accepts the risk. However, the owners and management of a business enterprise are not the same people. In some cases managers are appointment to act on behalf of the owners. It may also require the involvement of partners who are prepared to contribute some of the financing. The forms of business organisations in which more than one owner is involved may be a partnership, a close corporation or a company.
FORMS OF BUSINESS ORGANISATION
The advantages and disadvantages of the various forms of business organisations
1. The Sole Proprietorship
The sole proprietorship is sometimes also referred to as the "one-person
INTRODUCTION
Business firms exist because they satisfy a human need by providing a product or service. No business firm can be established without sufficient financing. The owner(s) therefore put personal loans they have entered into, and/or their hard-earned savings, at stake to partially finance the firm.
The owner's or owners' contribution is referred to as owners' equity. Normally, owners' equity is not sufficient
Borrowed funds (loans) have to be repaid through regular installments. These installments consist of interest and capital payments. Should the business firm not be able to repay these installments, it may be forced to cease its operations once it is declared insol¬vent. The assets of an insolvent business firm may be repossessed and sold (liquidated) by the creditors (the persons or organisations to whom the money is owed) in order to recover as much as possible of the amount of the loan. This will result in the loss of owners' equity.
When investing in a firm, the owners run the risk of losing their money and they also incur an opportunity cost. The owners could have earned interest at the bank (say 16% per annum) on the amount invested in the firm. The owners must therefore receive compensation for this opportunity cost and the risk they are accepting.
In the case of a sole proprietorship, one person accepts the risk. However, the owners and management of a business enterprise are not the same people. In some cases managers are appointment to act on behalf of the owners. It may also require the involvement of partners who are prepared to contribute some of the financing. The forms of business organisations in which more than one owner is involved may be a partnership, a close corporation or a company.
FORMS OF BUSINESS ORGANISATION
The advantages and disadvantages of the various forms of business organisations
1. The Sole Proprietorship
The sole proprietorship is sometimes also referred to as the "one-person