According to Gitman, Finance is defined as "the art and science of managing money." They affect decision-making both for us individuals, as well as for companies and the government. Thanks to finances we can know how to invest savings, how much to spend according to income, how much to save, etc.
The Financial Administration's function is the administration in financial matters in the private and public area, as well as the administration of financial resources in large and small companies, for profit or not for profit, development of corporate strategies to maximize the value of the company, of financial plans or budgets, evaluation of expenses, collection of money among other functions that are exercised in this area.
There are also three legal forms within a business organization which are:
- Sole proprietorship: in this there is only one owner, normally they operate in service, construction, major and retail industries. Both the owner and some employees are in charge of taking the company forward, however, there are disadvantages such as liabilities because they are the sole responsibility of the owner. Society: in this organization there are two or more owners within a scope for the purpose of profit is to say that there is a monetary interest. This society is established under a contract called astute of association. An important characteristic is that when a partner dies, the entire partnership is dissolved. Corporation: This is a legally created company that has legal rights like those of an individual because it has the possibility of both suing and being sued. It has the characteristic that the owners are its shareholders,however, this is demonstrated by their shares, whether preferred or common.
The company has a goal like its administrators which, as the author affirms, is based on "maximizing the wealth of the owners for whom it works" in general terms increasing the value of the shares, for that the performance must be evaluated, that is, the net cash inflow and the outflow. It is very important to consider this point as it is a legitimate goal for the entity, since it increases in value and it is clear that its profits can improve.
Financial management has a relationship with economics and accounting and for this the following arguments will be mentioned.
Financial managers use economic theories such as supply and demand, know the theory of prices, strategies to maximize profits, among others.
In small companies the accountant constantly performs functions in the area of finance; in large companies some financiers compile accounting information.
On the other hand, we can affirm that in finance decision-making is emphasized while in accounting cash flows are emphasized.
The controller can perform functions such as: tax administration, cost accounting, financial accounting, corporate accounting, among others. On the other hand, the treasurer has the ability to perform the following functions: supervision of pension plans, interest rates, currency exchange, managing cash, risk management for the company. In conclusion, the comptroller is developed internally and the treasurer externally.
Following the treasurer and / or financial manager, there are a series of activities that he performs below, the most important are scored:
- Makes financing decisions by determining how the company receives or collects money to pay for the assets in which it has invested Makes investment decisions to establish the types of assets the company holds Makes decisions based on the value of the company and not on accounting principles.
There is a relationship between company shareholders and managers when it comes to decision-making within a company, however, there are also problems.
The administrators operate as agents of the shareholders, this can be performed by any administrator, he will be in charge of representing the owners of the entity and for this it is necessary to specify terms in a contract between the board of directors and the agent.
The work works well when agents make decisions that benefit the shareholders, however, when the interests of both parties are different, the work does not work satisfactorily.
Financial managers share the agreement to maximize shareholder wealth, but they are also interested in personal wealth, for example: additional benefits, job security, among others.
The problem becomes evident when the administrators deviate from the main goal which is the maximization of wealth, thus putting their personal interests first.
As a consequence, this brings about the agency costs which symbolize a loss of wealth for the shareholders, having to supervise the administrators, since mismanagement would represent a drop in the share price.
"The environment of the financial markets"
Financial institutions are intermediaries to link the money saved by companies, government and individuals either through loans or investments. They are important since without them none of these three entities can operate or manage their funds in a better way. The individuals collectively within financial institutions serve as "net providers" while the aforementioned act as "net applicants." Some examples are: Commercial banks, insurance companies, investment funds, pension funds, credit unions, savings and loan associations, among others.
Financial markets are forums in which applicants for funds and providers transact directly. If we compare the functions between institutions and financial markets, we find that institutions carry out these transactions without the prior knowledge of savers. However, both are actively involved in financial markets as fund applicants and as providers.
There is an aspect that allows us to differentiate between capital markets and money markets. The money market is established when there is a relationship between applicants for short-term funds (less than a year to maturity) and providers. This market exists thanks to the fact that governments, companies and individuals keep money in inactive funds in order to obtain interest, requiring temporary or seasonal financing.
On the other hand. The capital market allows suppliers and applicants to carry out long-term transactions, including the issuance of securities by governments and companies. This market is made up of stock exchanges, bonds, etc. which include international capital markets.
The financial recession was a great blow for banks as they were under financial pressure in 2008, they modified their rules to provide credit and loans because the money market was no longer an option to raise money in the market unless the interest rates were extremely broad. Businesses began to raise a large amount of cash and would reduce expenses so that economic activity contracted since approximately 8 million jobs had been lost between 2008 and 2009. So the United States Congress approved an economic stimulus of $ 862 billion to To reactivate the economy, it was thus that little by little a recovery was presented, however, the labor market remained stagnant.All this caused by the increase in shares and a banking movement towards new lines of business, together causing one of the most serious crises in the financial sector since the Great Depression in 1929.
There are regulations that regulate financial institutions such as the Glass-Steagall Act in 1933 which created the Federal Deposit Insurance Corporation to calm the fear that people felt during the Great Depression because it prohibited financial institutions from accepting deposits that were related to negotiation and financing. The Gramm-Leach-Bliley Act was also created by former President Clinton and his Congress to allow investment banks, insurance companies, and commercial banks to come together to compete in a broader range of activities.
Business taxes must be paid by individuals and by legal entities, this goes according to income and is important in financial decisions since it allows them to continue with the business, be legally in order and with tax deduction benefits if it is paid in a timely manner. Continuing in the same context, companies or corporations can deduct expenses in interest and operating expenses, thanks to the tax deduction their cost after tax can be reduced.
Bibliography:
Principles of Financial Management (2003) Gitman, L. Pearson Education. 631 pages. ISBN: 9702604281, 9789702604280
