Introduction to Financial

Management
SLFI501
Introduction to Financial Management
• Forms of business organization
– Sole proprietorship
– Partnership
– One Person Company (OPC)
– Corporation
• Organizational Chart
• Financial Management Decisions
– Capital Budgeting decision (Investment decision)
• Working capital decision
– Capital structure decision (Financing decision)
– Dividend decision
• Goal of the Financial Manager
• Agency Problem
• Agency relationship
• Relation between Finance and other disciplines

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 Learning Outcomes
• Distinguishing between the Functions of
Finance
• Appreciating FM’s cross functional linkages
• Comprehending roles of CFO
• Understanding Goal of FM
• Being aware of Agency Problems
– Agency Problem at Glaxo SmithKline (ICMR Case
CLFIN031)

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 Forms of business organization
• Sole proprietorship
• Partnership
• One Person Company (OPC)
• Corporation

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 Sole Proprietorship
• The sole proprietor is a person who carries on
business exclusively by and for himself.
• He alone contributes the capital and skills and
is solely responsible for the results of the
enterprise.
• Number of partners: One
• Capital (max/min): No minimum capital
• Shareholders and liability: Unlimited liability
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 Advantages
(a) Simplicity – It is very easy to establish and dissolve a sole proprietorship.
(b) Quick Decisions – The entrepreneur need not consult anybody in deciding
his business affairs. Therefore, he can take on the spot decisions to exploit
opportunities from time to time. He is his own boss.
(c) High Secrecy – The proprietor has not to publish his accounts and the
business secrets are known to him alone. Maintenance of secrets guards him
from competitors.
(d) Direct Motivation – There is a direct relationship between efforts and
rewards. Nobody shares the profits of business. Therefore, the entrepreneur
has sufficient incentive to work hard.
(e) Personal Touch – The proprietor can maintain personal contacts with his
employees and clients. Such contacts help in the growth of the enterprise.
(f) Flexibility – In the absence of Government control, there is complete
freedom of action. There is no scope for difference of opinion and no problem
of co-ordination.

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 Disadvantages
• (a) Limited Funds – A proprietor can raise limited financial
resources. As a result the size of business remains small. There is
limited scope for growth and expansion. Economies of scale are not
available.
• (b) Limited Skills – Proprietorship is a one man show and one man
cannot be an expert in all areas (production, marketing, financing,
personnel etc.) of business. There is no scope for specialisation and
the decisions may not be balanced.
• (c) Unlimited Liability – The liability of the proprietor is unlimited.
In case of loss his private assets can also be used to pay off
creditors. This discourages expansion of the enterprise.
• (d) Uncertain Life – The life of proprietorship depends upon the life
of the owner. The enterprise may die premature death due to the
incapacity or death of the proprietor. The proprietor has a low
status and can be lonely.

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 Suitable
• i. Where small amount of capital is required e.g., sweet shops,
bakery, newsstand, etc.
• ii. Where quick decisions are very important, e.g., share brokers,
bullion dealers, etc.
• iii. Where limited risk is involved, e.g., automobile repair shop,
confectionery, small retail store, etc.
• iv. Where personal attention to individual tastes and fashions of
customers is required, e.g., beauty parlour, tailoring shops, lawyers,
painters, etc.
• v. Where the demand is local, seasonal or temporary, e.g., retail
trade, laundry, fruit sellers, etc.
• vi. Where fashions change quickly, e.g., artistic furniture, etc.
• vii. Where the operation is simple and does not require skilled
management.

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 Partnership
• According to Section 4 of the Partnership Act, 1932
partnership is “the relation between persons who have
agreed to share the profits of a business carried on by
all or anyone of them acting for all”.
• In other words, a partnership is an agreement among
two or more persons to carry on jointly a lawful
business and to share the profits arising there from.
• Persons who enter into such agreement are known
individually as ‘partners’ and collectively as ‘firm’.

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• Number of partners:
– Minimum number is 2,
– Maximum number can be 20
• Capital (max/min): No minimum capital
• Shareholders and liability: Liability of the partners
is unlimited.
• Partnership Deed.
– It must be signed by all the partners and should be
properly stamped.
– It can be altered with the mutual consent of all the
partners.

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 Advantages
• Ease of Formation
• Larger Financial Resources
• Specialisation and Balanced Approach
• Flexibility of Operations
• Protection of Minority Interest
• Personal Incentive and Direct Supervision
• Capacity for Survival
• Better Human and Public Relations
• Business Secrecy

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 Disadvantages
• Unlimited Liability
• Limited Resources
• Risk of Implied Agency
• Lack of Harmony
• Lack of Continuity
• Non-Transferability of Interest

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 LLP
• LLP will be registered with the Ministry of
Corporate Affairs under the Limited Liability
Partnership Act, 2008.
• Partners have limited liability and is liable only
to the extent of their contribution to the LLP.
• Minimum-2, Maximum-No Limit
• Ownership can be transferred
• LLP profits are taxed at 30% plus surcharge
and cess as applicable.
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 One Person Company (OPC)
• According to The Companies Act, 2013 of
India “One Person Company is a company
registered with just one member and shall
have ‘(OPC)’ added in brackets to its name.”
• The Memorandum of such a company shall
indicate the name of the person.
• gst: GST enables registration of one person
company - The Economic Times
([Link])

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 Advantages
• (i) OPC will enable small entrepreneurs and professionals, e.g., chartered
accountants, lawyers, doctors, etc. to avail the benefits of companies,
• (ii) The procedure for forming the OPC is very simple.
• (iii) Running an OPC is easy as it does not require compliance with many
legal formalities.
• (iv) As the risk is limited to the value of shares held by one person, small
entrepreneurs have not to fear litigation and attachment of personal
assets.
• (v) There is no need to share business information with any other person,
therefore, business secrecy is ensured.
• (vi) The motivation and commitment of the owner are high due to
absence of profit sharing.
• (vii) Quick decisions can be taken due to complete control by the owner.
There is freedom of action.
• (viii) OPC would provide the start-up entrepreneurs and professionals the
much needed flexibility in setting up business without losing control.

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 Disadvantages
• (i) The life of OPC is uncertain and instable.
• (ii) The concept of OPC makes mockery of the
corporate concept because company means more
than one person.
• (iii) A company should operate as a democratic
institution with discussion and decision by voting.
But in an OPC there is no democracy.
• (iv) An OPC has to be incorporated. It has also to
comply with some legal formalities.
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 Corporation
• It is the most complicated business structures because it adds more
laws and tax claims.
• Corporations are established under the laws of each state and are
subjected to all the corporate income tax.
• All the profits issued to shareholders as dividends are taxed as per
the individual tax rates on their private annual tax returns.
• Under this structure, the corporation is displayed as an entity that
manages the duties of a business.
• Similar to a person, the corporation is taxed and held responsible if
the company is liable for any legal action.
• In simple words, if a business is registered under a corporation,
then the owner is not personally responsible for its debts.

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 Types of Corporations
• Private Limited company – Haldiram India Private Ltd
• Public Limited Company – Reliance Ltd, TCS Ltd, Infosys Ltd
• Government Company – Indian Oil Corporation, NTPC
• One Man Company – Akhan Dairy(opc) private limited
• Section 8 Company – Reliance Foundation, Infosys Foundation

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 Private Limited Company
• Number of partners: Minimum number is 2,
while as the maximum number can be 200
• Capital (max/min): Minimum paid up capital
of INR 100,000
• Shareholders and liability: Limited liability to
the amount contributed.

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 Public Limited Company
• Number of partners: Minimum 7 partners;
while as there is no limit on the maximum
number of members/shareholders.
• Minimum 3 directors.
• Capital (max/min): Minimum paid up capital
of INR 500,000
• Shareholders and liability: The liability of a
member is limited to the face value of the
shares he owns.
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 Government Company
• Under section 2(45) of the Companies Act 2013, a
Government Company is defined as “any company in
which not less than 51% of the paid-up share capital is
held by the Central Government, or by any State
Government or Governments, or partly by the Central
Government and partly by one or more State
Governments, and includes a company which is a
subsidiary company of such a Government Company”.
• This means that one of the basic features of the
company is to have 51% of governmental stake.

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 Section 8 Company
• According to the Companies Act 2013, a Section 8
company is defined as an organization whose
objectives are to promote arts, commerce,
science, research, education, sports, charity,
social welfare, religion, environmental protection,
or other similar activities goals.
• These entities utilize their profits to achieve their
mission and do not distribute dividends to their
shareholders.
• Non Profit Organization (NPO)/Non-Government
Organisation (NGO)

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 Taxation
• Proprietorship- Taxed as individual, based on the total income of
the Proprietor.

• Partnership- profits are taxed at 30% plus surcharge and cess as

• LLP- profits are taxed at 30% plus surcharge and cess as applicable.

• OPC: profits are taxed at 30% plus surcharge and cess as applicable.

• Private Limited Company- profits are taxed at 30% plus surcharge

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 The Competent Organisation
• Ministry of Corporate Affairs
• Company Law Board
• RoC

• [Link]
vs-llp-vs-private-limited-company/

• [Link]

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 Organizational Chart

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 Organizational Chart

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 Matrix Form of Organizations

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 Financial Management Decisions

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 The Role of the Financial Manager

(2) (1)

Firm's Financial Financial

(3) (4b)
(1) Cash raised from investors (financing decision)
(2) Cash invested in operating assets (capital budgeting decision)
(3) Cash generated by operations
(4a) Cash reinvested (retained earnings / internal financing)
(4b) Cash returned to investors (interest payments/dividends)
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 Goal of the Financial Manager

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 Goal of the Financial Manager

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 Profit Maximizing vs Wealth Maximization

• Profit maximization is traditional approach whereas

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 Agency relationship

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 Agency Problem

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 Relation between Finance and other disciplines

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 Thanks

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