Agency Problems in Finance or Firms

Agency Problem
An agency problem is a relationship between an agent and owner. An agency relationship is a contract under which one or more people( The Principals) hire another person(The Agent) to perform some series and delegates authority to that agent. Growth of business size has increased the popularity of joint stock firms and as a result the distance between owners and managers has also increased. General shareholders elected Board of Director (BOD) and remaining managers and human resources are appointed by BOD such situation may differ the  interest between them and such conflict or difference is agency problem. Agency Problem may be defined as a potential conflict for own interest between Shareholders  vs Managers and Shareholders vs Debt holders(Creditors)

What Companies say about their Corporate Goal

  

''Our mission is to maximize share owner value over time''= The Coco- Cola Company, 1998 Annual Report

''Our key objective is to increase shareholder value''= CSX Corporation, 1998 Annual Report

'' There is a partnership between the board and its executives that is truly focused on our prime purpose of building long terms share owners wealth''= Campbell Soup Company, 1998 Annual Report

'' Our ultimate goal is to continuously increase shareholder value over the time ''= The Quaker Oats Company 1988 Annual Report.

Source: Different Books

 

Goals of Financial Management

Every firm has a goal or objective,  and it is easier to make decisions after setting the goal. Generally, business firms are established to achieve certain goals  that may be sales maximization, profit maximization and wealth maximization in-terms of economics, meanwhile, there are two types of goal in -terms of finance that is profit maximization and wealth maximization.
Hence, following are the goals of financial management
a) Profit Maximization
b) Wealth Maximization

a) Profit Maximization= Profit Maximization is one of the important goals of financial management and  is the single period and  short term goal of the firm, which is achieved in a year. It is refers to the maximization of rupee income of the firm.. Financial manager should select the best alternative, which gives maximum return(profit). Profit maximization is the process of identifying the most efficient way of obtaining the highest rate of return from it's production.

Benefits of Profit Maximization  
We can drawn following benefits of profit maximization
a) Profit Maximization is the main controlling of the performance, it is the primary objective of the firm.
b) Each firm established to earn maximum profit
c) Profit efforts efficient allocation of the resources
d) Profit motivated businessperson to continue the business
e) Profit encourage businessperson to innovate new concept
f) Profit is the means of salary, wages, incentives and return for stake holders of the firm
g) Profit is the source for continues supply of the raw materials

Treasurer and Controller

There are two chiefs under Chief Financial Officer.  They are treasurer and controller.
 Treasurer
 A treasurer is the person responsible for running the treasury of the firm. Treasurer is the watchdog of overall financial management of the firm and is working closely with other members of the management committee to safeguard the organization's finances. He is responsible to make plan and raise finance and have to establish relationship with bank and investors.

Importance of Finance

The importance of finance is increasing day by day. In early days, finance manager's job was simply to raise the money needs to purchase require plant, machinery, equipments and inventories but that situation no longer exist and now days decision is more coordinated and finance manager have direct relation with control process. Thus, we have found following importance of finance.
a) To make Investment Decision: Finance is important for decision regarding the investment in long term assets like land, building, furniture, machines, human resource etc. For example, when to buy, which assets to buy and whether to replace old one with new one etc and these decision are made by finance manager through capital budgeting technique.

Major Areas of Finance

Major Areas of Finance
Major areas of finance is also known as fields of finance and we have following areas:

a) Personal Finance : The financial decision made by the individual and households is known as personal finance. Under personal finance we study how the individuals allocate their income between consumption and investment.

b) Government Finance: Government finance is also known as public finance and it is the study of government agencies and it consists of theories of taxation, issue of treasury bills, budget formulation, asset management, and fiscal year planning..

Classification of Finance

Classification of Finance
Simply, the term finance denotes money or wealth. it is the life blood of economic and business activity. Finance is concerned with the allocation and mobilization of available funds. We can classify finance in following two ways.. 

Introduction to Finance

Finance
In simple term '' Finance'' denotes wealth or money. Like a man cannot live without blood, business and economic system cannot run without finance, so it is regarded as the life blood of business system. Finance is the art of allocating  assets and liabilities over the time for certainty and uncertainty.  In other word, finance is the science of describing the management, creation and study of money, banking, credit, investments, assets and liabilities. Finance consists of financial systems, which include the public, private and government. Finance is the main means of mobilization of funds, the method of allocating, acquiring and managing fund is known as finance.

According to Lawrence J. Gitman: ''Finance can be defined as art and science of managing money.  ''