WHAT IS FINANCIAL MANAGEMENT?

Thus far, we have optional that the financial manager should act to augment the value of the shareholders' speculation in the firm. But thousands of people are engaged in a huge organization. Each entity considers own personal benefit as glowing as that of the shareholders. Modern commercial finance deals not only with the financial targets of the firm, but also with the variety of appropriate recompense and penalty systems to ensure that each member of the company works toward the same goal and target.

Think of the company's net proceeds as a pie separated among a number of claimants. These comprise the management and the employees as glowing as the lenders and shareholders who have put up the cash to set up and finance the enduring operations  of the industry. The administration is a claimant, too, since it gets to tax the proceeds of the venture.

All these claimants are spring mutually in a complex web of contractual alliances, associations, and understandings. For example, when banks lend prices to the firm, they are adamant on a formal, legal contract that exclusively lists the concentration rate and reimbursement dates, plus some extra restrictions (called covenants) on extra or further borrowing in the future. Such a contract serves as a binding legal constraint on the future actions of the firm. Practically, however, it is impracticable to develop reasonable restrictions to cover every achievable future event. So the unambiguous, legal contract is often supplement by implied or unambiguous understandings. For example, managers appreciate that in revisit for a high salary they are expected to work hard on behalf of shareholders and not to divert corporate resources for their own individual benefit.

What enforces this type of considerate? Can we anticipate financial managers always to act on behalf of the shareholders? Most shareholders can't have enough money to spend their time monitoring every action of the manager to make certain that sound decision-making practices are organism followed.

Different institutional preparations have residential through time in an attempt to help align managers' and shareholders' welfare.  Let's take following two examples:

1. Managers are focus to the inspection of specialists. Their proceedings are monitored by the board of directors and review by banks; banks keep an eagle eye on the development of firms getting loans. Today, institutional investors are also very active at looking for information in an attempt to make certain that a firm is being managed with the best wellbeing of the shareholders in intelligence.

2. Managers are aggravated by incentive schemes, such as stock option, which pay off big if stock prices, augment but are valueless if they do not. These observations are not meant to propose that all business life is a progression of conflicts. It isn't, because practical commercial finance has slowly residential a variety of solutions to resolve personal and company interests-to keep everyone working mutually to augment the worth of the whole pie, not simply the size of each person's slice.

Nevertheless, the monetary manager must stay alert to possible problems cause by conflict of attention. We, too, have to think about possible conflicts to appreciate fully why takeovers happen, why lend contracts confine extra pay- outs, or why organizations sometimes favor to subject bonds that investor can replace to shares.  We discuss some of these planning in more detail in the following segment.