The management of corporate capital is one of the most vital and critical areas of corporate management. At money is only a medium of exchange and is substitute for the real resources of an economy, it is obvious that financial management or money management ought to be basically concerned with getting the best out of the resources deployed within the firm. The resources deployed are men, money, machines, materials and methods. All these inputs from which the outputs of the firm are derived are commanded through one single resource namely money. Therefore one of the most crucial tasks within a corporation is financial management. Effective financial management results by getting the best out of the every single rupee deployed with in the firm
At higher levels of corporate management almost every decision becomes a financial decision. Decisions taken on production, marketing, personnel and industrial relations have financial implications, which in turn affect the profitability of the enterprise, therefore it is essential that executives in companies irrespective of their fields of specifications, should have an understanding and appreciation of corporate finance
The corporate objective
The objective of a part should be in harmony with the objective set for the totality. It is very difficult to set the objective for any function within the business, be it production, marketing or personnel, without clearly defining the objectives of the corporation as a whole. What is or what ought to be the objective of the modern corporation is highly controversial question. According to the capitalistic school of thought the basic objective of a corporation is to maximise the wealth of shareholders . this theory looks upon the share holder basically an investor whose objective is to increase his personal wealth. Given a certain quantum of savings in an economy and wide variety of investment alternatives the investor makes a choice in terms of risks and returns. His objective is to maximise his returns at the risk level proffered by him/her
An investor in a corporation increases his wealth from the returns he receives from the corporation. These returns take in the form of dividends he receives, the bonus shares to which he would be entitled to from time to time, the value of right shares acquired and the increase in the market price of his shares. Dividends are paid out from present or past earnings of the company. Bonus shares are given from retained earnings. The value of the right shares would be dependent on the anticipated earnings from the new projects for which new capital in the form of right shares is raised. It is further widely believed that the market price of a share reflects the earning capability of a company in terms of dividend payments, issues of bonus shares and the ability to raise and deploy funds productively. In other words the reutns that accurue to the investor would be a function of the past, present and future earnings. Hence a company that is run for maximising the welfare of the share holders should maximised by the maximising the profits of a company, therefore according to the corporate theory developed by the capitalistic school, the basic objective of a corporation is to maximise the wealth of the share holders by maximising the profits of a company.
The socialistic school on the other hand argies that the function of the economic entities like modern corporation is not basically to make money for a handful of people but through mass production of goods and services at leasr cost to promote the welfare of all the people in the economy. While there may or may not be profit, the performance of an enterprise should be measured in relation to the quantum of goods and services produced and the costs thereof.
How should one view the objective of a corporation in a developing country like India? To answer this let us ask another fundamental question. Why are developing eager for industrialisation? This is because of there belief that industrial development would lead to rapid economic growth which in return would increase the welfare of the people. As economic growth is measured interms of national product the objective of the corporate sector from this point of view should be to maximise the national product or national income. The national product is increased by increasing the value added. There fore from the point of view of the nation, the basic objective of the firm ought to be the maximisation of the value added.
The value added by an enterprise is the difference between the revenue accruing to the enterprise and expenditure incurred bby it for payments made for purchases to third parties. In other words value added would consist of salaries, wages paid,interest and depreciation, profit and taxes. Increasing the value added by increasing prices only results in inflation. Hence economist suggest use of the costant prices in accounting for national income.
How does the value added process increases the wealth and welfare of a society? Take for example, an economy, the primitive stage of development but with enormous deposits of iron ore. Till it develops the technology to the mine the ore or borrows and uses this technology from another country. The value of this national resource to the economy would be zero. As soon as this society develops technology, the iron ore becomes valuable and let us assume it is a worth of 50rs per tonne, as society develops further a few tonnes of ore would now be converted to steel, a tonne of steel is worth, let us assume 2500/- soon this society is able to convert ta few tonnes of steel into a sophisticated machine tool worth 100,000/- at still higher levels of technological development it can convert its steel copper and aluminium into a highly valuable computer or aircraft. Its sells to a couple of these products to a country like india and able to import as much as it desires of tea, coffee, jute, textiles and other goods. At the end of the year, countries like India, would still owe this country some amount of money. It is now obvious that in value added process, technology development plays a vital and crucial part. Equally important is the role played by the management process. Consider what would happen to the developing countries if it mines a tonne of iron ore at a cost of rs 60. For every tonne of iron ore mined at rs 60, and sold at rs 50 the existing wealth of the society would be eroded at the rate of 10 rs per tonne. Therefore in order to maximise the value added, in a society both technological and managerial competence should go hands in gloves.
The above line of reasoning would indicate that a firm has two basic obligations ? one to the owners of the firm and the other, to the society or nation that allows to operate. It can be argues that the obligation of the firm to the stake holder is fulfilled by maximising the profits of the firm. The obligations to the society, on the other hand is fulfilled only by maximising the production of goods and services at least cost. Thereby maximising the wealth of the society.
Attempts have been made to bring a compromise between these tw obligations. The capatilistic school particulaty argues that in the course of maximising profits, the private firm invites competiotion which ensures that the firm could maximise the profits only by maximising the production of goods and services at least cost. The socialist school on the other hand argues that as market mechanisms are imperfect, monopolistic and oligopolistic characteristics would arise in the market and this would result in one of the few firms maximising profits at the expense of society by keeping the consumers at bay. Hence the socialists advocate effective state intervention by state ownership of all productive enterprises
Either due to ideological reasons or due to economic necessities more and more countries particularly developing countries are establishing public enterprises totally owned by there respective govt on behalf of all people in these countries. The owners of the enterprise and society become synonyms in such cases. Such enterprises seem to have only one obligation, obligation to society. Thus in such cases the basic corporate task appears to be maximising the production of goods and services at least cost rather than maximising the monetary profit, this does not preclude the need for these enterprises to mobilise the resources in the form of surpluses for further economic development of the societies concern, the point to be noted that there is profit in the sense in which it is applied to private enterprises is not meaning ful in the case of public enterprises
The above discussion leads to two conclusions. 1. From the point of view of the private shareholders the firm should maximise the profits, 2. From the point of view of the society and the economic welfare the firm should maximise production of goods and services at low cost.
Proit is the difference between revenue and cost. One can maximise the profit by increasing the revenue, costs remaining the same. By reducing the costs revenue remaining the same and whole both of them increase revene increases at faster pace that costs. Maximisation of goods and services at least cost would call for optimal utilisation of resources, in other words socially desirable private monetary profits and social profits in the form of value added are maximised only by getting the best from investments and by effective operational costs.
