There are four basic areas of financial management, each with their own fields of study; these include financial institutions, investments, international finance, and corporate finance (Ross, Westerfield, & Jordan, 2010). The area of investments deals with stocks, bonds, and other such financial investments, while financial institutions are those businesses that deal primarily with matters of finance (Ross, Westerfield, & Jordan, 2010). International finance is considered to be a specialization of any of the other areas, concentrating only on international matters within that area, while corporate finance is the process of looking at the different aspects of finance as they relate to a specific business, managing all financial activities, reviewing potential business investments, and so on (Ross, Westerfield, & Jordan, 2010). At its core, the goal of financial management is to work to ensure that all individuals are aware of the characteristics within their lives that work to create value and the best possible way for all individuals to improve their profitability, looking logically at matters in order to make the best possible financial decisions in a given situation, either for a company of for an individual (Ross, Westerfield, & Jordan, 2010).
There are many different pieces of legislature that work to affect the financial management environment; perhaps the one that has made the most difference in recent years is the Sarbanes Oxley Act. In years past there have been many names that have become synonymous with corporate greed and scandal, resulting in decreases in public confidence and financial damages to millions of individuals; in order to counter such occurrences, “the Sarbanes-Oxley Act was signed into law on July 30, 2002” (Simon, 2013). There are six primary components to the Act, including the “oversight board, increased auditor independence, greater financial disclosure, conflict of interest disclosures for analysts, corporate and criminal fraud accountability and sharpened responsibilities for attorneys” (Simon, 2013). The public oversight board was created for the purposes of overseeing the audit of all publically traded companies, setting the appropriate standards and rules for all audit reports on those companies, and demanding registration of all accounting firms with the oversight board whose job it is to go through and complete such audits (Simons, 2013). Auditor independence means that the companies which perform the audits of these publically traded companies are not allowed to undertake other services that they may typically offer the publically traded business while the audit is being completed; in this manner, there is an effort to work to ensure that there is no conflict of interest between the two (Simons, 2013). Greater financial disclosures ensure that all transactions or relationships that may affect a business’s financial status must be disclosed, and personal loans from the corporate executives of companies are no longer prohibited, working to try to ensure that no falsification of data may occur in order to prevent such issues as seen in the case of Enron (Simons, 2013). Conflict of interest disclosures work to ensure that all necessary information about the company is made public, and it is now illegal to alter, destroy, conceal, or falsify documents associated with the audit and such paperwork must be kept on file for five years by law (Simons, 2013). Finally, all attorneys representing publically traded corporations are now held to a minimum standard of accountability and professional conduct in order to ensure full compliance with the law (Simons, 2013). All of these different provisions, as outlined by the Sarbanes-Oxley act work to ensure that the financial management environment is one that is on the up and up, working to ensure that corporate greed and scandal do not allow another devastating financial crisis to occur.
There are many different forms that a publically traded company may take, including a sole proprietorship, partnership, or corporation, to name just a few. A sole proprietorship occurs when a business is owned by a single individual; it is both the easiest type of business to create and the one that is the least regulated; however, the owner of such a business is held fully liable for the business, with no cushion between their personal life and their professional life (Ross, Westerfield, & Jordan, 2010). A partnership occurs when two or more individuals come together to create a business; there may either be a general partnership in which all parties are liable for the business, or limited partnerships, wherein those individuals are only liable in part (Ross, Westerfield, & Jordan, 2010). A corporation, which may take many different forms, is considered to be the most important type of business organization within the U.S., at least in terms of its size (Ross, Westerfield, & Jordan, 2010). A corporation is setup as a separate legal entity by one or more parties, wherein the corporation is liable for itself, but the parties who have created the corporation may not be held personally liable for its debts (Ross, Westerfield, & Jordan, 2010).
The financial management decisions made by the company, investment and financing alike, play a key role in determining the success or failure of a business. If a company were to decide to invest in a product or service for which there was no available market, that company would lose money in the deal, potentially causing their business to go under. If, instead, the company were to invest in a product or service that had a large market, the company would likely turn a profit off of this decision. If a company were to take out financing in order to buy all their employees pogo sticks, they would likely be making a poor decision, but if the company were to take out financing as a means of upgrading their office with more ergonomically designed furniture, they would be likely to increase productivity, and thus increase their profit margins. By working to understand how a financial decision within the financial management environment may benefit a business, it is possible to work to steer the business away from failure and toward success.
- Ross, S., Westerfield, R., & Jordan, B. (2010). Essentials of Corporate Finance. (Custom Edition ed.). New York, NY: McGraw-Hill/Irwin.
- Simons, D. (2013). Corporate accountability: A summary of the Sarbanes-Oxley act . Retrieved from http://www.legalzoom.com