Financial management within a corporation plays a crucial role in order to establish financial success of the business. Hence, it is quite evident that the corporation consider financial management as the core component of the general management practices within the organization. It has been observed that financial management incorporates in itself the strategic goals amalgamated within the financial resources possessed by the business as well (Horngren et al., 2013). More specifically the specific roles incorporated in the financial management practices include bookkeeping, accounting, payable and receivable accounts and risk along with investment opportunities ((Persson et al., 2013)). These specific roles of financial management with an organization are explained one by one below,
During the process of establishing a financial management system it is quite necessary for the corporation to determine whether the management of the corporation will operate within the house or it will make use of an entity from outside the organization (Finkler et al., 2016). All of the accounting systems should be so efficient so that they are able to measure, record, identify and communicate all relevant financial information about the concerned organization. Therefore, the cornerstone of establishing an efficient financial management is establishing a good system of bookkeeping (Brigham & Daves, 2012). An efficient bookkeeper obtains accurate and complete information about the financial stature of the organization to the accountant (Horngren et al., 2013). Therefore these two parts of the financial management system that is bookkeeping and accounting the first one focuses on the specific transactions which takes place on a daily basis while the second one takes care of the entire financial scenario of the organization (Aebi et al., 2012).
Account payables depict the workflow and thereby will allow the corporation to approve the invoices, maintain an integrated management system for the documents and at the same time maintaining updated records (Persson et al., 2013). On the other hand, the account receivables keeps track of the records of what the customers owe to the organization in exchange of the products and services purchased by them. The system of accounts receivables is able to keep track of the payments, invoices and producing the reminder letters against the outstanding payments as well as calculating the interests for the amounts owned (Horngren et al., 2013). Moreover, the system of account receivables also enables the organizations to recover that past due amounts and thereby restrict those to become bad debt (Hörner & Samuelson, 2013). On the other hand, account payables equip the organization with relevant information regarding the accounts maintained with the suppliers. On the other hand, the accounts payable also represents the cost associated with the purchased items and how the corporation makes it payments during the previous periods and the details of those transactions ((Persson et al., 2013).
Another crucial aspect of the financial management system is associated with tracing out the opportunities that will either complement or benefit the organization to achieve success in near future ((Persson et al., 2013). It is possible for a business to exploit these opportunities if and only if the organization can find these objectives effectively and thereby acquires the ability to pay for the acquisitions which are desired by the organization (Ely, 2015). It is quite evident that with the help of careful considertion of the different aspects of financial management system an organization will be able to evaluate its overall financial health of the organization and its ability to invest in various potential opportunities (Fukuyama, 2013).
It is also very necessary for an organization to evaluate the risk. The prior objective of the financial management system is to reduce the risk associated with the operations of the organization by implementing the appropriate strategic framework that will help the organization to deal with the unforeseen circumstances (Fukuyama, 2013). The financial management system of a corporate should always include adequate insurance for the properties of the organization, its employees and equipments as well (Horngren et al., 2013). On the other hand, budgeting of the working capital yearly and quarterly will help to reduce the potential risk faced by the organization. Further, controlling the debt and thereby establishing an efficient and effective credit system for the suppliers as well as the financial institutions will help to reduce the risk associated with financial functions by allowing the operational flexibility (Fayezi et al., 2012).
According to Horngren et al., (2013), agency relationship can be regarded as a relationship in which a party (the principal) assigns another party (the agent) to perform or carry out a specific service or a number of services on their behalf. Moreover as a part of the process the principal will entitle the agent with some authority in decision making (Boyett, 2013). When the agency relationship is applied in the context of financial management there may be an issue of conflict of interest that may arise between the agency and creditors, management and the shareholders because of their different goals (Horngren et al., 2013). The agency problem mainly arises when the arrangement where there is a conflict between the agent and principle. This conflict may arise when there is a substantial difference between the interests of the principle and agent (Boyett, 2013).
The agency problem mainly arises because of the separation of the ownership and the control of business firms. In accordance with the theories the shareholders are the owner of the firms and they are the controller of the activities (Fayezi et al., 2012). However, practically as the disperse and fragmented group of the shareholders, the latter one employs a board of directors to direct the operations of the company.
In any of the principal agent relationship it is inherent that the agent will always work for the principal. The agent in the relationship will always assume that there is an obligation of loyalty towards the principal that they will always follow the instruction given by the principal and will neither by intention or negligence in their act of performance (Fayezi et al., 2012). An agent will not able to take personal advantage of the opportunities that the business agency will discover in future. From the above stated problems it is quite evident that there exists a fiduciary relationship between the principal and agent based on trust and confidence. The agency problem is sometimes aggravated by the asymmetry of information between the principle and agent (Boyett, 2013). The shareholders here acts as the agents while the board members are considered as the agents, and together they made decisions that will take the company towards prosperity. If there is a problem between these principle and agents the company or the organization will be in trouble ((Persson et al., 2013)).
Now in order to conclude it can be said that the essay has covered all the possible aspects of financial management and agent principle problems. While conducting the study a wide range of literature has been surveyed that has helped the researcher to gain a proper knowledge about the topic. With the light of the knowledge gained by conducting this study it has been tried to construct the study that will effectively and efficiently address the issues regarding financial management and principal agent theory. From the study above it can be said that in the context of the first part financial management is an essential component in any organization. In the case of principal agent problem, it is recommended to improve the communication process so as to reduce these problems.
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Boyett, I. (2013). The public sector entrepreneurâ€a definition. International Journal of Entrepreneurial Behavior & Research.
Brigham, E. F., & Daves, P. R. (2012). Intermediate financial management. Nelson Education.
Ely, J. C. (2015). Beeps. American Economic Review.
Fayezi, S., O'Loughlin, A., & Zutshi, A. (2012). Agency theory and supply chain management: a structured literature review. Supply chain management: an international journal, 17(5), 556-570.
Finkler, S. A., Smith, D. L., Calabrese, T. D., & Purtell, R. M. (2016).Financial management for public, health, and not-for-profit organizations. CQ Press.
Fukuyama, F. (2013). What is governance?. Governance, 26(3), 347-368.
Hörner, J., & Samuelson, L. (2013). Incentives for experimenting agents.The RAND Journal of Economics, 44(4), 632-663.
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Persson, A., Rothstein, B., & Teorell, J. (2013). Why anticorruption reforms fail—systemic corruption as a collective action problem. Governance, 26(3), 449-471.
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