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Module 4 FINP1 Financial Management
Module 4 FINP1 Financial Management
Lesson Number: 4
Topic: Business Organization and Trends
Learning Objectives:
After studying Chapter 4, you should be able to:
1. Explain the basic legal forms of business organizations such as, sole proprietorship,
partnership and corporation.
2. Know the advantages and disadvantages of adopting the sole proprietorship, partnership and
corporation form of business organization.
3. Determine the form of business organization most adaptable to an enterprise.
4. Understand the important business trends such as
Increased globalization of business
Improving information technology
Outsourcing
and how they import a business firm’s business operation.
Pre-assessment:
Write T if the statement is true and F if the statement is false.
___T__1. The business firm is an entity decided to organize raw materials, machines with the
goal of producing goods and/or services.
__T___2. Sole proprietorships are easy to establish in our country setting than other
organizational forms.
___T__3. In a partnership, creditors can run after the partner’s personal assets.
___F__4. In a corporation, the stockholders or shareholders will not be prosecuted if there is a
major issue involving the company.
___F__5. Various organizations need to adopt to new trends such as eating and dance
challenges.
CHAPTER 4
BUSINESS ORGANIZATION AND TRENDS
THE ORGANIZATION OF THE BUSINESS FIRM
The business firm is an entity designed to organize raw materials, machines with the goal of
producing goods and/or services. Firms
3. Tax savings
The entire income generated by the proprietorship passes directly to the owner. This
may result in a tax advantage if the owner’s tax rate is less than the tax rate of a
corporation.
Most large corporations operate on a global basis and with good reason: investing
abroad has proven to be highly profitable. Decisions to build plants and produce goods abroad
are also motivated by the attraction of low-cost labor and the easy transfer of highly efficient
technology that gives competitive price advantages to foreign operations.
As domestic demand reaches maturity, the search for new markets leads corporation to
invest and sell abroad. The trend to develop a presence abroad is also motivated by a desire to
hedge against risks. Because economic activity differs from one country to the next,
diversification abroad tends to dampen the overall fluctuations of sales and earnings, thus
reducing the risk exposure of a corporation. Fortunately, the advent of ness financial
instruments, including financial derivatives, such as futures and swap agreements, provides
managers with new tools for hedging and minimizing foreign risks.
Competition is intensified with the emergence of foreign industrial power, like Japan,
South Korea and China because of the opportunities for local firms to import lower priced goods
for sale in the domestic market. This not only saves the domestic firm the need to invest in new
capacity, but it also allows to share in the technological advances of that country.
Globalization of the firm will continue to provide highly profitable opportunities to
domestic firms, but this movement requires careful decision making and highly skillful financial
management.
Ever-improving Information Technology (IT)
Improvements in IT are spurring globalization, and they are changing financial
management as it is practiced in North America, Europe, Southeast Asia and elsewhere. Firms
are collecting massive data and using them takes much of the guesswork out of financial
decisions. For example, when Double-Drag011 Corporation is considering a potential site for a
new mall, it can draw historical results from thousands of other stores to predict results at the
proposed site. This lowers the risk of investing in new stores.
Corporate Governance
This trend relates to the way the top managers operate and interface with stakeholders.
At the same time, the Securities and Exchange Commission (SEC) which has jurisdiction over
the shareholders and the information that must be given has made it easier to activist
shareholders to changes the way things are done within firm. Some years ago, the corporation's
chairman of the board of directors was almost always also the chief executive officer, and this
person decides who would be elected to the board and therefore would have complete control
of the firm's operations. That made it impossible for shareholders to replace a poor
management team.
Currently, investors who control huge pools of capital (hedge funds and private equity
groups or venture capitalists) are constantly looking for underperforming firms and they quickly
take control and replace manager.
Most firms today have strong written codes of ethical behavior and companies also
conduct training programs to ensure that employees understand proper behavior in different
situations. When conflicts arise involving profits and ethics, ethical consideration are so
obviously important that they dominate.
Outsourcing
Outsourcing occurs when domestic firms invest and produce goods in foreign countries
or when these firms choose to rely on imports rather than build domestic plans and produce
these goods domestically. Low labor-cost countries, like China, open up new investment
opportunities for corporations from the United States, Europe and Middle-East. Growing
competitive pressures are forcing domestic firms to invest abroad or to import cheap foreign
products.
One major factor responsible for outsourcing is the ease with which technology can be
transferred abroad. China, India and other Asian countries including the Philippines can claim
technological parity while enjoying low costs of production. That is why outsourcing is such an
attractive investment option.
When evaluating the merits of outsourcing a corporate manager is to make central decisions.
1. Invest and produce domestically or move a plant overseas.
2. Import cheaper foreign goods to take advantage of low labor and other costs or shift to
more capital-intensive and technologically advanced operations.
3. Invest abroad in order to gain access to new rapidly growing foreign markets.
Outsourcing relieves managers from having to purchase raw materials or to hedge
against the risk that the prices of these raw materials will increase. An outsourcing firm does not
have to incur the high costs of pension plans, health benefits, pollution control, and worker
safety. Some risks such as technological obsolescence and unforeseen changes in demand
become less important with outsourcing. These and other advantages make outsourcing an
attractive option.
Learning how to work with probability models will help a manager to evaluate the relative
merits of outsourcing compared to domestic investments. Also, given global cost disparities
among countries, outsourcing will continue to pay an important role in business decision
making. However, when USA President Donald Trump decided to impose higher tariff on goods
imported from other countries such as China, Japan, Canada and others, trade wars are said to
have sparked among these nations.
Activity:
Write T if the statement is true and F if the statement is false.