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Unit 1: Introduction to Financial Management



                                                                                                  Notes
                Table  1.1: Strengths  and Weaknesses  of the  Common Forms  of Business  Organizations

                          Sole Proprietorship    Partnership            Company
              Strengths   Owners receive all   Can raise more funds   Owner’s liability is limited to
                         profits and incur all   than sole proprietorship.   the extent paid on their
                         losses.                                 shares.
                         Low organizational   Borrowing powers   Can achieve large size via
                         costs              enhanced by more     sale of shares.
                                            owners.
                         Income is included and   More available   Owners hip (share) is readily
                         taxed on owners    manpower and         transferable.
                         personal tax return.   managerial skill.
                         Independence       Income included and    Long life of the firm.
                                            mixed on individual
                                            partner’s tax return.
                         Secrecy                                 Can have professional
                                                                 managers.
                         Ease of dissolution                     Has better access to
                                                                 financing.
                                                                 Receives some tax
                                                                 advantage.
                         Owner has unlimited   Owners have unlimited   Taxes generally higher,
                         liability towards debt   liability and may have to   because corporate income is
                         of the firm        cover debts of other   taxed and dividends paid to
                                            partners.            owners are also axed (the
                                                                 latter has been exempted at
                                                                 the hands of the shareholders
                                                                 in India).
              Weaknesses   Limited fund raising   Partnership is dissolved   More expensive to organize
                         power limits growth   when partner dies.   than other forms of business.
                         Proprietor must be   Difficult to liquidate or   Subject to greater control by
                         jack-of-all trades.   transfer partnership.   regulating authorities.
                                                                 Lacks secrecy since the
                         Difficult to give
                         employees long-run                      shareholders must receive
                         career opportunities.                   financial reports at periodic
                                                                 intervals.
                         Lacks continuity when
                         proprietor dies or
                         unable to operate.

            Self Assessment

            Fill in the Blanks:
            13.  In the area of financing, funds are procured from …………..sources as well as ………………
                 sources.

            14.  The  three  most  common  forms  of  business  organization  are  sole  proprietorship,
                 partnership and the……………….
            15.  The …………….method of cash management is considered a better method of managing
                 liquid resources of the firm.
            16.  The dividend and bonus policies framed have a direct bearing on the…………………...







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