Corporate Financial Management

Corporate financial management is concerned with the efficient acquisition and deployment of both
short and long term financial resources, to ensure the objectives of the company are achieved.
It is the analysis and management of the relationship between an organisation's financial activities
and its business strategy. Corporate financial management looks at the organisation’s business and
financial strategies and seeks to determine the optimum solution to mesh the two together. It
answers the fundamental questions as to what assets the business should invest in and what capital
structure should be put in place to raise the money to make the investments.
Decisions must be taken in three key areas:
- Investment - both long term investment in non current assets and short term investment in
working capital;
- Finance - from what sources should funds be raised?
- Dividends – how should cash funds be allocated to shareholders and how will the value of the
business be affected by this?.

Investment Decision
The Investment Decision relates to the decision made by the investors or the top level management
with respect to the amount of funds to be deployed in the investment opportunities.
Simply, selecting the type of assets in which the funds will be invested by the firm is termed as the
investment decision. These assets fall into two categories:
1. Long Term Assets
2. Short-Term Assets
The decision of investing funds in the long term assets is known as Capital Budgeting/ Investment
Appraisal. Investment appraisal considers the long term plans of the business and identifies the
right projects to adopt to ensure financial objectives are met. The projects undertaken will nearly
always involve the purchase of non-current assets (long term assets) at the start of the process.
The investment made in the current assets or short term assets is termed as Working Capital
Management. For a business to be successful, as well as identifying and implementing potentially
successful projects, it must survive day to day. Working capital management is concerned with the
management of liquidity i.e, ensuring debts are collected, inventory levels are kept at the minimum
level compatible with efficient production, cash balances are invested appropriately and payables
are paid on a timely basis.
Financing Decision
Before a business can invest in anything, it needs to have some finance. Financing decision relates
to the finance mix of an organization. A key financial management decision is the identification of
the most appropriate sources, be it long or short term, or using the company’s own money, such as
share capital, retained earnings or borrowing funds from the outside in the form of debenture, loan,
bond, etc, taking into account the requirements of the company, the likely demands of the investors
and the amounts likely to be made available.
The objective of financial decision is to maintain an optimum capital structure, i.e. a proper mix
of debt and equity, to ensure the trade-off between the risk and return to the shareholders.

1
Dividend Decision
Having invested wisely, a business will hopefully be profitable and generate cash. The financial
key decision for an organization is whether to return any of that cash to the owners of the business
(in form of dividends) and if so, how much.
The alternative is to retain some of the cash in the business where it can be invested again to earn
further returns. The decision is therefore closely linked to the financing decision.
The decision on the level of dividends to be paid can affect the value of the business as a whole as
well as the ability of the business to raise further finance in the future.

Strategy, Corporate Objectives and Financial Objectives

Strategy
Strategy may be defined as a course of action, including the specification of resources required to
achieve a specific objective.
Corporate Objectives
Corporate objectives are those which are concerned with the firm as a whole. Objectives should be
explicit, quantifiable and capable of being achieved. The corporate objectives outline the
expectations of the firm and the strategic planning process is concerned with the means of achieving
the objectives.
Objectives should relate to the key factors for business success, which are typically as follows:
 Profitability (Return on Investment)
 Market Share
 Growth
 Cash flow
 Customer Satisfaction
 The quality of the firm’s products
 Industrial relations
Financial Objectives
Most companies are owned by shareholders and originally set up to make money for those
shareholders. The fundamental principle of financial management and the primary financial
objective of most companies is thus to maximize shareholders’ wealth.
1. Shareholder Wealth Maximization
The main corporate objective is the maximisation of shareholder wealth and this is taken as
maximising the market value of the company. If the financial objective of a company is to maximize
the value of the company, and in particular the value of its ordinary shares, we need to be able to
put values on a company and its shares.
The following three possible methods for the valuation of a company might occur to us:
a) Statement of Financial Position Valuation
Here, assets will be valued on a going concern basis. Certainly, investors will look at a
company’s statement of financial position. If retained profits rise every year, the company will
be a profitable one. Statement of financial position values are not a measure of ‘market value’,
2
 although retained profits might give some indication of what the company could pay as
dividends to shareholders.
b) Break-up basis
This method of valuing a business is only of interest when the business is threatened with
liquidation, or when its management is thinking about selling off individual assets to raise cash.
c) Market Values
The market value is the price at which buyers and sellers will trade stocks and shares in a
company. This is the method of valuation which is most relevant to the financial objectives of
a company.
i) When shares are traded on a recognized stock market, such as the Stock Exchange, the
market value of a company can be measured by the price at which shares are currently
being traded.
ii) When shares are in a private company, and are not traded on any stock market, there is
no easy way to measure their market value. Even so, the financial objective of these
companies should be to maximize the wealth of their ordinary shareholders.
The wealth of the shareholders in a company comes from:
 Dividend received
 Market value of the shares
A shareholder’s return on investment is obtained in the form of:
 Dividend Received
 Capital gains from increases in the market value of his or her shares
If a company’s shares are traded on a stock market, the wealth of shareholders is increased when
the share price goes up. The price of a company's shares will go up when the company makes
attractive profits, which it pays out as dividends or re-invests in the business to achieve future profit
growth and dividend growth
2. Profit Maximization
Profit maximization is the ability for a company to achieve a maximum profit with low operating
expenses. Although profit do matter, they are not the best measure of a company’s achievement.
There are a number of potential problems with adopting an objective of profit maximization:
a) Accounting profits are not the same as ‘economic profits. Accounting profits are just a paper
figure. They can be manipulated to some extent by choices of accounting policies. The
following are examples of how accounting profits might be manipulated
i) Provisions such as provisions for depreciation or anticipated losses.
ii) The capitalization of various expenses, such as development costs etc
b) Profit does not take account of risk. Shareholders will be very interested in the level of risk,
and maximizing profits may be achieved by increasing risk to unacceptable levels.
c) Profits on their own take no account of the volume of investment that it has taken to earn the
profits. Profits must be related to the volume of investment to have any real meaning. Hence
measure of financial achievement includes:
i) Accounting return on capital employed
3
 ii) Earnings per share
iii) Yields on investment, e.g. dividend yield as a percentage of stock market value.
d) Profits are reported every year. They are measures of short term performance, whereas a
company’s performance should ideally be judged over a longer term.

Maximizing and Satisficing

A distinction must be made between maximizing and satisficing:
 Maximizing – Seeking the maximum level of returns, even though this might involve exposure
to risk and much higher management workloads.
 Satisficing – finding a merely adequate outcome, holding returns at a satisfactory level,
avoiding risky ventures and reducing workloads.
3. Earnings Per Share (EPS) Growth
A widely used measure of corporate success is EPS as it provides a measure of return to equity.
EPS growth is therefore a commonly pursued objective.
However it is a measure of profitability, not wealth generation, and it is therefore open to the same
criticism as profit maximization above.
The disadvantage of EPS is that it does not represent income of the shareholder. Rather, it represents
that investor’s share of the income generated by the company according to an accounting formula.
While there is obviously a connection between earnings and the wealth received by individual
shareholders, they are not the same.
4. Maximization of balance sheet or asset value
A company may focus on maximizing its balance sheet or asset value to show that it is a big
company. However, this does not really translate to increase in the real value of the company. This
is because certain assets may not be reflected in the balance sheet. Examples of such assets include
goodwill, trade mark and patent. Assets that are worthless may also be included in the balance sheet
to make it look good. For example, obsolete stocks
5. Maximization of sales or market share
A company can have the maximization of sales/ market share as its objective. However, this will
not necessarily benefit the shareholders.
Sales can be maximized by reducing the price of products. It can also be maximized by relaxing
credit terms. This is likely to lead to high incidence of bad debt which in the long run will not
benefit the shareholders.
6. Minimization of Costs
Costs can be minimized by reducing activities relating to marketing and research and development.
This action will not really be in the interest of the shareholders.

Non-financial Objectives
Examples of non-financial objectives are as follows:
a) The Welfare of Employees
A company might try to provide good wages and salaries, comfortable and safe working
conditions, good training and career development and good pensions.

4
b) The Welfare of Management
Managers will often take decisions to improve their own circumstances, even though their
decisions will incur expenditure and so reduce profits. High salaries, company cars and other
perks are all examples of managers promoting their own interests.
c) Fulfilment of responsibilities towards customers
Responsibilities towards customers include providing in good time a product or service of a
quality that customers expect and dealing honestly and fairly with customers. Reliable supply
arrangements and also after-sales service arrangements, are important.
d) Fulfilment of responsibilities towards suppliers
Responsibilities towards suppliers are expressed mainly in terms of trading relationships. A
company’s size could give it considerable power as a buyer. The company should not use its
power unscrupulously. Suppliers might rely on getting prompt payment in accordance with the
agreed terms of trade.
e) The welfare of society as a whole
The management of some companies is aware of the role that their company has to play in
exercising corporate social responsibility. This includes compliance with applicable laws and
regulations but is wider than that. Companies may be aware to their responsibility to minimize
pollution and other harmful externalities which their activities generate in delivering green
environmental policies, a company may improve its corporate image as well as reducing
harmful externality effects. Companies also may consider their positive responsibilities for
example, to make contributions to the community by local sponsorship.
Other non-financial objectives are growth, diversification and leadership in research and
development.
Non-financial objectives do not negate financial objectives, but they do suggest that the simple
theory of company finance that the objective of a firm is to maximize the wealth of ordinary
shareholders is too narrow. Financial objectives may have to be compromised in order to
satisfy non-financial objectives.
Stakeholders
Stakeholders are individuals or groups who are affected by the activities of the firm. They can be
classified as internal (employees and managers), connected (shareholders, customers and suppliers)
and external (local communities, pressure groups, government).

Stakeholder Groups
Internal Employees
Managers

Connected Shareholders
Debt holders
Customers

5
 Bankers
Suppliers
Competitors

External Government
Pressure Groups
Local and national communities
Professional and regulatory bodies

Objectives of Stakeholder Groups

The various groups of stakeholders in a firm will have different goals which depends in part on the
particular situation of the enterprise. Some of the more important aspects of these different goals
are as follows:
a) Ordinary (equity) Shareholders
Ordinary shareholders are the providers of the risk capital of a company. Usually their goal
will be to maximize the wealth which they have as a result of the ownership of the shares in
the company.
b) Trade Payable (Creditors)
Trade payables have supplied goods or services to the firm. Trade payables will generally be
profit maxmising firms themselves and have the objective of being paid in full amount due by
the date agreed. On the other hand, they usually wish to ensure that they continue their trading
relationship with the firm and may sometimes be prepared to accept later payments to avoid
jeopardizing that relationship.
c) Long-term Payables
Long-term payables, which will often be banks, have the objective of receiving payments of
interest and capital on loan by the due date for the repayments. Where the loan is secured on
assets of the company, the lender will be able to appoint a receiver to dispose of the company’s
assets if the company defaults on the payments. To avoid the possibility that this may result in
a loss to the lender if the assets are not sufficient to cover the loan, the lender will wish to
minimize the risk of default and will not wish to lend more than is prudent.
d) Employees
Employees will usually want to maximize their rewards paid to them in salaries and benefits,
according to the particular skills and the rewards available in alternative employment. Most
employees will also want continuity of employment, good working condition and career
development.
e) Government
Government has objectives which can be formulated in political terms. The government
agencies impinge on the firm’s activities in different ways including through taxation of the
firm’s profit, the provision of grants, health and safety legislation etc. Government policies
will often be macroeconomic objectives such as sustained economic growth and high levels of
employment.

6
f) Management
Management has, like other employees (and managers who are not directors will normally be
employees), the objective of maximizing its own rewards. Directors and the managers to whom
they delegate responsibilities, must manage the company for the benefit of shareholders. The
objective of reward maximization might conflict with the exercise of this duty.
g) Customers
Customers have an interest in the actions of companies whose goods or services they buy, and
might be able to influence what companies do.
h) Society as a whole.
A company might need to consider the concerns of society as a whole, about issues such as
business ethics, human rights, the protection of the environment, the preservation of natural
resources and avoiding pollution. Companies might need to consider how to protect their
‘reputation’ in the mind of the public, since a poor reputation might lead to public pressure for
new legislation, or a loss in consumer (customer) support for the company’s products or
services.

Stakeholder groups, Strategy and Objectives

The actions of stakeholder groups in pursuit of their various goals can exert influence on strategy
and objectives. The greater the power of a stakeholder, the greater his influence will be. Each
stakeholder group will have different expectations about what it wants, and the expectations of the
various groups may conflict. Each group however, will influence strategic decision making.
Shareholders and Management
Although ordinary shareholders (equity shareholders) are the owners of the company to whom the
board of directors are accountable, the actual powers of shareholders tend to be restricted, except
in companies where the shareholders are also the directors. The day to day running of a company
is the responsibility of management. Although the company’s results are submitted for
shareholders’ approval at the annual general meeting, there is often apathy and acquiescence in
directors’ recommendations.
Shareholders are often ignorant about their company’s current situation and future prospects. They
have no right to inspect the books of account, and their forecasts of future prospects are gleaned
from the annual report and accounts, stockbrokers, investment journals and daily newspapers. The
relationship between management and shareholders is sometimes referred to as an agency
relationship, in which managers’ act as agents for the shareholders.
Agency relationship in this context is a description of the relationship between management and
shareholders expressing the idea that managers act as agents for the shareholder, using delegated
powers to run the company in the shareholders best interests.
Agency relationship occurs when one party, the principal, employs another party, the agent, to
perform a task on their behalf.
Shareholders, managers and the company’s long-term creditors
The relationship between long-tern creditors of a company, the management and the shareholders
of a company encompasses the following factors:
a) Management may decide to raise finance for a company by taking out long-term or medium-
term loans. They might be taking risky investment decisions using outsiders’ money to
finance them.
7
b) Investors who provide debt finance will rely on the company management to generate
enough net cash-inflows to make interest payments on time and eventually repay the loans.
However, long term creditors will often take security for their loan, perhaps in the form of
a fixed charge over an asset (such as a mortgage on a building). Bonds are also often subject
to certain restrictive covenants, which restricts the company’s rights to borrow more money
until the debenture have been repaid.
If a company is unable to pay what it owes its creditors, the creditors may decide to exercise
their security or to apply for the company to be wound up.
c) The money that is provided by long-term creditors will be invested to earn profits and the
profits (in excess of what is needed to pay interest on the borrowing) will provide extra
dividends or retained profits for the shareholders of the company. In other words,
shareholders will expect to increase their wealth using creditors’ money.
Shareholders, managers and government
The government does not have a direct interest in companies (except for those in which it actually
holds shares). However, the government does often have a strong indirect interest in companies
affairs.
a) Taxation
The government raises taxes on sales and profits and on shareholders dividends.it also
expects companies to act as tax collectors for income tax and VAT. The tax structure might
influence investors’ preferences for either dividends or capital growth.
b) Encouraging new investments
The government might provide funds towards the cost of some investment projects. It might
also encourage private investment by offering tax incentives.
c) Legislation
The government also influences companies , and the relationships between shareholders,
creditors, management, employees and the general public through legislation, including the
companies Acts, legislation on employment, health and safety regulations, legislations on
consumer protection and consumer rights and environmental legislation.
d) Economic Policy
A government’s economic policy will affect business activity. For example, exchange rate
policy will have implications for the revenues of exporting firms and for the purchase costs
of importing firms. Policies on economic growth, inflation, employment, interest rates and
so on are all relevant to business activities.
Conflict between Different Stakeholder Objectives
Different stakeholders have differing interests in a company, and these might be incompatible and
in conflict with each other. When stakeholders have conflicting interests:
 either a compromise will be found so that the interests of each stakeholder group are satisfied
partially but not in full
 or the company will act in the interests of the most powerful stakeholder group, so that the
interests of the other stakeholder groups are ignored.
In practice there might be a combination of these two possible outcomes. A company might make
small concessions to some stakeholder groups but act mainly in the interests of its most powerful

8
stakeholder group (or groups). Some examples of conflicting interests of stakeholder groups are as
follows:
 If a company needs to raise more long-term finance, its directors and shareholders might
wish to do so by raising more debt capital, because debt capital is usually cheaper than equity
finance (to be explained under cost of capital). However, existing lenders might believe that
the company should not borrow any more without first increasing its equity capital – by
issuing more shares or retaining more profits. The terms of loan agreements (the lending
‘covenants’) might therefore include a specification that the company must not allow its debt
level (gearing level) to exceed a specified maximum amount.
 The government might want to receive tax on a company’s profits, whereas the company
will want to minimise its tax liabilities, through ‘efficient’ tax avoidance schemes.
 A company cannot maximise returns to its shareholders if it also seeks to maintain a
contented work force, possibly by paying them high wages and salaries.
 A company cannot maximise short-term profits if it spends money on environmental
protection measures and safe waste disposal measures.
However the most significant conflict of interest between stakeholders in a large company,
especially a public company whose shares are traded on a stock market, is generally considered to
be the conflict of interests between:
 the shareholders and
 the board of directors, especially the executive directors, and the other senior executive
managers
The agency relationship
Agency theory was developed by Jensen and Meckling (1976). They suggested a theory of how the
governance of a company is based on the conflicts of interest between the company’s owners
(shareholders), its managers and major providers of debt finance. Each of these groups has different
interests and objectives.
 The shareholders want to increase their income and wealth. Their interest is with the returns
that the company will provide in the form of dividends, and also in the value of their shares.
The value of their shares depends on the long-term financial prospects for the company.
Shareholders are therefore concerned about dividends, but they are even more concerned
about long-term profitability and financial prospects, because these affect the value of their
shares.
 The managers are employed to run the company on behalf of the shareholders. However, if
the managers do not own shares in the company, they have no direct interest in future returns
for shareholders, or in the value of the shares. Managers have an employment contract and
earn a salary. Unless they own shares, or unless their remuneration is linked to profits or
share values, their main interests are likely to be the size of their remuneration package and
their status as company managers.
This will impact negatively on the shareholders’ goal of wealth maximization, hence, there will be
an agency problem. It should be noted that this problem arises from the separation of ownership
and control. An indication that there is an agency problem is the profit “satisficing” behavior by
managers. Rather than performing optimally, managers do just enough to satisfy the expectations
of shareholders.
This raises a fundamental question. How can managers, as agents of their company, be induced or
persuaded to act in the best interests of the shareholders?
9
Reducing the agency problem
Jensen and Meckling argued that in order to reduce the agency problem, incentives should be
provided to management to increase their willingness to take ‘value-maximising decisions’ – in
other words, to take decisions that benefit the shareholders by maximising the value of their shares.
Several methods of reducing the agency problem have been suggested. These include:
 Devising a remuneration package for executive directors and senior managers that gives
them an incentive to act in the best interests of the shareholders.
 Fama and Jensen (1983) argued that an effective board must consist largely of independent
non-executive directors. Independent nonexecutive directors have no executive role in the
company and are not fulltime employees. They are able to act in the best interests of the
shareholders.
 Independent non-executive directors should also take the decisions where there is (or could
be) a conflict of interest between executive directors and the best interests of the company.
For example, non-executive directors should be responsible for the remuneration packages
for executive directors and other senior managers.
Incentive schemes (management reward schemes)
Most, if not all, large stock market companies have remuneration schemes for their executive
directors and other senior managers, and the purpose of such schemes is to make the personal
interests of the directors and managers similar to those of the shareholders. By achieving a financial
performance that is in the interests of the shareholders, directors and managers will also obtain
personal benefits for themselves.
Structure of a remuneration package for senior executives
The structure of a remuneration package for executive directors or senior managers can vary, but it
is usual for a remuneration package to have at least three elements.
a) A basic salary (with pension entitlements). Basic salaries need to be high enough to attract
and retain individuals with the required skills and talent.
b) Annual performance incentives, where the reward is based on achieving or exceeding
specified annual performance targets. The performance target might be stated as profit or
earnings growth, EPS growth, achieving a profit target or achieving a target for TSR (Total
Shareholders’ Return). Some managers might also have a non-financial performance target.
Some managers might have several annual performance targets, and there is a reward for
achieving each separate target. Annual rewards are usually in the form of a cash bonus.
c) Long-term performance incentives, which are linked in some way to share price growth or
TSR over a longer period of time (in practice typically three years). Long-term incentives
are usually provided in the form of share awards or share options in the company. The
purpose of these awards is to give the manager a personal incentive in trying to increase the
value of the company’s shares. As a holder of shares or share options, the manager will
benefit financially from a rising share price.
Share awards
With a share award scheme, the company purchases a quantity of its own shares and awards these
to its executive directors and other senior managers on condition that certain ‘long-term’ financial
targets are achieved, typically over a three-year period.
Share options
A company might award share options to its executives. A share option gives its holder the right to
purchase new shares in the company on or after a specified date in the future, typically from three
10
years after the options have been awarded. The right to buy new shares in the company is at a fixed
price (an ‘exercise price’) that is specified when the share options are awarded. Typically the
exercise price is the market price of the shares at the time the options are awarded. The holder of a
share option gains from any increase in the share price above the exercise price, and so has a direct
personal interest in a rising share price.
For example, a company might award share options to its chief executive officer. If the market price
of the shares at the date of the award is, say, ₦7.00, the CEO might be given 500,000 share options
at ₦7 per share, exercisable from three years after the date of the option award. If the share price
three years later is, say, ₦10, the CEO will be able to buy 500,000 new shares at ₦7 and sell them
immediately at ₦10, to make a personal financial gain of ₦1,500,000.

Forms of Business Organisation

The following are forms of legal business entities in Nigeria are:
a) Proprietorships or sole trader
b) Partnerships
c) Incorporated companies or corporations which are of three main types
i) Unlimited liability company
ii) Company limited by guarantee.
iii) Company limited by shares

Sole Proprietorship
This form of organization refers to the business enterprise owned and controlled by a single person
(The proprietor). The proprietor hold the title to all it assets and bears unlimited liability for the
firm’s debts. It is a type of business entity that is owned and run by one individual and in which
there is no legal distinction between the owner and the business. Their principal limitations is that
the proprietor is legally responsible for all obligations the organization incurs. The firm’s liabilities
are the owner’s liabilities.

Advantages of Sole Proprietorship

 Sole proprietors have complete control of their business – a sole proprietor has only himself
to answer to. His judgments good or bad, is his own responsibility.
 Ease of formation and dissolution (no red tape or complicated legal problems and it costs
relatively little to start).
 Personal attention to consumer needs: In a sole proprietorship business, one generally finds
the proprietor taking personal care of consumers’ needs as they normally functions within a
small geographical area.
 Equitable distribution of wealth: A sole proprietorship business is generally a small scale
business. Hence there is an opportunity for many individuals to own and manage small

11
 business units thus, enables widespread dispersion of economic wealth and diffuses
concentration of a business in the hands of few.

Disadvantages of Sole Proprietorship

 Management limitations; the entrepreneur cannot be a specialist in all fields. He is a jack of
all trades and master of none
 Unlimited financial liability
 Limited financial resources
 Life of business is limited to the life of the owner-death of a proprietor may mean the death
of a business
Partnerships
The partnership Act of 1890 is an Act of the parliament of the United Kingdom which governs the
rights and duties of people who carry on business in common with a view of maximizing profit.
According to Partnership Act 1890 defines partnership and essentially states that where two or more
people carry on business with a common view of profit, then a partnership exists
Deed of partnership is a document that legalizes a partnership business which contains rules and
regulations that governs the business

Partners Rights under the 1890 Act

 Every partner may take part in the management of the business except proven otherwise by
a written agreement
 A simple majority of partners is all that is required to make a decision except proven
otherwise by a written agreement

Financial rights of partners (1890 Part. Act)

The default position from the 1890 act is that all partners are entitled to share equally in the profits
and capital of the partnership and must contribute equally to the losses. This means a partner that
does not contribute capital in the same proportions as the other partners, he is still entitled to share
in the profits equally.
Deed of partnership consist of the following
 Amount of capital each partner should provide
 How profit or losses should be divided
 How many votes each partners has (usually based on the proportion of capital provided)
 Rules on how to take on new partners
 How the partnership is brought to an end or how a partner leaves
12
Dissolution of Partnership
 It can occur automatically on the death of a partner (in the case of two partners)
 It can occur by notice ie any partner can just dissolve the partnership by giving notice
 The court can dissolve a partnership where it decides that;
 a partner has carried on in a way that is damaging to the business
 where a partner commits a breach of the agreement consistently
 whenever the court decides that is just and reasonable to dissolve it

Advantages of Partnerships
 There is flexibility in the management of the business
 Survival rate is greater.
 Decisions are more rational two heads are battler than one
 Ability to generate more capital
 Easy formation
Disadvantages
 Instability
 Unlimited liability in case of business failure
 Lack of harmony
 It is difficult to take decisions

Incorporated Company
An incorporated company refers to a company that is registered under the Companies and Allied
Matters Act Cap C20 LFN 2004. A company may be registered either as a limited company or
unlimited company.
Limited company (Limited Liability Company)
 Companies limited by shares
 Companies limited by guarantee

Limited Liability Company (LLC)

This is a form of business organization which in the eyes of the law exists independently from its
owners, it is an impersonal entity created by law which can own assets and incur liabilities

13
Companies limited by shares
Companies limited by shares when the liability its owners (shareholders) bear do not exceed the
monetary value of the shares they hold.
These company are grouped into
(1) Private limited companies (Ltd)
(2) Public limited companies (Plc.)

Private Limited Companies (Ltd)

Private limited companies as required by law must have a membership from 2 – 50, excluding
bonafide employees of the company. The capital of the firm is divided into shares but not available
to public subscription of shares (not sold on the floor of stock exchange. Consequently shares have
to be sold privately through private placement the law also has its provisions in its articles of
association restricting the transfer of its shares.
Advantages
 It has more people contributing capital than a sole trader or partnership
 Has limited liability (to the face value of shares held)
 The ownership of a company can change without changing the company. This means that the
company will still continue in operation even without the continuous existence of its owners.
 It is a legal entity. It can sue and can be sued
Disadvantage
 Capital raising possibilities are limited because shares cannot be offered for public sale
 Audited accounts have to be available for inspection

Public Limited Companies

These are limited companies other than private companies. They invite the public to subscribe to
their shares. The minimum number of shareholders required to form a public limited company is
seven (7). There is no restriction on the maximum number of shareholders and the shares are
transferable to other persons without informing other shareholders. The name of the company must
end with a PLC. Public limited liability company can either be quoted or unquoted.

Quoted public limited liability companies have their shares traded on a recognized stock exchange,
while unquoted public limited liability companies do not have their shares traded on a recognized
stock exchange.

Companies limited by guarantee

These are companies whose liabilities are limited to the amount guaranteed by the members in the
event of liquidation. It may not be incorporated with the objective of carrying on business for the
purpose of making profits for distribution to its members. When a company is formed for the

14
purpose of promoting the arts, science, religion, sports, culture, education, research, charity etc.,
and the income and property of the company are to be applied solely towards the promotion of its
objects and no portion is to be paid directly or indirectly to its members except as permitted by the
law, the company shall not be registered as a company limited by shares but as a company limited
by guarantee.

Regulatory Framework for Companies

The main legislation regulating companies in Nigeria s the Companies and Allied Matters Act, Cap
C20 LFN 2004. The Act provides the legal framework for setting up and running a company in
Nigeria including what it is, how it is formed, its membership, who runs it and how decisions are
made. Areas of corporate financial management covered by the Act includes:

i) Raising of funds through issue of shares, debentures, annual returns

j) Financial Statements and audit
k) Winding up of companies
l) Dealing in companies securities: and
m) Reconstruction, mergers and takeovers of companies

Companies are also regulated in other ways. For example, financial statements must be prepared in
accordance with the International Fianancial Reporting Standards (IFRS) and comply with the
requirements of the Financial Reporting Council of Nigeria Act 2011 (FRC), and all companies
operating in Nigera are expected to file annual returns with the Corporate Affairs Commission
(CAC).

Banks, including microfinance banks, are regulated by the Central Bank of Nigeria (CBN) and the
Nigeria Deposit Insurance Corporation (NDIC). The National Insurance Commission (NAICOM)
oversees the insurance industry.

The Nigerian Communications Commission (NCC) is the independent regulatory authority for the
telecommunications industry in Nigeria. The NCC is responsible for creating an enabling
environment for competition among operators in the industry. It also ensures the provision of
qualitative and efficient telecommunication services in the country.

Companies in the food, beverages and pharmaceutical sectors are regulated by the National Agency
for Food and Drug Administration and Control (NAFDAC). Its mission is to safeguard the health
of the public by ensuring that only the right quality foor, drugs and other regulated products are
manufactures, exported, advertised, sold and used in Nigeria.

Public companies are also required to comply with the provisions of the Investments and Securities
Act, 2007 which, among other things regulate the investments and securities business in Nigeria,
especially in the areas of mergers, acquisitions and take overs.

There are various corporate governance codes that companies are expected to comply with.
Examples are those issued by the Securities and Exchange Commission and the Central Bank of
Nigeria (CBN).

15
Finance Functions in an Organisation
The Finance Function is a part of financial management. Financial Management is the activity
concerned with control and planning of financial resources. In a business, the finance
function involves the acquiring and utilization of funds necessary for efficient operations. Finance
is the lifeblood of a business without it things wouldn’t run smoothly. It is the source to run any
organization, it provides the money, it acquires the money.
The finance Functions in an organisation includes:
1) Raising of finance at reasonable cost Eto fund projects
2) Determination of the optimum capital structure
3) Security of company’s assets
4) Relating with investors
5) Evaluation of proposed investments
6) Managing the liquidity of the company
7) Ensuring that finance funds don’t remain idle
8) Ensuring efficient, effective and profitable utilization of funds.

Why a Business Needs the Finance Functions

 Helps Establish a Business– Without money, you cannot get labour, land and so on with
the finance function you can determine what is required to start your business and plan for
it.
 Helps Run a Business– To remain in business you must cater for the day to day operating
costs such as paying salaries, buying stationery, raw material, the finance function ensures
you always have adequate funds to cater for this.
 To Expand, Modernize, Diversify– A business needs to grow otherwise it may become
redundant in no time. With the finance function, you can determine and acquire the funds
required to do so.
 Purchase Assets-You need money to purchase assets. This can be tangible assets like
furniture, buildings or intangible like trademarks, patents etc. to get this you need finances.

Roles and Objectives of Public Sector and Non Profit Organisations

Public Sector
Public sector includes the ministries, departments and agencies (MDAs) at the federal, state and
local government levels.
The public sector role and objectives in the economic development is, therefore, very vast and all
pervading. It includes, maintaining public services, Provision of level playing ground for private
sector to flourish, laying rules of conduct for businesses in the economy, shaping economic
institutions, influencing the use of resources, provision of basic amenities, and the fair distribution
of income. It should be noted that public sector organisations are not profit-oriented unlike their
private counterparts.
Finance and reporting in the public sector is guided by the Constitution, various financial
legislations and financial regulation.

16
Non Profit Oragisations
Non-profit organisations are mainly companies limited by guarantee. The companies and Allied
Matters Act, Cap C20 LFN 2004 sets out the objects for which such organisations may be
established including the promotion of commerce, arts, science. religion, sports, culture, education,
research, charity and other similar objects.
These organisations are expected to be registered as companies limited by guarantee and not by
shares. They are not to be profit oriented and no distribution of profits to members is allowed. These
organisations have as their major aim the contribution to the development of society and the good
of the general public.
Corporate Governance
Corporate governance is the system of structures, rights, duties and obligations by which companies
are directed and controlled. The governance structure specifies the distribution of rights and
responsibilities among the stakeholders and specifies the rules and procedures for making decisions
in corporate affairs. Governance provides the structure through which companies set and pursue
their goals within the context of social, regulatory and market environment.
It is generally accepted that weak corporate governance is responsible for company failures. The
code of corporate governance for public companies by Securities and Exchange Commission has
the following major segments:
i) The board of directors – responsibilities, duties, composition and structure
ii) Relationship with shareholders
iii) Relationship with other stakeholders
iv) Risk management and audit
v) Accountability and reporting
vi) Communication; and
vii) Code of ethics.

17