Question

1. Discuss agency theory.  Then explain why an entrepreneur has no conflict as compared to a manager who is a worker of shareholders. 

2.  Discuss four (4) reasons why a company needs more working capital in order to expand / increase sales.    

   
   

Answer 1

1. There exist a conflict of interest for the manager who is a worker of shareholders. While stockholders and business managers are primarily concerned with the profit performance of the business in which they are shareholders, they have an inherent conflict of interest.

The conflicts between stockholders and the managers of a business include the following:

• The more money that managers make in wages and benefits, the fewer stockholders see in bottom-line net income. Stockholders obviously want the best managers for the job, but they don’t want to pay any more than they have to. In many corporations, top-level managers, for all practical purposes, set their own salaries and compensation packages.

• The question of who should control the business — managers, who are hired for their competence and are intimately familiar with the business, or stockholders, who may have no experience relevant to running this business but whose money makes the business tick — can be tough to answer

An entrepreneur is a person who converts an opportunity into a workable and marketable concept. They apply their time, money, skills, and effort to the process of getting their product or service into the marketplace.

An entrepreneur doesn't have any conflict of interest as he strives for the betterment of the organization. There are no other players involved. He is the owner and manager of the organization.

2. Working capital is the amount used to meet the day-to-day operational activities of a business. In the broad sense, the term working capital is used to denote the total value of current assets less current liabilities.

Working capital is required for the following reasons:

It helps the business concern to provide an adequate amount of working capital at the time of requirements.

Working capital is important because it is necessary in order for businesses to remain solvent. In theory, a business could become bankrupt even if it is profitable.

If you are planning to grow your company, you need to ensure that you have enough liquidity when you take loans for financing the expansion. If there is low working capital, then there is a risk of not paying your debts on time, which will lead to further problems for your company.

Working Capital is a widely used tool to measure efficiency, liquidity, and the financial health of a firm. Although it is extremely important to maintain it, the need for working capital varies from one sector to another, as the payback period differs from one another.