Business finance

Business Finance

Meaning

Money required for carrying out business activities is called business Finance.

Financial management

Financial management is concerned with optimal procurement as well as usage of

Finance.

Scope The approach to the scope and functions of financial management is divided for the purpose of exposition into two broad categories: Traditional approach.

Modern approach.

Traditional Approach

The traditional approach, which was popular in the early stage, limited the role of financial management to raising

and administering of funds needed by the corporate enterprises to meet their

financial needs.

Main limitations of Traditional Approach Ignored routine problems. Ignored finance manager’s viewpoint. Ignored non-corporate enterprise. No Emphasis on allocation of funds.

Modern ApproachAccording to modern approach the term

financial management provides a conceptual and analytical framework for

financial decision-making.

Major decisionsThe financial management can be further classified into three major decisions:

The financing decision. The investment decision. The dividend decision.

Financial Decisions

Investment Decision

Dividend Decision

Financing Decision

Capital Budgeting

Cost of capitalWorking CapitalManagement

Capital Structure

Investment Decisions These decisions relate to how the firm’s

funds are invested in different assets so that they are able to earn the highest possible return for their investors.

Factors Affecting Cash flows of the project. The rate of return. The investment criteria involved

Financing Decisions This is about the quantum of finance to

be raised from various long-term sources.

The main sources of funds are shareholders funds and borrowed funds.

Factors Affecting Cost Risk Floatation costs. Cash flow position of the business

Dividend Decision Dividend is that portion of profits, which

is distributed to shareholders. The decision made here is how much of

the profit is to be distributed to the shareholders and how much of it should be retained to meet the investment requirements.

Factors Affecting Earnings. Stability of earnings. Stability of dividend. Growth oppurtunities.

ObjectivesEfficient financial management requires the existence of some objectives which are as follows: Profit maximisation. Wealth maximisation.

Financial planning

Financial planning is essentially preparation of a financial blueprint of an

organisation's future operations.

Importance It tries to forecast what will happen in

future under different business situations.

It helps in avoiding business shocks and uncertainties.

It helps in co-ordinating various business functions.

Fixed capital Fixed capital refers to investment in

long-term assets. It affects the growth, profitability and

risk of the business in the long run.

Importance Long-term growth and efficiency. Large amount of funds involved. Risk involved. Irreversible decisions.

Factors affecting Nature of business. Scale of operations. Choice of technique. Technology upgradation

Working capital Working capital are the investments

which facilitate smooth day-to-day operations of a business.

Working capital is usually more liquid, but contribute less to the profits than fixed assets

Factors Affecting Nature of business. Scale of operations. Business cycle. Operating efficiency.

Types of business finance Finance used in business is of following

kinds: long-term finance. Medium-term finance. Short-term finance

Instruments of finance A business form can raise funds from

two main sources: owned funds. Borrowed funds.

shares

Issue of shares is the most important source of raising long term finance

Types of shares There are two types of shares. Equity shares. Preference shares

Retained profits

Retained profits refer to the profits which have not been distributed as dividends, but have been For use in business.

Retained profits are also known as reserves or surplus

Debentures

A debenture is a document or certificate issued by a company under its seal as an

acknowledgement of its debt

Institutional Finance

Loan or equity capital provided by a financial institution, instead of by one or

more individual.

Public Deposits

Public deposits were to the deposits received by a company from the public as

loan debts.

Bank Finance Find finance refers to the Finance

reached from commercial banks. Commercial banks are an important

source of short-term and medium-term finance pro-business