Business Finance Review PDF

BUSINESS FINANCE - Funds are invested in a business to earn sufficient return on investment. Increasing the value of a business Finance...

BUSINESS FINANCE - Funds are invested in a business to earn sufficient return on investment. Increasing the value of a business Finance - Growth and stability are the primary bases in - Latin word called finer or finis (to end\to pay) measuring the value of a business entity. - Concept : art and science of managing money Social responsibility of businessmen - It refers to his contribution to the improvement According to Shetty et al (1995) of the quality of life in the community - Viewed finance as the operational or practical side of economics FUNCTION OF BUSINESS FINANCE - Practical science of the production and ✔ Allocation of financial resources distribution of wealth. ✔ Procurement of funds ✔ Efficient and effective utilization of According to Saldana (1995) financial resources - Finance is the efficient allocation of scarce resources Allocation of financial resources - As a discipline\concerned with identifying, - In accordance with a company’s financial evaluating and managing sources objectives and standards, projects or activities - Use of cash in order to increase the value of and operations are carefully planned, evaluated the business enterprise to its present based on certain criteria and subsequently owners ranked for the allocation of financial resources According to Medina (2007) Question asked in evaluating project proposals - Finance as the study of the acquisition and - Is the project necessary? investment of cash for the purpose of - What is its social relevance? enhancing value and wealth. - Are there other alternatives? How will the proposal affect our current operations? FUNCTION OF FINANCE - What resources of the company (labor force, ✔ Allocating available funds plant, property and equipment, etc) can be ✔ Acquiring needed funds used in the project? ✔ Utilizing these funds to achieve set goals - How much is the estimated capital ❖ ALLOCATION – Determining where to requirement? use funds that is currently available - What is the economic life of the project (or its ❖ ACQUISITION – Obtaining funds from the number of years of operation? right sources at the right time - How much are the estimated cash returns? ❖ UTILIZATION – Using the funds - How long will it take to recover our investment or whatis the payback period? PRIMARY GOALS OF A BUSINESS - What is the rate of return on investment? ✔ To earn profit - Is the rate of return higher than the cost of ✔ To increase its own value in a business to capital to be used? earn sufficient return on investment - What are the risks involved in the proposals? ✔ To improve the quality of life in the community To earn profit  Procurement of funds - It requires awareness of the different a. Personal finance sources of funds and the cost involved b. Finance of non profit organization - Capital must be made available at the least c. Business finance cost when it is needed - Cost of capital varies with the resources A. PERSONAL FINANCE thereof. On borrowed funds, it is in the - Conducted by individual\consumers. form of financing charges (interest, - EXAMPLE: commissions and service-charges). ✔ Family spending for their food, clothing, shelter, recreation, education. Efficient and effective utilization of financial B. FINANCE OF NON PROFIT ORGANIZATION resources - Conducted by charitable, civic, religious - Efficient utilization of financial resources organization refers to their economical use C. BUSINESS FINANCE - Effective utilization of financial resources - Deals with financing for business firms or for refers to their use towards the attainment commercial use, the goal of which is to make of predetermined objectives. profit. CLASSIFICATION OF FINANCE FINANCIAL MANAGEMENT A. As to form of negotiation - Also called as managerial finance that is 1. DIRECT FINANCE concerned with the managing of funds - Involved in direct borrowing - It is the efficient and effective allocation, - Example: acquisition and utilization of funds ✔ Going to a bank to obtain a loan ✔ Friend borrowing money from another FINANCIAL MANAGERS ✔ Corporation selling shares to its - Decides as to where to get financial incorporators resources like cash, inventories, equipment - M. Hadjimichalakis & K. Hadjimichalakis and other assets needed by the firm in its ✔ Distinguished direct finance from indirect operation finance. 2. INDIRECT FINANCE THE FINANCIAL MANAGER : HIS - Involves financial intermediaries(acts like PRIMARY ACTIVITIES middlemen) in the real sense of the world. - Financial\finance manager in a business organization is not always called as such B. As to User - His title varies depending on the size and 1. PUBLIC FINANCE organizational setup in a company - Deals with the revenue and expenditure - They function are discharged by the sole patterns of the government proprietor, the accountant or by the - Concerned with government affairs like manager managing the government’s sources and uses of funds 2. PRIVATE FINANCE - All finance other than public finance is private finance. PRIMARY ACTIVITIES OF FINANCIAL MANAGER: FINANCIAL MARKETS - Institutions and systems that facilitates A. FINANCIAL PLANNING AND ANALYSIS transactions in all types of financial claims. - They are te bridge between those with B. MANAGING THE ASSETS OF THE COMPANY access funds. Questions: - How much must be in the form of cash, CLASSIFICATION OF FINANCIAL MARKETS receivables, inventories and other current 1. As to term or maturity assets? a) Money market - How much must be in plant, property and b) Capital market equipment? 2. As to type of issue - What are the fixed assets to be acquired? a) Primary market - Which of the fixed assets already owned b) Secondary market must be modified or replaced? - Are assets duly safeguarded? Who are AS TO TERM OR MATURITY accountable for them? MONEY MARKET - How effective is the internal control system - Markets for short-term debt instruments. in the company? They consist of a network of institutions and facilities for trading debt securities with a C. MANAGING COMPANY’S LIABILITIES AND maturity of one year or less (Saldana 1997). OWNER’S EQUITY CAPITAL MARKET - Markets for long term securities.Long term FINANCIAL DECISION MAKING means maturity of more than a year. - It requires knowledge of economics AS TO TYPE OF ISSUE GOALS OF THE FINANCIAL MANAGER PRIMARY MARKET - A goal sets directions and keep those - Consist of underwriters, issuers, and concerned focused. instruments - It provides a reference to measure - They raise cash for the issuing company performance and progress. SECONDARY MARKET - Target toward which members of the - Markets for currently outstanding securities. organization need to move forward to. - Shares held by the public are termed - Financial goals should be aligned with the outstanding shares or securities. overall goals of a firm FINANCIAL INSTITUTIONS \ 1. Acquisition of funds with the least cost from INTERMEDIARIES the right sources at the right time - Firms that bridge the gap between the 2. effective cash management surplus units (SUs) or investors lenders and 3. effective working capital management the deficit units (DUS) or borrowers, which 4. effective inventory management issue their own financial instruments called 5. effective investment decisions secondary instruments.. 6. proper asset selection 7. proper risk management. DEPOSITORY INSTITUTIONS 5. Securities dealers and brokers - This are the financial institutions that 6. Pawnshops accepts deposits from surplus units. 7. Trust companies and departments 8. Lending investors 1. Commercial banks a. Ordinary commercial banks FINANCIAL, CORPORATE, STRATEGIC, b. Expanded commercial or universal banks PROJECT AND OPERATIONAL PLANNING (clients are business and government) 2. Thrift banks ⮚ Financial planning a. Savings and mortgage banks - refers to the process of determining the best b. Private development banks uses of the financial resources of an c. Savings and loan associations organization to attain its predetermined d. Microfinance thrift banks object and the procurement of the required e. Credit unions funds at the least cost 3. Rural banks ⮚ Corporate planning ✔ COMMERCIAL BANKS - defined as a formal and systematic manager - Traditionally, commercial banks grant only process, organized by responsibility, time short-term loans. and information, to ensure the operational - These loans were originally extended to planning, project planning, and strategic merchants for the transport of their goods in planning are carried out regularly to enable both the domestic and international top management to direct and control the markets, as well as to finance the holding of future of the enterprise inventories during the brief period required for their sale. ⮚ Strategic planning ✔ THRIFT BANKS - process of making decisions which will tend - Composed of savings and mortgage banks, to optimize the organization's future position private development banks, stock savings despite changes in future environment. and loan association and microfinance thrift - A strategy is a plan, an integration of an banks. organization important objectives, policies ✔ RURAL BANKS AND COOPERATIVE BANKS and programs into a cohesive whole. - These banks are more popular type of bank in the rural communities. ⮚ Project planning of capital expenditure - Their role is to promote and expand the rural planning economy - refers to working out the detailed execution of - an action outside the scope of current NON-DEPOSITORY INSTITUTIONS operations such as acquisition of another - Unlike depository institutions which obtain company, a new plant, a new market or funds by issuing deposits issue contracts that adoption new system, are not deposits ⮚ Operational planning 1. Insurance companies - refers to forward planning of existing 2. Fund managers operations It involves the determination of how 3. Investment banks/houses/companies to effectively use current resources attain both 4. Finance companies short-range goals and long-range objectives. BUDGETING: Its Objectives and Budgetary III. Capital expenditures budget Control - This is in the form of a statement showing the - Budgeting is the process of translating a plan in planned procurement and disposal of plant, quantitative terms, usually monetary. property and equipment. OBJECTIVES OF BUDGETING CONCEPTS OF CAPITAL 1. PLANNING - The financial plans of the different sub units are CAPITAL prepared geared towards the attainment of the - The term capital has been used in different company’s predetermined objectives concepts depending from whose point of view 2. COORDINATION it is being referred to. From the point of view of - Budgeting brings about harmony and a businessman who has just started his own synchronized operations for the different levels business, capital would refer to the resources of the management he has accumulated and invested in his venture. 3. CONTROL - budgeting provides management with the SOURCES OF CAPITAL yardstick in evaluating performance - The total capital of a business, as stated in the preceding paragraph, consists of borrowed and BUDGETARY CONTROL equity capital. - refers to the use of budgets and budgetary - reports to coordinate, evaluate and control EQUITY CAPITAL day-to-day operations to attain the goals - This refers to the financial resources provided specified by the budget. by owners of the business. It may be in the form of initial and additional investments plus MASTER BUDGET earnings retained in the business - The consolidation of all the budgets of the different sub-units (departments, branches, and BORROWED CAPITAL sections) in an enterprise is called the master - Capital acquired that gives rise to a liability (or budget. debtor-creditor relationship) is borrowed - it serves as the management's principal vehicle capital. for coordinating the plans of the firm. WHY A COMPANY HOLDS CASH It consists of the following: - A thorough understanding of why and how a I. Operating budget or profit plan firm holds cash requires an accurate look at - This refers to the plan of operations wherein how cash flows into and through the enterprise details of revenues and expenses are shown MANAGEMENT OF CASH and takes the form of budgeted income - Cash is considered as vital asset and its proper statement. management suppon company development II. Financial resources budgets and financial strength. An effective cash - These show the effects of the profit plan on the managemen program designed by companies financial resources of the company and consist can help to realize this growth and strength of the budgeted balance sheet and cash budget. CASH MANAGEMENT MANAGEMENT OF INVESTORY - Stewardship or proper use of an entity's cash - Inventory Management is basically related to resources. task of controlling the assets that are produced to be sold in the normal course of the firms's FUNCTION OF CASH MANAGEMENT procedures. 1.CASH PLANNING - Experts emphasizes the wise planning of funds COMPONENTS OF INVENTORY MANAGEMENT that can lead to huge success. For any 1. RAW MATERIALS management decision, planning is the primary - Those inputs that are transformed into requirement. completed goods throughout manufacturing process, 2. MANAGING CASH FLOWS - Second function of cash management is to 2. WORK IN PROCESS properly manage cash flows. - A stage of stocks between raw materials and - It means to manage efficiently the flow of cash finished goods. coming inside the business (cash inflow) and cash moving out of the business (cash outflows) 3. FINISHED PRODUCTS - Those products which are totally manufactured 3. CONTROLLING THE CASH FLOWS and company can immediately sell to - It has been observed that prediction is not an customers. exact knowledge because it is based on certain conventions. 4.STORES AND SPARES - Therefore, cash planning will unavoidably be at It comprises of office and plant cleaning materials variance with the results actually obtained. like soap, brooms, oil, fuel, light, bulbs and are purchased and stored for the purpose of 4. OPTIMIZING THE CASH LEVEL maintenance of machinery. (gloves, plastic, spoons) - It is important that a financial manager muse focus to maintain sound liquidity position ie., TYPES OF INVENTORY cash level. 1. RAW MATERIALS INVENTORY 5. INVESTING IDLE CASH - Includes basic materials purchased from other - Idle cash or surplus cash is described as the firms to be used in the firm's production extra cash inflows over cash outflows, which do operations. not have any specific operations or any other purpose to solve currently. 2.WORK IN PROCESS INVENTORY - Usually, a firm is required to hold cash for - Comprises of partly finished goods requiring meeting working needs facing contingencies additional work before they become finished and to maintain as well as develop friendliness goods. of bankers. 3.FINISHED FOOD INVENTORY - Includes goods on which production has been completed but that are not yet sold.