Introduction to financial information (Chapter-6)

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♦♦♦Business and Managers need financial information for
i. Planning
ii. Controlling
iii. Recording transactions
iv. Performance measurement♦
v. Decision making

♦Types of information:
i. Planning information: Helps people involved in the planning process.
ii. Operational information: helps people carry out their day-to-day activities,
e.g. how many operatives are needed in one shift.
iii. Tactical information: Helps people deal with short-term issues &
opportunities, e.g., monthly variance reports for the factory.
iv. Strategic information: Supports major long-term decision making, e.g. can
resources be made available to expand production?

A Good Information should have the following chrematistics or qualities: (ACCURATE)

♦ ♦ A = Accurate
C= Complete
C= Cost-beneficial
U= User- targeted
R= Relevant
A= Authoritative
T= Timely
E= Easy to use.

What makes information valuable?

• It’s Source
• Ease of assimilation
• Accessibility
• Relevance
*The value of information obtained should me more than the cost of obtaining it.

♦Data: Distinct pieces of information, which can exist in a variety of forms as numbers or
text on pieces of paper, as bits or bytes stored in a electronic memory, or as facts stored in
a person’s mind. (Data is a source of information)
♦Information: The output of whatever system is used to process data. This may be
computer system, turning single pieces of data into a report, for instance.
Database: A structured collection of records or data that is stored in a computer system
along with rules as to the information that will be sought from it, so that queries may be
answered by interrogating the database.

Internal sources of data/information:

• Communication between managers and staff or between managers.
• Accounting records
• System of collecting transaction data
• Human resources & payroll records
• Machine logs & computer system in production
• Time sheets in service business
• Staff

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External sources of data/information:
• Business’s tax specialists
• About new legislation
• R&D work done by another business
• Marketing manager’s research exercises.
• Information received from customers & suppliers
• The internet
• The Govt.
• Advice for information bureau
• Consultancies
• News paper & magazine publishers
• The system of other business via EDI (Electronic Data Interchange).
• Libraries or information services.

Information processing: Data once collected is converted into information for

communicating more widely within the business. In the information processing system data
is input, processed & then output as information.
To be effective, information processing should meet the following CATIVA criteria:
C = Completeness
A = Accuracy
T = Timeliness/Time bound
I = Inalterability
V = Verifiability
A = Accessibility

A system: a set of interacting components that operate together to accomplish a purpose.

A business system: a collection of people, machines & methods organized to accomplish a
set of specific functions.
Information system (IS): all systems & procedures involved in the collection, storage,
production & distribution of information
Information technology (IT): the equipment used to capture, store, transmit or present
information. IT provides a large part of information systems infrastructure.

Fig: Information system

Transaction Processing System (TPS): A type of information system that collects, stores,
modifies and retrieves the data transactions of an enterprise.

Information management Systems

Management Information System (MIS): Converts data from mainly internal sources into
information (e.g. summary reports, exception reports). This information enables Managers to
make timely & effective decisions for planning, directing & controlling the activities for which
they are responsible.

Fuad Amin BUSINESS FINANCE (CL) 49

The MIS transforms data from underlying TPS into summarized files that are used as the
basis for management reports. It-
i. Supports Structured decisions at operational & management control levels
ii. Is designed to report on existing operations.
iii. Has little analytical capability
iv. Is relatively inflexible
v. Has an internal focus.
Executive Support system (ESS): help senior managers to take strategic decisions
Decision support systems (DSS)
Knowledge work Systems (KWS): Integration of new knowledge into an organization
Office Automation System (OAS): Increases the productivity of workers.

Expert system: Expert systems allow users to benefit from expert knowledge & information.
The system consists of a database holding specialized data & rules about what to do in, or
how to interpret, a given circumstances.

Where expert systems are applicable in business?

• Legal or tax advice
• Forecasting of economic or financial developments, or of market & customer
behavior.
• Surveillance, for example of the number of customers entering a super market, to
decide what shelves need restocking & when more checkouts need to be
opened, or of machines in a factory, to determine when they need maintenance.
• Diagnostic systems, to identify causes of problems. For example in production
control in a factory, or in healthcare.
• Project management
• Education & training, diagnosing a student’s or worker’s weaknesses & providing
or recommending extra instruction as appropriate.
When expert system is most useful?
• The problem is reasonably well-defined
• The expert can define some rules by which the problem can be solved.
• The problem can’t be solved by conventional transaction processing or data handling.
• The expert could be released to more difficult problems. Experts are often highly
paid; meaning the value of even small-time savings is likely to be significant.
• The investment is an expert system is cost-justified.

*An intranet is a private network, operated by a large company or other organisation, which
uses internet technologies, but is insulated from the global internet. An extranet is
an intranet that is accessible to some people from outside the company, or possibly shared
by more than one organisation.

♦Security: The protection of data from accidental or deliberate threads which might cause
unauthorized modification, disclosure or destruction of data, and the protection of the
information system from the degradation or non-availability of services.
♦Ensure the security of information:
i. Prevention;
ii. Detection
iii. Deterrence (the action of discouraging an action or event through instilling
doubt or fear of the consequences. Ie, computer misuse restriction)
iv. Recovery procedures
v. Correction procedures
vi. Threads avoidance

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♦Qualities of a secure information system (ACIANA)
A = Availability
C = Confidentiality
I = Integrity
A = Authenticity
N = Non-reputation
A = Authorization
Types of Security control of information:
1. Physical Access Control: Security guards, door locks, intruder alarms, PIN etc
2. Security controls: help to prevent:
i. Human error
➢ Entering incorrect transactions
➢ Failing to correct errors
➢ Processing the wrong files
ii. Technical error such as malfunctioning hardware or software
iii. Deliberate actions such as fraud
iv. Commercial espionage
v. Malicious damage
3. Integrity Controls in the system: Maintain Complete, accurate, reasonable and
valid data by data verification, data validation etc.

♦Financial information used for:

The Framework of the Preparation & Presentation of Financial Statements published by the
International Accounting Standards Board (IASB) is focused on public financial statement in
particular rather than financial information in general, but it usually points out that nearly all
users use financial information to make economic decisions, such as those to:
i. Decide when to buy, hold or sale shares on the basis of their risk & return.
ii. Assess how effectively the business’s management has looked after its affairs
(its stewardship) & decide whether to replace or reappoint them.
iii. Assess a business’s ability to provide benefits to its employees.
iv. Assess security for amounts lent to the business.
The IASB framework identifies the following users of financial information:
i. Present & potential investors (shareholders)
ii. Employees
iii. Customers
iv. Suppliers & other business partners
v. Lenders
vi. Govt. & its agencies
vii. The public at large.
The framework states that the financial information is useful to users when it:
i. Helps them to make economic decisions, and
ii. Shows the results of management’s stewardship of the resources entrusted to
them.

Qualitative characteristics of financial statements (IFRS Framework)

Fundamental Qualitative Characteristics:
i. Relevance: Information of the financial statement is relevant to users, when it
influences their economic decisions because they can thereby:
➢ Evaluate past, present or future events, or
➢ Correct or confirm past evaluations.
Relevance is affected by:
➢ The nature of certain items, and / or
➢ The materiality of certain items.
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 1. Faithful Representation:
• Complete, including necessary descriptions and explanations
• Neutral (Without bias in selection of information
• Free from error.

Enhancing Qualitative Characteristics:

1. Understandability
2. Comparability: Measurement & display of the financial effect of like transactions
and other events must be carried out in a consistent way:
a. throughout the business
b. overtime, and
c. across different business.
3. Verifiability
4. Timeliness: Generally, the older the information, less useful it is.

Limitations of Financial Statement:

• Lack of timeliness
• Cost/benefit
• Conventionalized (highly standardized, diversified & designed)
• Backward Looking (past events)
• Omission of non-financial information, such as:
i. Narrative description of major operations
ii. Discussion of business risks & opportunities
iii. Narrative analysis of the business’s performance & prospects
iv. Management policies & how the business is governed & controlled.

Financial information is poor if it does not:

i. Meet the needs of users
ii. Display the qualitative characteristics
The effect of poor financial information is:
i. To undermine the integrity of financial markets
ii. To fail to serve the public interest.

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 Finance function (Chapter-7)

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What does Finance function do?
i. The finance function’s tasks:
• Recording financial transactions: Ensuring that the business has an
accurate record of its revenue, expenses, assets, liabilities and capital.
• Management accounting: ►►Providing information to assist managers
and other internal users in their decision making, performance measure,
planning and control activities
• Financial reporting: Providing information about a business to external
users that is useful to them in making decisions and for assessing the
stewardship of the business’s management.
• Treasury management: Managing the fund of a business, namely cash and
other working capital items, plus long-term investments, short-term and long-
term debt and equity finance.♦

ii. The finance function supports the business’s pursuit of its strategic objectives
by providing information to measure performance & support decision making, & by
ensuring the business has sufficient funds for its activities.
• Undertaking transaction processing and ensuring there are sufficient
financial control process in the system
• By providing information to measure performance & support decisions
(financial reporting & management accounting)
• By ensuring there is finance and cash available for the business’s
activities (treasury management).

Cost accounting: Gathering information about costs & attaching it to each unit of output (a
cost unit); Establishing budgets, standard costs and actual costs of operations, processes,
activities or products & analyzing variance & profitability. How:
i. Establishing asset valuations (for example ; for inventory)
ii. Planning (for example; providing forecast costs at different activity levels)
iii. Control (for example; providing actual & standard costs for comparison
purposes).
iv. Decision-making (for example; providing information about actual unit costs
for the period for making decisions about pricing)

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Cost classification: The arrangement of cost elements into logical groups with respect to
their nature or function.
• Fixed cost: A cost incurred for an accounting period that is unaffected by fluctuations in
the levels of activity.
• Variable cost: A cost that varies with the level of activity.
• Semi variable cost: A cost containing both fixed and variable components & thus partly
affected by a change in the level of activity.
• Future Cost: Yet to be incurred
• Sunk Cost: Have already been acquired
• Avoidable cost : That will not be incurred if a particular activity is not performed
• Unavoidable cost
• The Differential/ Incremental Cost: Difference in total cost between the new and
existing level.
• Margin Cost: Additional cost of one extra unit of output
• Opportunity Cost: Best alternative project that is not chosen.
• Relevant cost in decision making process: Only future costs that will be changed by the
decision made now
• Irrelevant cost in decision making process: Will remain unchanged whatever decision is
made
• A direct cost is a price that can be directly tied to the production of specific goods
or services. ♦
• Controllable costs are those over which the company has full authority. Such expenses
include marketing budgets and labor costs. ♦

Management decision making in allocation of resource: Two categories

1. Making resource decision in the short-mid term
2. Making Investment decisions for the long-term

Making resource decision in the short-mid term

Managers want to spend as little as possible to earn the most amount of revenue by
maximizing revenue & minimizing variable costs so that the contribution to fixed cost is as
large as possible.

Marginal costing: Including only variable costs in unity

costs when making decisions or valuing inventory (the
marginal cost of a unit of inventory excludes fixed costs or
its share of overheads).
Contribution: Unit selling price Less marginal cost.

Cost volume profit (CVP) is the

study of interrelationship between
costs, Volume & profit at various
levels of activity.

BEP: The level of production & sales

at which after deducting both fixed &
variable costs from sales revenue,
neither a profit nor a loss will occur.
(FC/Contribution margin)

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Contribution Analysis: Unit Revenue-Unit VC
Limiting factor analysis: a technique which will maximize contribution for an organisation,
by allocating a scarce resource that exists to producing goods or services that earn the
highest contribution per unit of scarce resource available.

Making Investment decisions for the long-term

Capital Budgeting: The process that a business uses to determine which proposed fixed
asset purchases it should accept, and which should be declined.

Capital Investment Appraisal: If the business identifies a possible capital investment

opportunity, the accountant needs to help evaluate or appraise the project to make a
decision as to whether to go ahead with it. The techniques includes
• Accounting Rate of Return (ARR)
• Payback period (PBP)
• Internal Rate of Return (IRR)
• Net Present value (NPV)
• Profitability Index
----------------------------------------------------------------------------------------------------
Forecasting is the process of making future predictions based on past and present data
and most commonly by analysis of trends. It is particularly important regarding:
a. Sales volumes
b. Costs
c. Economic factors (interest & exchange rates)
d. Other environmental factors such as regulation, technological developments,
and taste.

Budgeting
Budget: A plan expressed in monetary term.
A budget cycle is the life of a budget from creation or preparation, to evaluation. Most
small businesses don't use the term “budget cycle” but they use the process and go
through each of its four phases — preparation, approval, execution and evaluation.

Types of budgeting:
Incremental budgeting is the traditional budgeting method whereby the budget is
prepared by taking the current period's budget or actual performance as a base,
with incremental amounts then being added for the new budget period. ... The current
year's budget or actual performance is a starting point only.

Zero-Based budgeting (ZBB): is an approach to making a budget from scratch. From zero.

A flexible budget is a budget that adjusts to the activity or volume levels of a company.
Unlike a static budget, which does not change from the amounts established when
the budget was created, a flexible budget continuously "flexes" with a business's
variations in costs.

A rolling budget is continually updated to add a new budget period as the most
recent budget period is completed.

♦Bottom-up budgeting. With a bottom-up approach, the process starts in the individual
departments where managers create a budget and then send it upwards for approval.
That budget is either approved, revised or sent back for modifications, and a master
budget is created from the various departmental creations
Fuad Amin BUSINESS FINANCE (CL) 56
Purposes of budgets:
i. Guiding managers on how to achieve objectives
ii. Helping to compel planning
iii. Allocating resources
iv. Setting targets & allocating responsibility
v. Helping to co-ordinate activities
vi. Communicating plans
vii. Enabling control
viii. Helping to motivate employees
ix. Helping to evaluate performance

Strategic management accounting: Providing and analyzing financial information on the

business’s product markets & competitors’ costs & cost structures & monitoring the
business’s strategic & those of its competitors in this market over a number of periods.

Types of Performing measure:

1. Qualitative measures: subjective and judgmental, non-numerical form.
2. Quantitative Measures: Objective, based on reliable data, numeric form
I. Financial measures: sales, profit
II. Non-financial measures: Number of item produced or phone call answered.

Profitability: Revenue-cost
Activity: Activity causes cost. Measured in terms of physical numbers, monetary value or
time spent.
Productivity: The quantity of the service or product produced in relation to the resources
put in. ie. Goods produced per employee.

Resources used: Economy, Effectiveness & Efficiency

Efficient use of resources is concerned with the economy with which resources are used
and the effectiveness of their use in achieving the objectives of the business.

Measuring Critical Success Factor (CSFs): The key factors that are vital for business
success.
Identifying key Performance Indicator (KPIs): Once a business has identified its CSFs
and the things it must be good at to succeed it must identify performance standards to be
achieved to outperform rivals. These standards are sometimes called key performance
indicators (KPI). ♦♦♦ One way of setting KPIs is to use benchmarking.
Key performance indicators (KPIs) measure a company's success versus a set of
targets, objectives, or industry peers. KPIs can be financial, including net profit (or the
bottom line, gross profit margin), revenues minus certain expenses, or the current ratio
(liquidity and cash availability).

Benchmarking: Evaluate performance by comparison with a standard. The establishment,

through data gathering, of targets and comparators, through whose use relative levels of
performance (and particularly areas of underperformance) can be identified. By the adoption
of identified best practices it is hoped that performance will improve.

Measuring Sustainability Management: The headings under which sustainability and

corporate responsibility (CR) can perhaps be most usefully measured are those of what is
known as the Triple Bottom line.
• Social
• Environmental
• Economic
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The performance measures that are calculated & reported are used by three groups:
i. Managers, to make control & planning decisions
ii. Directors, to assess whether corporate governance is effective.
iii. External users, to make economic decisions

Limitations of Financial Measures:

A. Information problems:
i. The base information may be out of date, so timeliness of information leads to
problems of interpretation,
ii. Historical cost information may not be the most appropriate information for the
decision for which it is being used,
iii. For external users, information often comes from published financial statements
which generally comprise summarized information; more information may be
needed,
iv. Analysis of financial measures only identified symptoms, not causes, and thus is
of limited use on its own.
B. Comparison problems: trends
i. Effects of price changes make comparisons difficult unless adjustment are made,
ii. Impacts of changes in technology the affect the value of assets, the likely return &
future markets,
iii. A changing environment affects the results reflected in the accounting information,
iv. Changes in accounting policies can affect the reported results,
v. There can be problems in establishing a normal base year to compare other years
with.
C. Comparison problems: different business. Analyzing measures for different
businesses & comparing them can be difficult, because of :
i. Selection of industry norms and the usefulness of norms based on averages,
ii. Different firms having different financial & business risk profiles, and the impact of
this on analysis.
iii. Different firms using different accounting policies.
iv. Impact of the size of the business and its comparators on risk, structure & returns.
v. Impacts of different environments on results, e.g. different countries or home-based
Vs multinational firms.

♦Balance scorecard is an integrated set of performance measures linked to the

achievement of strategic objectives.
The scorecard was developed by Robert Kaplan and David Norton, and it produces a set
of measures that allows top managers to focus on the factors that are significant in
achieving long-term control and direction of the business, and hence profitability in the long
term.
Balanced scorecard was developed to help companies to manage the multiple objectives. It
was developed due to traditional accounting weakness.

Fuad Amin BUSINESS FINANCE (CL) 58

♦Difference perspectives of Balanced scorecard:

♦♦♦Internal control: A process, effected by an entity’s board of directors, management

& other personnel, designed to provide reasonable assurance regarding the achievement of
objectives in the following categories:
i. Effectiveness and efficiency of operations
ii. Reliability of financial reporting
iii. Compliance with applicable laws & regulations.

♦♦Features of internal control:

i. Is a process: It is a means to an end, not an end in itself.
ii. Is affected by people, not merely by policy manuals and forms.
iii. Can be expected to provide only reasonable assurance, not
absolute assurance, to an entity’s management & board that operations are
effective & efficient, financial reporting is reliable & laws & regulations are being
complained with.
iv. It geared to the achievement of objectives in one or more separate
but overlapping categories.
Control environment include:
i. The integrity, business, ethics & operating style of management
ii. How far authority is delegated
iii. The processes for managing and developing people in the business.

Control activities: The policies and procedures that help ensure management directives
are carried out. Control activities occur throughout the business at all levels and in all
functions- not just the finance function. They include:
i. Approval
ii. Authorization
iii. Verification
iv. Reconciliation
v. Review of operating performance
vi. Security of assets and
vii. Segregation of Duties (see book).

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 Business and Personal Finance (Chapter-8)

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A Business is financed:
• By Equity (from its owner in return for dividends) or
• By Debt (From lenders in return for interest) or
• By a combination of equity and debt

Needs for finance:

• Immediate: wages, petty expenses
• Short-term: payables
• Medium term: Pay tax, Inventory increase
• Long-Term: Buying non-current assets.

Financing Current
assets:

The Choice is a matter

for managerial judgement
of the trade-off between
the relative Cheapness
of the shot- term finance
verses it’s risk.

Long-term finance
includes equity finance
which is particularly
expensive because of the
risk they suffer
shareholders expect high
returns and dividends are
not tax deductible. The
flexibility of short-term finance may, therefore, reduce its overall cost.

Risk of borrowing of short-Term Finance:

• Renewal risk: As it is short term, It has to be continually renegotiated as the various
facilities expire which may be difficult for some economic condition or financial situation.
• Interest rate risk: If the business is constantly having to renew its funding
arrangements, it will be at the mercy of fluctuation in short-term interest rates.

1. An Aggressive company has more short-term credit than equity. (High return, High risk)
2. An Average company uses Long term debt for permanent current assets and short-term
credit for fluctuating current assets.
3. A Defensive Company sacrifices profitability for liquidity by having little short-term credit.

Cost of holding cash: Opportunity cost

Cost of running out of cash: Liquidity and solvency causing losses.

Motives underlying how much a business would wish to hold a cash:

• Transaction Motive: to meet current day to day financial obligations.
• Finance Motive: Major items i.e. Repayment of loans, purchase of non-current assets.
• Precautionary motive: to give a cushion against unplanned expenditure.
• Investment motive: to take advantage of market opportunities.
Finance Intermediation: The process of Standing in the middle like banks take deposits
from customers (surplus cash) and then use that money to lend money to other customers
(Deficit cash).
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Banks:
• Primary banks are those which operate the money transmission service or clearing
system in the economy. Also known as commercial, retail or clearing bank
• Secondary banks are made up of a wide range of merchant banks and other banks. They
don’t take part in clearing system.
Two main roles of Bangladesh Bank:
1. Monetary policy: Monetary policy is the macroeconomic policy laid down by the
central bank. It involves management of money supply and interest rate and is the
demand side economic policy used by the government of a country to achieve
macroeconomic objectives like inflation, consumption, growth and liquidity. The
Bangladesh bank is the banker of the banks, lending money to the banking sector
through its financial market operations at the base rate set by the monetary policy
committee (MPC).
2. Financial Stability: Financial stability is a state in which the financial system, i.e. the
key financial markets and the financial institutional system is resistant
to economic shocks and is fit to smoothly fulfil its basic functions: the intermediation
of financial funds, management of risks and the arrangement of payments. BB does it
by Financial Stability Department (FSD)

The interval between when the amounts are paid into a primary bank and when they can be
drawn upon depends on the Clearing mechanism:
• General clearing
• Electronic funds transfer (EFT): Computer based. i.e. Debit/ Credit Card
• Banks Automated clearing system (BACS): an EFT system that deals with
salaries, standing orders and direct debits. The account of the payer is debited on the
same day as the account of the recipient is credited.
• Society for Worldwide interbank Financial Telecommunication (SWIFT): The
worldwide financial messaging network which exchanges messages between banks
and other financial institutions so that a similar service to CHAPS is possible for
international transfer of money. Clearing House Automated Payments System.
Bank/Customer Contractual relationship:
I. Receivable/Payable relationship (Loan or deposit)
II. Bailor/Bailee relationship (Customers property for storage in the safe)
III. Principal/agent relationship (Customer pays cross cheque. Receiving bank
acts as agent of the principal)
IV. Mortgagor/Mortgagee relationship. (loan security)

Bank/Customer Fiduciary relationship:

I. The bank’s duties to the customer:
• Honor a customer’s cheque
• Must credit cash that are paid into the customer’s account
• Repay the amount on demand
• Comply with the customer’s instructions
• Must provide statement of transactions
• Confidentiality
• Inform if there has been an attempt to forge the customer’s signature on
the cheque
• Use care and skill in its action
• Must provide reasonable notice if it is to close a customer’s account
II. Customer’s duties to the bank
• Draw up cheques carefully
• Tell the bank any known forgeries

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 III. The right of the bank
• To charge reasonable bank charges
• Use the customer’s money
• To be repaid overdrawn balances on demand
• To be indemnified against possible losses when acting on behalf of
customers

Money market: Money market is the trade in short-term debt. It is a constant flow of cash
between governments, corporations, banks and financial institutions, borrowing and lending
for a term as short as overnight and no longer than a year.
Money market financial instruments:
• Treasury bills
• Certificate of Deposit (CD)
• Commercial Paper
• Banker’s Acceptance
• Repurchase Agreements

Capital Market: The capital market encompasses the trade in both stocks and bonds.
These are long term assets bought by financial institutions, professional brokers and
individual investors.
• Debt Instruments (bonds, debentures, leases, bill of exchange and promissory Note)
• Equities (Common Stock, Preference share)
Types of capital market: Primary Market and Secondary market

3 Methods of raising equity:

I. Retained Earnings: Retained earnings (RE) is the amount of net income left over for
the business after it has paid out dividends to its shareholders.
II. Right issues of shares: A rights issue is an offer to the existing shareholders to
purchase additional shares of the company at a discounted price.
III. New issues of share: Placings, Offers for sale or direct offers.

Factors to be considered when making right share issues:

• Issue cost
• Shareholders reaction
• Increase of existing shareholders control
• Unlisted companies

Placing: When new equity shares are issued to

individual investors, corporate entities, or small
groups of investors for capital. This increases the
number of shares in issue and dilutes existing
shareholders.

• Benefit: Lover transaction cost (e.g.

Advertisement, administration) than public
offers
• Drawbacks: by offering a narrow pool of
institutional investors, the spread of
shareholders is more limited, which reduces
the efficiency of the market in the shares.

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Public Offers: Two types.
1. Offer for sale (More
commonly used method)
2. Direct offer (offer for
subscription)

Pricing of new issues: Two

ways in which the pricing
problem can be addressed.

1. Underwriting: The
process whereby, in exchange for a fixed fee (usually 1-2% of the total finance to be
raised), an institution or a group of institutions will undertake to purchase any
securities not subscribed for by the public. It’s like an insurance policy that
guarantees that the required capital will be raised.

2. Offer for sale by tender: The investing public is invited to tender (offer, bid) for
shares at the price it willing to pay. A minimum price, however is set by the issuing
company and tenders must be at or above the minimum.

Preference share: no voting rights, no right to share in excess profits. Fixed rate of
dividend.
Going public refers to a private company's initial public offering (IPO), thus becoming a
publicly-traded (full listing) and owned entity.

Fuad Amin BUSINESS FINANCE (CL) 64

Sources of debt finance:
1. Overdraft: An overdraft occurs when money is withdrawn in excess of what is on the
current account. A short-term loan of various amount up to a limit from the bank,
typically repayable on demand. Interest is charged on a day-to-day basis at a variable
rate.
2. Debt factoring: External short-term source of finance. By debt factoring a business
can raise cash by selling their outstanding sales invoices(receivables) to a third party
(a factoring company) at a discount
3. Term loans: Traditional finance from the banking sector.
4. Loan stock: Debt capital in the form of securities issued be companies, the
governments and local authorities. These are also referred to bond or debentures. It’s
both an investment for the lender and borrowing for the company.
• Coupon rate
• Redemption value
• Redemption date
• Ownership
5. Leasing:
• Finance lease: A lease that transfers substantially all the risk and rewards of
the ownership of an asset from the lessor (the finance company or bank) to the
lessee (the business). Ownership passes to the lessee at the end of the term.
Long-term debt finance (i.e. a purchase of a car by the lessee, financed by a
loan from the lessor)
• Operating lease: An operating lease agreement to finance equipment for less
than it’s useful life. The lease can return equipment to the lessor at the end of
the lease period. This is a Short-term Rental of an asset
6. Other form of debt
• Money markets
• Securitization (Asset-backed borrowing): the conversion of asset,
especially a long-term loan, into marketable securities for the purpose of
raising cash by selling
• Public sector grants and loans

Business Angels: Wealthy individuals investing in start-up, early stage or expanding

businesses in exchange for a share of the company's equity.
Venture Capital: Private equity financing that is provided by venture capital firms (Venture
capitalists) to start-ups, early stage and expanding companies that have high growth
potential in exchange for a share of the company's equity.

Overseas trade raises additional risks:

• Physical risk: Goods being lost or stolen in transit
• Credit risk: The possibility of payment default be the customer
• Trade risk: The risk of the customer refusing to accept the good on delivery, or the
cancellation of the order in transit.
• Liquidity risk: The inability to finance the credit given to customers
• Political risk
• Cultural risk

Bills of exchange: A bill of exchange is a document that is drawn up by the exporter (seller)
and sent to the overseas buyer’s bank, which accepts the obligation to pay the bill by
signing it. Payment is therefore guaranteed by the buyer’s bank, which means that the seller
can then sell or ‘discount’ the bill to the third party in return for cash now. Thus, the
procedure both mitigates the risk of irrecoverable debt and can also provide liquidity.

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Letter of credit: provide a method of payment in international trade which gives the
exporter a risk-free method of obtaining payment. The arrangement must be made between
the exporter, the buyer and the participating banks (issuing bank and the advising bank)
before the export sale takes place.

Export Credit insurance is insurance against the risk of non-payment by foreign customers
for export debts.
Government of Bangladesh has introduced Export Credit Guarantee Schemes (ECGS) to
deal with credit risks associated with the export trade. Sadharan Bima Corporation has
been entrusted with the responsibility of the scheme by the government of Bangladesh.

Financial Capability: An individual being able to manage money, keeping track of their
finances, plan ahead, choose financial products and stay informed about financial matters.
Key Stages in personal financial management:
• Establish Individual Objectives
• Establish Individual attitude to risk
• Establish Individual Circumstances
▪ Stage in life cycle
▪ Age and commitments
▪ Risk profile
▪ Degree of control/Budgeting
Fuad Amin BUSINESS FINANCE (CL) 66
 • Taking appropriate actions
▪ Borrowing
▪ Investment and saving
▪ Protection
▪ Retirement planning
▪ Estate planning
Borrowing
Secured borrowing (Mortgage): The borrower (the mortgagor) mortgages the property,
that is, the borrower creates a legal charge over the property to the lender 9the mortgagee)
as security for the loan.
Unsecured borrowing: Risk on lending is greater so cost of borrowing is higher.
▪ Current account overdraft
▪ Credit card borrowing
▪ Personal loans
▪ Finance lease
Investment and saving
1. Short-term needs: for car or holidays
2. Long-term needs: Investing for retirement or providing capital for children as they
become adult.
Key risk for individual investors:
• Capital risk: Losing part or all the capital invested.
• Shortfall risk: Short in obtained profit compared to expected amount.
• Interest risk: Interest-bearing investments. Risk of interest receiving will be lower
than it might have been.
• Inflation risk: Rising prices will reduce the purchasing power of that is invested.
Protection
Risk management:
• Avoidance: not doing the risky activity
• Reduction: Reducing the possibility and impact of the risk.
• Sharing: Taking insurance.
• Acceptance: of the remaining risk.
Retirement planning
Issues to be considered:
• Planned age of retirement
• Income expectations for retirement
• Whether there are expected dependency on spouse, children or grandchildren or not
• What assets will be available at retirement.
• State pensions
Estate planning
Someone’s estate is the wealth they leave when they die. It is concerned with
• How that wealth is passed on the beneficiaries. Making Will
• How fat the estate’s liability for Inheritance tax (due on death) can be minimized.

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