Business Finance

Business Finance.
Definition:
Guthmann and Douglas-
“Business finance can be broadly defined as the
activity concerned with planning, raising,
controlling and administering the funds used in
the business”.
In short it is a process of raising, providing and
managing of all the money to be used in
connection with business activities.
Finance Function (Modern Approach)

Financing
Decision
RISK

MARKET VALUE OF
SHARE HOLDERS
Investment
WEALTH
decision

RETURN

Dividend
Decision
 Production

Materials

H.R.M

Finance Marketing
Function

M.I.S
R&D

Finance is the heart function of an organisation.

 ORGANISATION OF FINANCE FUNCTION
SHAREHOLDERS

B.O.D

M.D./CHAIRMAN

PRODUCTION
MARKETING FINANCE
MANAGER HR R&D
MANAGER MANAGER
MANAGER SYSTEMS/
M.I.S

TREASURER/
CONTROLLER
COMPANY SECRETARY

Provision of Finance, Banking & Financial Accounting, Management and

Custody, Investor relationship, Cost A/c, Internal Audit, Tax
Short term Finance, Cash Administration, Budgeting and Control,
Management, Credit Economic Appraisal.
administration, Investments,
 FINANCE AND OTHER RELATED DISCIPLINES.

PRIMARY
DISCIPLINE:
FINANCIAL
1. Accounting.
DECISION AREAS:
2. Micro
1. Investment
Economics.
analysis.
3. Macro
2. Working Capital
Economics.
Management.
3. Sources & Cost
of funds.
4. Capital
Structure. SECONDARY
5. Dividend DISCIPLINE:
Analysis of risk 1. Marketing
and return. 2. Production
3. Quantitative
Methods.
Features of Business Finance:

1. Deals with financial aspects-

• Finance touches all aspects of business.
• It deals with planning, raising, administering
and controlling the funds
• It is a science as well as an art.
 Features continued…

2. Concerned with estimation, collection and

utilization of funds.

3. Needs proper planning and control.

 Features continued…

4. Objective oriented activity-

• It is basic for running the business activity.
• It helps in providing adequate profitability in
the business.
• It ensures fair return to owners/shareholders.
• Helps in creating and developing reserves for
meeting contingencies and growth.
 Features continued…

5. It is closely related to others aspects of

business – (Production, Distribution etc.)

6. Dynamic in nature –
• New challenges and problems
• A financial manager needs maturity, skill,
experience and innovation.
 Features continued…

7. Business needs different types of finance-

Fixed and working capital
 Business finance v/s corporate finance
Meaning
It deals with financial requirements of It deals with financial requirements
business enterprise engaged in production, of a corporation or joint stock
marketing and so on. company .
Nature of concept
It is a narrow concept as it deals
It is a broad concept as it deals with the with the financial problems of joint
financial problems of all types of business stock companies only.
enterprises
Nature of term Narrow term as its coverage is
Wider term due to wide coverage narrow
( covers entire business activity such as
industry, commerce, trade and so on.) The term corporation finance used
Use of the term in olden days & is no more used
Business finance is a term now used extensively.
extensively and is popular in the present
business world
 Role of Business Finance
• Organisation is a combination of factors of production.
• A business organisation is established in order to conduct some
type of business activity.
• An organisation needs financial support throughout its life span.
• For its survival, orderly functioning and growth.
• Finance plays a significant role in company’s financial activities
as well as other activities such as production and management.
• Expansion, modernisation or diversification of business
organisation is possible only when adequate fubds are available/
collected.
• Finance enables management in getting over their business
problems and achieving their wealth maximisation goal.
• This suggest the importance/ significance of finance in
company’s activities and operations
 Principles of Business finance
Full Utilisation of Funds
 Wastage or misdirection of funds should be
avoided
 Funds collected should used economically as it
ensures return
 This means funds should be gainfully employed
for better returns in terms of profit.
 Misusing of funds for undesirable purpose
should be avoided.
Maximisation of return on investment
 Funds provide maximum return only when they
are used in a rational manner.
 There should be value addition to the funds
invested in the business.
 This will be in the form of return or profit
available.
Survival and prosperity of business unit
 Financial management should bring stability to the
business unit.
 It should lead the business unit towards progress &
prosperity in terms of sales, profit or market
reputation.
 There should be no danger to its survival.
 The funds of the company should be invested with
proper care & caution so as to minimise the risk &
ensure high return over years.
Fair balance between liquidity and profitability
 There should be adequate cash flow to meet the
regular expenses of the company (purchase of raw
material, payment of wages , other regular expenses
etc.
 Profitability increases due to healthy cash flow position.
 A company should not try to raise profitability at the
cost of liquidity.
 Excess liquidity is undesirable as it may bring down the
rate of profitability.
 A fair balance between liquidity and profitability is
desirable as it offers many benefits
Good public image
 Business enterprise should try to create favourable
public image through its objectives & operations.
 It should offer
• various incentives to its employees
• attractive dividend to its shareholders
• regular supply of quality goods at fair prices to its
consumers
• Financial support to local community & society at large
by providing funds for social purposes such as pollution
control & provision of educational & sports facilities to
local people.
 This is possible if funds are utilised properly &fully.
 Financial Planning Meaning

 It is an integral part of overall business planning.

 The outcomes are in the form of financial plan or capital plan.

 It leads to overall preparation of financial plan which is an estimate

of total capital requirements of the company.
 A financial/ Capital plan gives a blueprint of the financial structure of a
company.
 It is a statement which tells how much capital will be required, how it
will be collected and utilised.

 The financial plan lays down sound foundation for the capital structure
of a company.
 Definition

According to Gerstenberg, Financial planning involves three

major activities. These are:
a. Determining the amount of capital needed by a concern to
carry out its operations smoothly, i.e. capitalisation.

b. Determining the pattern of securities to be issued by the

company in order to ensure the availability of required funds.
i.e. capital structure.

c. Determining the suitable policies for the proper utilisation

and administration of capital i.e. assets management
policies.
 Objectives of Financial Planning
1. To estimate precisely and accurately the total financial needs
of a business unit.
2. To ensure adequate supply of capital to the enterprise so that
smooth & orderly working is ensured.
3. To minimize the cost of raising funds by procuring funds
under the most favourable circumstances
4. To provide flexibility to the financial structure of the
enterprise for suitable adjustments as per the need. i.e as per
the changes in the business environment.
 Steps in Financial Planning

1. Determining long term and short term financial objectives-

2. Formulation of financial policies-

3. Developing Financial Procedures

4. Reviewing Financial plan

 Steps in financial planning contd.

1. Determining long-term and short-term financial

objectives-
 It begins with finalization of financial objectives for the
corporation/enterprise.
 Objectives act as a guide to financial managers.
 They provide clear direction and avoids confusion.
 Long term financial objectives is maximisation of wealth
 It helps the firm to ensure liquidity, replacement, capacity
improvement and other decisions.
 Short term financial objective of a firm is to ensure its
survival in the business world.
 The firm has to ensure adequate liquidity in assets.
 Steps in financial planning contd.

2. Formulation of financial policies-

 Financial policies serve as guide and are associated with
requisition, allocation and control of funds.
 The following categories
a. Policies pertaining to quantum of funds to accomplish goals.
b. Policies pertaining to patter of capitalization.
c. Policies relating to controlling powers of suppliers of funds.
d. Policies w.r.t choice of sources of funds.
e. Policies pertaining to allocation of funds between cash and cash
equivalents.
f. Policies pertaining to allocation of funds as between forms of
inventories.
g. Policies in regard to credit and credit collection activities (Bills
receivables).
h. Policies relating to allocation of income.
 Steps in financial
planning contd.

3. Developing financial procedures-

 The firm must lay down procedures for attainment of
policies.
 Procedures guide employees and enable them to understand
what they are suppose to expect.
 Procedures simplify administrative process, ensures co-
ordination of actives and improves the quality of performance
of employees.
 Procedures decided should be simple, easy to understand &
quick to follow.
 Steps in financial
planning contd.

4. Reviewing financial plan-

 The management must review and revise the firm’s short
term objectives, policies and procedures periodically in the
light of changed economic & business
situations/environment.
 There should exist flexibility which is necessary for the firm.
 Financial planning without due attention to flexibility may
prove to be harmful to the firm.
 Requirements/Essentials of Financial planning.

1. Gives a foresight- prepared with a vision & foresight

 Helps in visualizing the current as well as the future
financial needs.
 It helps in making the plans practical and result oriented.

Investment

Loans
 Requirements/Essentials of Financial planning.

2. Provides for contingencies-

 Helps to visualize contingencies and make suitable provisions
to meet such situations.
 Contingencies should be anticipated and remedial measures
should be introduced in financial planning.

3. Helps in providing for liquidity-

 Adequate provisions should be made for liquidity as shortage
of funds could lead to embarrassments.
 Liquidity is necessary for maintaining credit standing of a
firm
 Requirements/Essentials of Financial planning.

4. Safety to investors-
 It ensures that investors get a fair return on investment.
5. It helps in avoiding over or under capitalization situations.
6. Economy – The cost of raising finance should be kept low and
expenses on collection of funds should be minimum.
7. Objectivity- The financial plan should be realistic, based on
exact financial needs and should meet the objectives of the
enterprise
8. Simplicity- it should be free from ambiguities, complexities .A
simple capital structure is easy to understand & administer
9. flexibility_- capable of undergoing modifications as
circumstances arise. It should be capable of being adjusted as
and when needed.
 Requirements/Essentials of Financial planning.

10.Appealing to investors
 It should be appealing and attractive to the investors(interest rate,
the retention ratio, dividend payout ratio.)
 There should be balanced combination of different securities
11. Proper timing of financing
 Proper timing for collection of capital should be considered.
 Sale of equity shares (even at a premium) is possible during the
boom period when stock exchanges are active.
 Borrowed capital will be necessary during depression.
12. Intensive use of funds collected( Maximum utilization)
 Should utilize available resources in the best possible manner.
 In order to raise profitability by avoidng scarcity of capital as well
as excess capital which cannot be put to proper use.
 Significance/ Importance of Financial Planning:

1. It acts as a road map in financial matters-

 Matters such as
o Pay roll execution – Accounts payable.
o Estimation of upcoming earnings of the company.
o Debts and rising cost of finance.
o Diversification, modification and expansion of
capacity/product lines.
o Marketing.
 Significance/ Importance of Financial Planning:

2. Income: 
 Its is possible to manage income more effectively through
planning.

3. Cash Flow: 
 Considers cash inflows and outflows
 Helps in monitoring expenses, Tax
planning, budgeting etc.
 Significance/ Importance of Financial Planning:

4. It emphasizes on both the sides of the balance sheet- asset

and liability side.

5. Financial Understanding: 
 Better financial understanding of financial goals.
• Sound financial planning ensures orderly
functioning , stability & prosperity to an
business unit.
• Financial planning is important as it is the
starting point of promoting a company.
• Defective financial planning may create
financial problems before a business.
• Such as overcapitalisation.
 Types of financial plan
1. Short term financial Plan
 Prepared for a maximum period of one year.
 It is suitable for assessment of working capital needs
of the enterprise.
 Preparation of different types of budgets such as
sales budget or cash budgets are e.g. of short term
plan.
 Useful for organising activities of different
departments in an orderly manner.
 This plan are prepared at the departmental level by
Departmental manager
 2. Medium term plan
• Normally prepared for a period of five years.
• Such plans are prepared for replacement &
maintenance of assets, Research &
Development of activities of an enterprise &
financing of increased working capital needs of
the enterprise.
• Preparation of medium term plan is difficult as
compared to the preparation of short term plan.
• Such plan is prepared by production manager/
Research Manager & so on.
 3. Long term Financial Plan
• Is prepared for a period of five years or more
than five years period.
• Such long term plan incorporates policies &
programmes pertaining to capitalisation,
financing growth & expansion programmes of
the enterprise.
• Long term financial plan is normally designed by
the promoters of the company.
• Knowledge, vision & foresight are required for
the preparation of long term financial plan.