BizFinance MockT.pptx
- 1. BUSSINESS FINANCE 1.0 - INTRODUCTION
- 2. Learning Outcome • Acquire an understanding of finance and the role that finance plays within an organization. • Acquire an understanding of the different types of markets, institutions and individuals that are involved in the financial environment.
- 3. What is Business Finance? • Determines what business will buy, with what money and when it will pay its suppliers. • Financial manager —> Coordinates accounting and treasury activities.
- 4. BUSINESS FINANCE • The study of financing and investment decisions made from theory to practice. • Making of decisions about which investment the business should make. • Management of money an other valuable assets. You need to be familiar with accounting method, investing strategies and debt management.
- 5. Basic Areas of Finance • Corporate Finance —> Theories and ideas of finance • Investments —> Financial assets (shares and bonds) • Financial market/Financial Institutions —> Firms dealing in financial matters • International Finance —> Covers area above in global context.
- 6. Corporate Finance • Corporate finance is the area of finance that incorporates the actions of the company when it comes to making decisions about financing. • In other words, every time a business owner buys something, they have to figure out how to pay for it. For instance, when a company buys inventory, the company has to figure out a way to pay for that inventory. • Other areas of corporate finance include budgeting, managing working capital, financial analysis, financial statement development, and more.
- 7. Investments • Another area of finance is investment. Within a business, particularly a large business, the firm may invest in assets ranging from short-term securities to long-term securities like stocks and bonds. • The business invests for the same reason individuals invest - to earn a return. • Companies invest in both financial assets such as stocks of other firms and in physical assets such as buying a new building or new equipment.
- 8. Financial Markets and Institutions • Financial markets and financial institutions comprise the third area of business finance. • Financial markets include everything from the stock and bond markets, the primary and second markets, and the money and capital markets. • Financial markets, such as the stock market, help facilitate the transfer of funds between savers of funds and users of funds. Savers are usually households and users are generally businesses and the government. The stock market, for instance, provides a seamless exchange of ownership of a company between one person or business and another. • The financial institutions work hard in hand with the financial markets. Financial institutions generally act as intermediaries that help make transfers of funds between businesses and savers (working as a broker or agent for the trade). For example, an individual might deposit money into a savings account. Then, the financial institution would take that money and loan it out to a business.
- 9. International finance • International finance activities help organizations engage in cross-border transactions with foreign business partners, such as customers, suppliers and lenders. Government agencies and nonprofit institutions also use international finance tools to meet operating needs.
- 10. ROLE OF BUSINESS FINANCE FINANCING: The act of bringing money into the organization/firm. • Bus. Fin. Will helps in financing and investment decision. Methods of financing are: taking on debt credit arrangements investments on real assets and financial assets. • The success and failure of business rely on this discipline.
- 11. Goal of Financial Management • Maximise shareholder wealth (max share price) • Profit maximisation not a good goal due lack of time frame. • Sales maximisation and other goals also not appropriate.
- 12. It’s all about the money • Business needs cash to survive. • Distinguish between accounting income and cash flow.
- 13. Factors in any Financial Decision • Dollar amount —> the actual cash flow received or paid out • Time —> When cash flow received/paid out (time value of money TVM) • Risk —> Amount of uncertainty (Investors —> higher returns for higher risk)
- 14. Risk and Return Tradeoff
- 15. Financial Manager’s Responsibility • Investment decision —> what assets to buy? • (Capital Budgeting decision) • Financing decision —> where money comes from? (Capital Structure decision) • Working Capital decision —> Inventory, Receivables, Accounts Payable. Less potential for value creation.
- 16. BUSINESS FINANCE AND ACCOUNTING • ACCOUNTANT is concerned with financial record keeping, production or periodic report, statement and analysis. • FINANCIAL MANAGER only makes decision involving finance and not to provide financial information. In a small business, an accountant and financial manager can be one person. Business finance and accounting are not the same thing. But, in a small business, an accountant and financial manager can be one person.
- 17. Forms of Business • Sole trader/proprietorship limited life + equity limited to sole trader’s wealth (undercapitalised) • Partnership similar to sole trader but with 2-3 more people sharing in gains and losses. • Company —Separate legal entity with unlimited life, more agreements, limited liability for shareholders and superior form when raising capital.
- 19. Investment Decision - Most important —> wrong ones costly to reverse. - How to determine value of long term asset - Evaluate size, time, risk of cash flows. - Select assets to create most shareholder wealth. Financing Decision - Investments financed —> having best mix between debt (loan funds —> contractual claim) and equity (owner’s funds —> residual claim) - Tradeoff between return and risk —> using debt called gearing or leverage. Working Capital Decision - Managing short-term assets and liabilities - Relates to investment decisions (forms part of the decision) This includes: - Inventory Management —> optimal level of inventory? - Receivables Management —> credit sales be allowed? - Accounts Payable Management —> time waited before suppliers get paid? - Cash —> amount of cash company should hold?
- 20. General type of market Primary Market • Security or instrument issued to investor for first time • Funds raised by firm and flow to it • Public offering/private placement • Can be debt or equity funding • Fund raising between investors and firm Secondary Market • Financial securities that are already issued are bought and sold • Way of transferring ownership • Securities exchange example of secondary market • Investor to investor trading • No additional funds are raised by firm
- 21. Referrence • Eddie McLaney (2009). Business Finance: Theory and Practice. Prentice Hall; 8 edition. (pp 3-18)
- 22. “BEWARE OF LITTLE EXPENSES, A SMALL LEAK WILL SINK A GREAT SHIP”