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ATHE - Level: 5

Subject: Finance for Managers

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Table of Contents

No Contents Page No
1 Introduction 3
2 1.1 The purpose and requirements for keeping financial records 4

3 1.2 Analysis of the techniques for recording financial information 5

4 1.3 Analysis of the legal and organizational requirements of 6
financial reporting
5 1.4 Evaluation of the usefulness of financial statements to stakeholders 7

6 2.1 An analysis of the components of working capital 8

7 2.2 An explanation of how business organisations can effectively manage 9
working capital

8 3.1 The difference between management and financial accounting 11

9 3.2 Explanations of the budgetary control process 12

10 3.3 Calculation and interpretation of variances from budget 13

11 3.4 Evaluation of the use of different costing methods used for pricing 16
purposes
12 4.1 Demonstration of the main methods of project appraisal 17

13 4.2 Evaluation of the methods of project appraisal 19

14 4.3 Explanation of how finance might be obtained for a business project 22

15 Conclusion 23
16 References and bibliography 24
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Introduction

Financial management may refer to:

 Managerial finance, a branch of finance that concerns itself with the managerial
significance of finance techniques.
 Corporate finance, a type of finance dealing with monetary decisions that business
enterprises make and the tools and analysis used to make these decisions.
 Financial management for IT services, financial management of IT assets and resources.

1.1 The purpose and requirements for keeping financial records

Controlling and planning the activities of a business such as SPA Ltd is a critical concept of a
business succeeding internally and externally. The financial situation of any business such as
SPA Ltd must be monitored and handled effectively, taking considerations of information being
accurate and well planned for presentation. Without, SPA Ltd having accurate financial
information, the business may not perform effectively internally and externally and may incur
problems suffering from financial position and legal status. (Financial Record Purpose, n.d.)

There are many purposes of which accurate financial records are kept. One of the main particular
records is used to present information to inform the stakeholders of SPA Ltd, which it is legally
entitled to present accurate financial position at a certain time. The whole purpose of presenting
the current financial status of SPA Ltd to its stakeholders is to inform them of how well the
company has progressed through the year.

The purpose of the keeping Financial Records module is to

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 provide a management framework for the control of financial records as a vital resource
for public sector financial management, economic policy development and planning

 assist records managers and non-records staff, including accounting and audit personnel,
to manage financial records in support of public accountability and good governance

 inform policy makers and administrators associated with the financial management
process of the value of, and necessity for, the effective management of financial records

1.2 Analysis of the techniques for recording financial information

A small business has more freedom in choosing the method of handling its accounting
transactions than a large corporation. Many options exist for the small businessman to decide
how he keeps track of income, expenses or inventories. Though actual accounting steps may be
similar to that of a large corporation, the small business maintains more flexibility in its
accounting methods when reporting and recording financial data.

Cash or Accrual: Businesses have the option of using either the cash or accrual method of
accounting when recording transactions. Large businesses must use the accrual-based accounting
system according to the IRS Publication 538, but small businesses may choose which method to
follow.

Periodic or Perpetual: Small businesses have the option of using a periodic inventory system or
a perpetual one. A periodic inventory system records all finished goods or products when placed
in inventory and the amounts remain in the inventory account until a physical inventory count is
taken. Typically small businesses, using this system, take an inventory count once or twice a
year. When this occurs, the inventory account is reduced to reflect the actual amount of
inventory on hand.
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Inventory Methods: Small businesses choose how they account for the inventory they sell by
choosing an inventory method. The options are first in, first out (FIFO) or last in, first out (LIFO)
and weighted average. FIFO is a method that assumes the first inventory stored is the first
inventory sold. LIFO is a method assuming the last inventory stored is the first inventory sold.
Weighted average takes an average of all inventory in stock and uses that number as a basis for
the sale of inventory (Analysis, n.d.)

1.3 Analysis of the legal and organizational requirements of financial

reporting

Different countries have developed their own accounting principles over time, making
international comparisons of companies difficult. To ensure uniformity and comparability
between financial statements prepared by different companies, a set of guidelines and rules are
used. Commonly referred to as Generally Accepted Accounting Principles (GAAP), these set of
guidelines provide the basis in the preparation of financial statements, although many companies
voluntarily disclose information beyond the scope of such requirements.[4]

Recently there has been a push towards standardizing accounting rules made by the International
Accounting Standards Board ("IASB"). IASB develops International Financial Reporting
Standards that have been adopted by Australia, Canada and the European Union (for publicly
quoted companies only), are under consideration in South Africa and other countries. The United
States Financial Accounting Standards Board has made a commitment to converge the U.S.
GAAP and IFRS over time(Anthony E. Boardman, David H. Greenberg, Aidan R. Vining, and
David L. Weimer, (1996)

For a business enterprise, all the relevant financial information, presented in a structured manner
and in a form easy to understand, are called the financial statements. They typically include four
basic financial statements, accompanied by a management discussion and analysis:[1]

1. Statement of Financial Position: also referred to as a balance sheet, reports on a

company's assets, liabilities, and ownership equity at a given point in time.
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2. Statement of Comprehensive Income: also referred to as Profit and Loss statement (or a
"P&L"), reports on a company's income, expenses, and profits over a period of time. A
Profit & Loss statement provides information on the operation of the enterprise. These
include sale and the various expenses incurred during the processing state.
3. Statement of Changes in Equity: explains the changes of the company's equity
throughout the reporting period
4. Statement of cash flows: reports on a company's cash flow activities, particularly its
operating, investing and financing activities. (FInancial Analysis Report, n.d.)

1.4 Evaluation of the usefulness of financial statements to stakeholders

A stakeholder will require financial information to get an understanding of the performance of

the organization. This record shows the assets owned, amounts owed, amounts invested in the
organization and profitability to better manage the operations.

The importance of financial statements are listed below. Note however that this list is not
exhaustive.

AIDS INVESTMENT ANALYSIS

One of the importances of financial statements is to aid investment analysis process. Investment
analysis cannot be successfully done without the help of information contained in the financial
statements. The information contained in the financial statements are so comprehensive that is
serves the interest and intention of almost all interested party (Arnold, G. 2007).

PROVIDES STEWARDSHIP INFORMATION

The divorce of ownership from management made it imperative for there to be a communication
line between owners and managers of business. Financial statements perfectly create this
medium of communication between the business owners and managers that would have not been
there if not for the accounting information provides.
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AIDS PLANNING

It is obvious that the government rely heavily on information contained in the financial
statements for planning. For example, the government base part of its anticipated income on the
estimated tax that would be paid by companies. And the companies would be assessed based on
the information found in financial statements(Williams, J.R. et al,2012),

PROMOTES ECONOMIC GROWTH AND DEVELOPMENT

Since financial statements provides information used in analyzing investments and making
economic decisions, it then means that one of the importance of financial statements is the
promotion of economic activities that are encouraged by investments of all kinds. (UKessasys ,
2016)

2.1 Analysis of the components of working capital

Working capital is the money needed to fund the normal, day to day operations of your business.
It ensures you have enough cash to pay your debts and expenses as they fall due, particularly
during your start-up period as very few new businesses are profitable as soon as they open their
doors. It takes time to reach your breakeven point and start making a profit.

The main components of working capital are:

 Cash. Cash is one of the most liquid and important components of working capital.
Holding cash involves cost because the worth of cash held, after a year will be less than the
value of cash as on today. Excess of cash balance should not be kept in business because
cash is a non-earning asset.-Hence, a proper and judicious cash management is of utmost
importance in business.
 Marketable Securities. These securities also don't give much yield to the business because
of two reasons, (i) Marketable securities act as a substitute for cash, (ii) These are used are
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temporary investments. These are held not for speculative balances, but only as a guard
against possible shortage of bank credit.
 Accounts Receivable. Too many debtors always lock up the firm's resources especially
during inflationary tendencies. This is a two step account. When goods are sold, inventories
are reduced and accounts receivables are created. When payment is made, debtors reduce
and cash level increases. Thus, quantum of debtors depends on two things, (i) volume of
Credit sales (ii) average length of time between sales and collections. The entrepreneur
should determine the optimal credit standards. An optimal credit policy should be
established and the firm's operations should be continuously monitored to achieve higher
sales and minimum bad debt losses.
 Inventory. Inventories represent a substantial amount of firm's assets. Inventories must be
properly managed so that this investment doesn't become too large, as it would result in
blocked capital which could be put to productive use elsewhere. On the other hand, having
too little or small inventory could result in loss of sales or loss of customer goodwill. An
optimum level of inventory, therefore, should be maintained. (edupristine, 2016)

2.2 An explanation of how business organisations can effectively manage

working capital

The impact of ineffective working capital management can be complex and just as debilitating
for a business. Companies with effective cash flow management practices not only generate
more cash from their businesses, they have more flexibility to take advantage of opportunities as
they arise and are less dependent on external financing.

Most business organisations can improve their working capital position by at least 20 percent
over time if they pay attention to the following list of cash management policies.

1. Get paid - quickly

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Many businesses invoice at the end of the month and offer a 30 day payment period. If the sale
happens early in the month that nearly doubles your debtor days. Ensure your business invoices
customers when goods or services are sold, on a daily basis if possible. Then follow up each
invoice – ensure it was received, check the customer agrees with the invoice and then actively
chase payment – before the money is due. Debtors often use disputes or excuses to delay
payment, so if you only follow up when payment is due, you won’t receive payment on time.

The cost of chasing payments quickly mounts up and smaller companies simply can’t afford to
have accounting staff focused on this at the expense of other activity. You have two options, the
first of which is factoring – selling your receivables to a third party for them to chase. This
passes on the activity to another party while guaranteeing you a proportion of monies owed, but
you lose control of your debt recovery and incur the costs of the factoring agency.

Arguably, a better alternative is to involve more people within the business itself. Salespeople
can use their relationship with the customer to follow up on the initial invoice, ensure there are
no disputes, and help to chase payment when it falls due. Alternatively, an administrative
assistant with good ‘completer/finisher’ skills can undertake the series of calls and emails
required to chase payment and ensure that all communications are logged carefully.

2. Keep meticulous records

Salespeople, accountants and administrators need to record every communication – whether by

letter, phone or email – including dates, times, what was said, and what was agreed. If your
business can’t rebut the excuses your debtor makes to avoid paying, it puts you at an immediate
disadvantage. You should also employ the same tactics with your creditors, to ensure that you
enjoy your agreed credit terms. Technology has made this process much easier, as emails are
normally saved. It’s a good idea to follow up every phone call with an email to recap.

3. Discount with care

Ironically, a successful sales team could have a negative effect on working capital if customers
are offered discounts or extended credit terms. Ensure your salespeople know the limits – and
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impacts – of what they can offer and don’t over-negotiate in order to close a sale. In addition,
discounting tends to have hidden costs that aren’t immediately apparent. Some accounting
software packages will assume discounts are ongoing and consequently regular customers may
pay a substantial part of their invoice at the right time, but leave some of the bill unpaid. Your
business will then have to bear the cost of chasing that smaller amount.

4. Manage inventory

Controlling stock effectively has a significant positive impact. Focus on overall stock levels to
identify lines that aren’t selling rather than just ensuring popular stock lines are replenished, then
lead the sales and marketing team in rationalising the number of lines you offer and focusing on
the most profitable ones. Sourcing is also important. If possible, deal in consignment stock which
can be held on your business premises but doesn’t need to be paid for until you sell it on. This
lowers your costs while maximising revenues, as will properly planning and managing stock
levels to accommodate peaks and troughs in demand.

5. Secure good credit terms

Seek payment terms that at least match the terms you extend to your customers. Streamline
buying relationships, perhaps by entering into a purchasing co-operative or by ensuring that
subsidiaries leverage the organisation’s buying power by negotiating better terms centrally. It’s
also sensible to consider how you deal with customers who are also suppliers – “netting off”
your payment (i.e. paying them for what you owe, minus what they owe you) is much more time
and cost effective for both parties. (investopedia working capital management , 2016)

3.1 The difference between management and financial accounting

The differences between management accounting and financial accounting include:

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1. Management accounting provides information to people within an organization while

financial accounting is mainly for those outside it, such as shareholders
2. Financial accounting is required by law while management accounting is not. Specific
standards and formats may be required for statutory accounts such as International
Financial Reporting Standards.
3. Financial accounting covers the entire organization while management accounting may
be concerned with particular products or cost centres.

Managerial accounting is used primarily by those within a company or organization. Reports can
be generated for any period of time such as daily, weekly or monthly. Reports are considered to
be "future looking" and have forecasting value to those within the company(Brent, Robert J.).

Financial accounting is used primarily by those outside of a company or organization. Financial

reports are usually created for a set period of time, such as a fiscal year or period. Financial
reports are historically factual and have predictive value to those who wish to make financial
decisions or investments in a company. Management Accounting is the branch of Accounting
that deals primarily with confidential financial reports for the exclusive use of top management
within an organization.

These reports are prepared utilizing scientific and statistical methods to arrive at certain
monetary values which are then used for decision making. Such reports may include:

 Sales Forecasting reports

 Budget analysis and comparative analysis
 Feasibility studies
 Merger and consolidation reports

Financial Accounting, on the other hand, concentrates on the production of financial reports,
including the basic reporting requirements of profitability, liquidity, solvency and stability.
Reports of this nature can be accessed by internal and external users such as the shareholders, the
banks and the creditors(Layard, Richard and Glaister, Stephen (eds) (Accounting tools, 2008)
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3.2 Explanations of the budgetary control process

The procedure to be followed in the preparation and control of budget may differ from business
to
business. But, a general pattern of outline of budget preparation and control may go a long way
to achieve the end results. The steps are as follows:

Formulation of policies: The business policies are the foundation stone of budget construction.
Function policies should be formulated in advance. Longrange policies with short term
projections should be made for the functional areas such as sales, production, inventory, cash
management, capital expenditure.

Preparation of forecasts: Based on the formulated policies, forecast should be made in respect
of each function. Activity based concepts should be introduced at the micro level for each
function Forecasts should not be considered as a mere estimates. Scientific methods should be
adopted for forecasting. Analysis of various factors based on past, and present, future forecast
should be made.

Preparation of budgets: Forecasts are converted into written codified document. Such written
documents can be used for coordination purposes. Function budgets will act as guidelines for
implementation.

Forecast combinations: While developing the budgets, through a Master Budget various
permutations and combination processes are considered and developed. Based on this,
establishment of the most preferred one which will yield optimum benefits should be considered.
All the factor components should be identified which are likely to cause disturbances while
implementing the budgets(Kohli, K. N (1993).
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3.3 Calculation and interpretation of variances from budget

Direct material variances

The direct material total variance is the difference between what the output actually cost and
what it should have cost, in terms of material.

From the example above the material total variance is given by:

Particulars £ total

1175 kg that have cost per 20 (1175×20) 23500

But did cost 23260

Direct materials price varience 140

a. Direct labour rate variance

This is the difference between what the actual number of hours worked should have cost and
what it did cost.

1075hrs should have cost (1075×22) 23600

But did cost 24420

Direct labour rate variance 770(A)

b. Fixed production overhead variances

The total fixed production variance is an attempt to explain the under- or over-absorbed fixed
production overhead.
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Budgeted fixed
production
Remember that overhead absorption rate = overhead
Budgeted level
of activity

c. Selling price variance

The selling price variance is a measure of the effect on expected profit of a

different selling price to standard selling price. It is calculated as the difference
between what the sales revenue should have been for the actual quantity sold,
and what it was.

The most common presentation of the reconciliation between budgeted and

actual profit is as follows.

£ £
Budgeted profit before sales and admin
costs X
Sales variances - price X
- volume X

X
Actual sales minus standard cost of
sales X

Cost variances £ £
(F) (A)
Material price X X
Material usage etc __ X
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X X
Sales and administration costs X
Actual
profit
X

Variances in a standard marginal costing system

 No fixed overhead volume variance

 Sales volume variances are valued at standard
contribution margin (not standard profit margin)

3.4 Evaluation of the use of different costing methods used for pricing
purposes

The appropriateness of cost-based pricing methods in interconnection to improve and sustain

efficiency and competition is well justified. However, many important issues arise in the way
costs are used to price interconnection. For example, how are costs measured and to what extent
are common costs (or overhead) allocated?

Primary costing models include fully-distributed cost and incremental cost methods. Jamison
(2006, 2008) provides a thorough discussion and analysis of these and other costing methods.

A key difference between cost models is how prices are developed using cost data. A top-
down approach1 takes the existing cost structure of a group of services, and allocates the costs
incurred in producing each product (using accounting records). This usually leaves a large
amount of common costs to be allocated to each product, using various cost-causation methods
(what product causes what cost). A bottom-up approach2 does not use actual accounting data,
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but rather a model to estimate the costs of producing each product using the most efficient
means of doing so with current and estimated future technology.

Fully-distributed cost: The fully-distributed cost (FDC) method is a top-down costing

approach that was the dominant form of cost measurement over the past several decades. It is
still used in many countries today, primarily due to its simplicity in that costs are apportioned
to the services which incur the cost. The main advantage to using FDC is that the method uses
accounting methods that tend to be more easily verifiable for audit purposes. Secondly, at least
for incumbents, FDC often embeds a contribution to common costs.

Incremental cost: Incremental cost methods are a type of bottom-up approach that arguably can
improve and facilitate entry and competition. Incremental costing is a form of marginal cost
pricing, with the distinction that incremental costs measure the additional cost of providing an
increment (instead of just one additional unit), which can be a service or a network
element(Anthony E. Boardman, David H. Greenberg, Aidan R. Vining, and David L. Weimer,
(1996)

Variations of LRIC: Various forms of LRIC have been adopted in different countries, such as
TELRIC, TSLRIC, and LRAIC. But as countries undergo regulatory reform, incremental costing
remains a common goal to be achieved once accurate cost studies become available. The
following summarizes the variations of LRIC in terms of how they address common costs.

4.1 Demonstration of the main methods of project appraisal

1. Calculate the depreciation expense per year: £(10,000-3,000) / 12= £1,400
2. Calculate the average annual profit: £3,600– (1,400) = £2200.
3. Use the formula: ARR = £2,200/ £10,000 = 22%

Payback Method

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Cost -10000
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Cash Inflows 2000 3000 3000 5000 5000

Residual Income 3000
- - - -
Depreciation -1400.00 1400.00 1400.00 1400.00 1400.00
Net
Profit 600 1600 1600 3600 6600
4.727273

4.472

4 Years and 4 months and 22 days.

When costs and benefits have been identified, priced, and valued, the analyst is ready to
determine which among various projects one is to accept and which to reject. There is no one
best technique for estimating project worth (although some are better than others, and some
are especially deficient). The techniques of project appraisal can be discussed under two
heads viz (i) Undiscounted and (ii) Discounted. Undiscounted techniques include (a) Pay back
period, (b) Value-added, (c) Capital-Output Ratio, (d) Proceeds per unit of outlay, and (e)
Average annual proceeds per unit of outlay. These techniques are discussed in the following
paragraphs (Arnold, G. (2007).

(a) Pay Back Period

The pay back period refers to the length of time required to recover the capital cost of the
project. In other words, it is the length of time from the beginning of the project until the
net value of the incremental production stream reaches the total amount of capital
investment (Net value of incremental production = value of incremental production less
O&M, production cost). According to this criterion, the shorter the period for recovery
the more profitable is the project. This criterion has two important weaknesses viz (a) it
fails to consider earnings after the pay back period and (b) it does not adequately take into
consideration the timing of proceeds(Williams, J.R. et al,2012).
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(b) Value-Added

It is the amount of economic value generated by the activity carried out within each
production unit in the economy. In any production unit, value-added is measured by the
difference between the value of the output of the firm and the value of all inputs
purchased from outside the firm. The capital and labour attached to each firm are
considered internal inputs. Thus, value-added is the value that has been added by the
labour and capital of the enterprise to the economy. Gross value-added includes payment
for taxes, interest, rent, profits, reserves for depreciation. Deducting depreciation gives
the net value-added. The sum of all the net value-added is referred to as net domestic
product. So the more the value added by the project, the more it will be justified
economically.

4.2 Evaluation of the methods of project appraisal

1. Evaluation of Financial Aspects

Investment decision is done at the beginning of a project and it depends on the final value being superior
to the total investment. Gitman and Forrester (1977) refer that evaluation methodologies can be divided
into two groups. On the one hand, project performance is measured with accounting data. Payback period
and accounting profit rate are also considered in this group. However, these evaluation methods are
inadequate because of problems associated with accounting data. On the other hand, we have to consider
cash flow criteria in project evaluation. The investment decision is taken based on NPV and IRR. This
second group of evaluation criteria tend to be more used than the criteria based on accounting data (Pike,
1996; Arnold and Hatzopoulos, 2000).
Based on risk analysis, we can obtain information about aspects that affect projects. Ho and Pike (1991)
consider that the use of probability analysis and simulation analysis approaches can offer a higher level of
confidence in final decision. The risk analysis is, very often, included in adjustments to the discount rate
or cost of capital or in adjustment to cash flows and use of a risk-free discount rate (Ho and Pike, 1991).
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Freeman and Hobbes (1991) show that 47% of firms use the same discount rate for all projects. This is a
signal that companies do not pay any attention to project evaluation risk. On the contrary, Poterba and
Summers (1995) assure that companies adjust the discount rate according to project type.

2. Evaluation of Non Financial Aspects

The analysis and the incorporation of non financial aspects in decision making can be explored through
three perspectives. Firstly, how are non-financial elements of the project evaluated? Lopes and Flavell
(1998) demonstrate that decision-makers’ experience in other projects is important for risk evaluation, a
technique that includes maintaining records of past evaluations to verify the credibility of management
opinion.
Alternatively, to avoid a qualitative evaluation that heavily depends on people, their experience and
comprehension, companies must create a register of their own past experience and generate checklists of
analysis of all aspects. These analyses should be systematic, rigorous and incorporate people from several
backgrounds. The examination can be done using external advisors in project appraisal. The qualitative
project appraisal should not have a standard-format, but be a free-format qualitative evaluation. If
projectsm are incorrectly analysed by management, it is important to define alternative strategies and
consider all risks. Nardini (1997) suggests that for non financial aspects companies can use a multi-
criteria analysis of projects.

3. Project’s Capital Structure

With regard to the way a corporation finances its activity, it is important to consider that the company's
value is affected by the capital structure employed. In this way, we can analyse if there is an optimal
capital structure: the one which maximizes the value of the firm. Ultimately, beyond the importance of
investment decision, it is essential to acknowledge that the way projects are financed is also of extreme
importance. Therefore, debt policy and financing decisions are essential to the project’s viability.

4. Agency Problems
Investment decision analysis does not usually consider incentives and information problems that can
emerge by the fact that the decision depends on the reports of people, with their own interests and private
information about the quality of the project. Investment decisions can be influenced by agency problems
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and asymmetry of information between the decision makers (management) and capital owners
(shareholders).
Investment decision distortion can happen because of the misalignment of management and shareholder
interests (Jensen and Meckling, 1976; Jensen, 1986), and because of information asymmetry between
insiders and outsiders (Myers and Majluf, 1984). Both motives make the investment sensitive to the
available resources in the firm. Jensen (1986) notes that companies with more cash flow have morem
propensity to invest, sometimes in non lucrative projects – managers over-invest for private benefits. The
over-investment increases the agent’s power since it increases the resources under his control and often
arises linked to higher manager reward.

5. Governance
Apart from agency problems, governance can also drive investment decisions. Malmendier and Tate
(2005) show that CEO characteristics can create distortions in a company’s investment policy. Heaton
(2002) shows that distortions can be the result of overconfident management and the overestimation of
project’s returns by managers, mainly when there is excess free cash flow. There are some CEO
characteristics that can pressure investment decision making: education, experience (career area), birth
generation and position accumulation (CEO and chairman). Chakraborty et al. (1999) also show that CEO
compensation uncertainty has a negative effect on the level of investment of companies.

6. Real Option Use

One of the main elements that influence expectations in investment decisions is the available information
and its interpretation. Sometimes it is necessary to wait for more information because we need to reduce
investment uncertainty and risk and because of the possible net present value of future volatility. Carruth
et. al. (2000) refer that uncertainty increases the value of the postponement real option. The investment
decision can be postponed to wait for new information about market conditions.

7. Other Considerations
Papadakis et al. (1998) present some other factors that influence the strategic decision making process,
namely the investment decision. This study identifies the following decision elements: specific
characteristics of the decision (nature of strategic decision and characteristics of the decision process);
demographic characteristics and CEO personality (need for conquests, risk attitude, CEO tenure and CEO
education); top management team characteristics (level of aggressiveness, dynamic or hostile
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environment); external environmental context (heterogenic, dynamic or hostile environment); and internal
environmental context (internal system, performance, dimension and company control).

4.3 Explanation of how finance might be obtained for a business project

Financing a business is always a challenge. From Bill Gates, Warren Buffet, Laurence Tisch to
the little investor in the south of the Sahara, the invariable question is, how can one obtain
financing for their business? The answers to this query will vary from person to person, time to
time and many more aspects.

Below are some of the sources from where finance might be obtained for business project.

Personal Finance:

A majority of entrepreneurs generally finance their business project with their personal savings,
credit cards and other personal assets. These methods will usually work out if one has
accumulated a large pool of money or assets. It will be possible to sell these assets to gain
capital.

Friends and Family:

Hitting up family and friends is the most common way to finance a business project. But when
you turn loved ones into creditors, you're risking their financial future and jeopardizing
important personal relationships. For this reason, you should supply formal financial projections,
as well as an evidence-based assessment of when your loved ones will see their money again. It
lets your investors know you take their money seriously. Most importantly, you need to
emphasize the risk involved.

Angel financing
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This is a popular mode of financing new businesses and may only be second to personal
financing. How this works is that a prospective business owner will approach a private interested
party with an idea or business proposal. If accepted, the “angel” will finance it with or without
participating in the everyday management of the business. The proven way of accessing them is
through referrals and networking.

Venture capital

Obtaining business financing from these only means that a business owner or idea owner will
seek financing from professional investors who specialize in acquiring a stake in young and
vibrant businesses. Many venture capital funds, however, occasionally make other types of
private equity investments. Closely related to this source is corporate venture capital which is an
initiative by companies to invest in younger businesses outside of themselves or these that were
once related to them.

Bank loans

Most people across the world always look for these for business projects. In fact, beginners love
to seek the banks help for business financing. Commercial banks will be able to lend either
secured or unsecured loans. All this will depend on the credit worthiness of the borrower. It is
obvious for an investor to find that banks will trust the gurus who have had real experience in the
business world as opposed to these who are beginners. However, it is easier to access a secured
loan whether you are a first timer or an experienced business person.

Conclusion

Financial Management studies corporate finance and capital markets, emphasizing the financial
aspects of managerial decisions. It touches on all areas of finance, including the valuation of real
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and financial assets, risk management and financial derivatives, the trade-off between risk and
expected return, and corporate financing and dividend policy.

References

I. Arnold, G. (2007). Essentials of corporate financial management. London: Pearson

Education, Ltd.

II. Williams, J.R. et al,2012, Financial And Managerial Accounting, Mcgraw Hill, p1117

III. Brent, Robert J. Cost-Benefit Analysis for Developing Countries. Edward Elgar
Publishing. Overseas Development Administration. Appraisal of Projects in Developing
Countries. A Guide for Economists. HMSO Publications.
IV. Layard, Richard and Glaister, Stephen (eds) Cost-Benefit Analysis. Second edition.
Cambridge.
V. Kohli, K. N (1993). Economic analysis of investment projects: a practical approach.
Oxford University
VI. Anthony E. Boardman, David H. Greenberg, Aidan R. Vining, and David L. Weimer,
(1996) Cost – Benefit Analysis: Concepts and Practice, 1st Edition, by