Business Finance

Meaning

Money required for carrying out business

activities is called business Finance.
 Financial management

Financial management is concerned with

optimal procurement as well as usage of
Finance.
 Scope
The approach to the scope and functions
of financial management is divided for the
purpose of exposition into two broad
categories:
 Traditional approach.

 Modern approach.
 Traditional Approach

The traditional approach, which was

popular in the early stage, limited the role
of financial management to raising and
administering of funds needed by the
corporate enterprises to meet their financial
needs.
Main limitations of Traditional
Approach
 Ignored routine problems.
 Ignored finance manager’s viewpoint.
 Ignored non-corporate enterprise.
 No Emphasis on allocation of funds.
 Modern Approach
According to modern approach the term
financial management provides a
conceptual and analytical framework for
financial decision-making.
 Major decisions
The financial management can be further
classified into three major decisions:

 The financing decision.

 The investment decision.
 The dividend decision.
 Financial Decisions

Investment Financing Dividend

Decision Decision Decision

Working Capital Cost of capital Capital Structure

Management
Capital Budgeting
Investment Decisions
 These decisions relate to how the firm’s
funds are invested in different assets so
that they are able to earn the highest
possible return for their investors.
Factors Affecting
 Cash flows of the project.
 The rate of return.
 The investment criteria involved
Financing Decisions
 Thisis about the quantum of finance to be
raised from various long-term sources.
 The main sources of funds are
shareholders funds and borrowed funds.
Factors Affecting
 Cost
 Risk
 Floatationcosts.
 Cash flow position of the business
Dividend Decision
 Dividend is that portion of profits, which is
distributed to shareholders.
 The decision made here is how much of
the profit is to be distributed to the
shareholders and how much of it should
be retained to meet the investment
requirements.
Factors Affecting
 Earnings.
 Stability of earnings.
 Stability of dividend.
 Growth oppurtunities.
 Objectives
Efficient financial management requires the
existence of some objectives which are as
follows:
 Profit maximisation.
 Wealth maximisation.
 Financial planning

Financial planning is essentially preparation

of a financial blueprint of an organisation's
future operations.
 Importance
 It tries to forecast what will happen in
future under different business situations.
 It helps in avoiding business shocks and
uncertainties.
 It helps in co-ordinating various business
functions.
 Fixed capital
 Fixed capital refers to investment in long-
term assets.
 It affects the growth, profitability and risk
of the business in the long run.
 Importance
 Long-term growth and efficiency.
 Large amount of funds involved.
 Risk involved.
 Irreversible decisions.
 Factors affecting
 Nature of business.
 Scale of operations.
 Choice of technique.
 Technology upgradation
 Working capital
 Working capital are the investments which
facilitate smooth day-to-day operations
of a business.
 Working capital is usually more liquid, but
contribute less to the profits than fixed
assets
 Factors Affecting
 Nature of business.
 Scale of operations.
 Business cycle.
 Operating efficiency.
 Types of business finance
 Finance used in business is of following
kinds:
 long-term finance.
 Medium-term finance.
 Short-term finance
 Instruments of finance
A business form can raise funds from two
main sources:
 owned funds.
 Borrowed funds.
 shares

Issue of shares is the most important source

of raising long term finance
 Types of shares
 There are two types of shares.
 Equity shares.
 Preference shares
 Retained profits

 Retained profits refer to the profits which

have not been distributed as
dividends, but have been For use in
business.
 Retained profits are also known as
reserves or surplus
 Debentures

A debenture is a document or certificate

issued by a company under its seal as an
acknowledgement of its debt
 Institutional Finance

Loan or equity capital provided by

a financial institution, instead of by one or
more individual.
 Public Deposits

Public deposits were to the deposits

received by a company from the public as
loan debts.
 Bank Finance
 Find finance refers to the Finance
reached from commercial banks.
 Commercial banks are an important
source of short-term and medium-term
finance pro-business