INTRODUCTION TO BUSINESS

FINANCE

Chapter 1
 Key Concepts and Skills
1.1

 Know the functions of business finance

 Know the basic types of financial management
decisions and the role of the financial manager
 Know the financial implications of the different

forms of business organization

 Why Study Finance?
1.2

 Marketing
 Budgets, marketing research, marketing financial products
 Accounting
 Dual accounting and finance function, preparation of financial
statements
 Management
 Strategic thinking, job performance and profitability
 Personal finance
 Budgeting, retirement planning, college planning, day-to-day cash
flow issues
 Finance: an overview
1.3

 Business/ Firm
 Source of financing
 Investing

 Profit

 Cash availability
 Business Flow
1.4
 Basic Areas Of Finance
1.5

• Financial institutions-where to acquire funds

• Investments- proper use of funds

• Corporate finance-acquiring, using and investing

funds
 Functions of BUSINESS FINANCE
1.6

 Allocating the financial resources of the company.

 Procurement of funds
 Efficient and effective utilization of funds
 Goal Of Financial Management
1.7

 What should be the goal of a corporation?

 Maximize profit?
 Minimize costs?

 Maximize market share?

 Maximize the current value of the company’s stock?

Does this mean we should do anything and

everything to maximize owner wealth?
 Financial managers try to answer some or all of

these questions
 Financial Manager
1.8

 The top financial manager within a firm is usually the

Chief Financial Officer (CFO)
 Treasurer – oversees cash management, credit
management, capital expenditures and financial
planning
 Controller/Comptroller – oversees taxes, cost accounting,
financial accounting and data processing
 Financial Management Decisions
1.9

 Capital budgeting
 What long-term investments or projects should the
business take on?
 Capital structure
 How should we pay for our assets?
 Should we use debt or equity?

 Working capital management

 How do we manage the day-to-day finances of the firm?
 Forms of Business Organization
1.10

 Three major forms

 Sole proprietorship
 Partnership

 Corporation
 Sole Proprietorship
1.11

 Sole Proprietorship
 is a business owned by ONE person and operated for
his own profit.
 example: service business; retail stores; professional
practices.
 it is the simplest type of business to start and is the
least regulated form of organization.
 Sole Proprietorship
1.12

 Advantages  Disadvantages
 Easiest to start  Limited to life of owner

 Least regulated  Equity capital limited to

 Single owner keeps all the owner’s personal wealth

profits  Unlimited liability

 Taxed once as personal  Difficult to sell ownership

income interest
 Partnership
1.13

 Partnership
a business owned by TWO or MORE persons who
operate a business as co-owners by voluntary legal
agreement.
 Partnership
1.14

 Advantages  Disadvantages
 Two or more owners  Unlimited liability

 More capital available  General partnership

 Limited partnership
 Relatively easy to start
 Partnership dissolves when
 Income taxed once as
personal income one partner dies or wishes to
sell.
 Possibility of disputes among
partners.
 Classes of Partnership
1.15

 As to liability
 General

 Limited

 As to contribution
 Capitalist Partner
 Industrial Partner

 Capitalist-Industrial
 Corporation
1.16

 Corporation
 isa legal entity whose assets and liability are separate
from those of its owners.
 as a legal person, its personality is distinct from its
owners.
 Corporation
1.17

 Advantages  Disadvantages
 Limited liability  Double taxation (income

 Unlimited life taxed at the corporate rate

 Separation of ownership and
and then dividends taxed at
management personal rate)
 More expensive and onerous
 Transfer of ownership is easy
to organize because of legal
 Easier to raise capital
requirements and extensive
reporting compliance.
 Corporation
1.18

Documents in forming a Corporation:

 includes name of corporation
 intended life
 business purpose
 no. of shares to be issued.
B.
 Rules of the corporation
 Election of directors
 Functions of the officers
Submitted to the Securities and Exchange
Commission.
 Classifications of Corporation
1.19

 Based on source of capital

 Stock Corporation - is an entity where capital is in

the form of capital stock divided into shares.
Corporate earnings may be distributed to
shareholders as dividends.

 Non-stock Corporation - is one where no part of its

income is distributable as dividends to members,
trustees or officers. This is formed for charitable,
religious, educational, social civic or similar purposes.
 Classifications of Corporation
1.20

 Based on the type of ownership

 Public Corporation - organized for the

government.
 Private Corporation - formed for private
purpose or benefit.
 Classifications of Corporation
1.21

 Based on their relation to other corporations

 Parent Corporation
 Subsidiary Corporation

 Based on their country of origin

 Domestic Corporation
 Foreign Corporation
 Classifications of Corporation
1.22

 Based on acceptable stockholders

 Close
Corporation - limited to selected persons or
members of the family.

 Open Corporation - is open to any person who may

intend to become a stockholder or member of the
corporation.
 Classes of shares of stock
 Common Stock - represents the basic issue of shares and has all the basic rights
of a share.
 Right to vote
 Proxy voting
 Right to share proportionally in dividends paid
 Right to share proportionally in assets remaining after liabilities have been paid in a
liquidation
 Right to vote on stockholders matter of great importance
 Right to share proportionally in any new stock sold before offering it to the general
public.
 Preferred Stock- is a class of stock with preferences over common shares, including
distribution of dividends and corporate assets upon dissolution of the corporation.

Dividends- amount of money received by stockholders from his investment in a

corporation.
 Forms of Dividends
1.24

 Cash Dividend
q Property dividend- non-cash assets
 Stock Dividend
 Scrip Dividend - promissory note indicating
future benefit entitled for the stockholder.
 Bond Dividend - issuance of bonds
 Liquidating Dividend - declared upon
dissolution of operations or return of
capital to investors.
 Special Dividend- unusual or one-time
event dividend declaration
 Steps in Dividend Payment
1.25

1. Declaration date - date on which the Board of

Directors (BOD) passes a resolution to pay a
dividend.
2. Ex-dividend date - date 2 business days before
the date of record, establishing those individuals
entitled to a dividend.
3. Date of record - date by which a holder must be
on record to be designated to receive a dividend.
4. Date of payment- date that the dividends are
distributed or paid to stockholders.
1.26

Thank you..
 Seatwork:
1.27

 What are basic areas of finance? Explain.

 What are the three types of financial management
decisions and what questions are they designed to
answer?
 What are the three major forms of business
organization? Explain.