BUSINESS FINANCE
Bachelor of Science in Legal Management | 2B
INTRODUCTION TO BUSINESS FINANCE
Source of Funds
➢ Costumer, Loan (Bank), Investors
Balance Sheets
● Assets - Cash
- Receivables (monetary obligations of others to you)
- Inventories - things we need to seel (merchandise)
- Prepayments - property, plant and equipment
● Liabilities - Obligations (Accounts payable)
- Costumers advance payments (downpayment)
- Loans payable
● Owners equity/ shares - share of the owners in asset, owners
investments, business net income or loss
Business Finance - study of money and its management
- limited sources that’s why we need to study financial
management.
Areas/Disciplines of Business Finance
1. Financial Institutions- creation of financial assets, the market for
training, securities and the regulations of financial market.
2. Investment - analysis of individual assets and planning for well
diverse portfolio.
3. Business Finance - management of financial resources available to
the organizations
- As an academic discipline, finance has its roots from accounting and
economics.
Economics- supply and demand
Major Business Financial Decisions
- Financial decisions related to generating funds internally and
externally
- Investment decisions determine the real assets that business has.
Factors of Finance
➢ Allocating the financial resources of the organizations
➢ Procurement of funds needed
➢ Efficient and effective utilization of funds.
Effectiveness- used the funds for intended purposes
-cash inflows come and compared to outflows
Efficiency - savings in resources
- avoid wastage
- generate more profit at least cost
Funds- can be borrowed from a financial institutions, or contributed by
investors.
EFFICIENT AND EFFECTIVE UTILIZATION OF FUNDS
Consider the cost of capital.
● Externally sourced funds will incur interests.
● Stockholders will expect dividend from the funds they invest.
To ensure efficient and effective usage of funds, organizations should
avoid excessive balance of cash, receivables, inventories and other
resources.
● Idle cash will not generate revenue but will still incur the cost of
capital.
● Receivables have the tendency to become bad debts if not timely
collected.
● Inventories may become obsolete and incurs handling costs.
● Properties and equipments involves high amount of needed capital,
and will incur expenditure for its repairs and maintenance.
KEY DECISIONS OF THE FINANCIAL MANAGER
Working Capital Management - Administration of the firm’s short-term
assets and liabilities to ensure continuity of day-to-day business activities.
Capital Budgeting - Management of long-term investment and projects.
Capital Structuring - Evaluation of sources and management of short-term
and long-term financing to fund working capital requirements and capital
projects.
ROLE OF THE FINANCE MANAGER
★ Managing investment in non-current assets through evaluation of capital projects.
★ Evaluating, obtaining and servicing long-term financial requirements through
borrowing, leasing, retaining funds or issuing stocks and securities.
★ Distribution of dividends to shareholders.
★ Collection and custody of cash and payments of bills.
★ Managing investment in current assets such as cash, marketable securities and inventory.
★ Obtaining and servicing short-term finance.
★ Managing risks associated with changes in interest rates and exchange rates.
★ Assessing the viability of growth through acquisition of other businesses.
★ Planning the future development of the business.
★ Development and implementation of financial policies.
STARTING A BUSINESS IN THE PHILIPPINES
Reasons to Engage in Business
- Increase your income and the level of control over one’s income
- Free up more time for other purposes
- Gain greater control over your life
Causes of Business Failure
- Failure to understand your market and customers.
- Opening a business in an industry that isn’t profitable.
- Failure to understand and communicate what you are selling.
- Inadequate financing
- Reactive attitudes
- Overdependence on a single customer
- No customer strategy
- Not knowing when to say “No.”
- Poor management
- No planning
Types of Business: Based on Nature of Activity
Service Business An entity engaged in providing specific kinds of
service(s) to its customer and does not create any
tangible product.
Trading/Merchandising An entity engaged in buying goods from manufacturer
Business or other merchandisers to be sold to its customers at a
mark-up.
Manufacturing Business An entity engaged in procuring raw materials, labor
and other goods and services with the intention of
creating a finished product for sale to customers.
Types of Business: Based on Ownership Structure
Sole Proprietorship A business owned by a single owner who generally
manages the affair of the business.
Partnership A business owned by two or more persons who bind
themselves to contribute money, property or industry
in an undertaking with the intention of dividing profits
among themselves.
Corporation An artificial being created by operation and owned by
stockholders. The corporation is a separate legal entity,
and the stockholders are not personally liable to the
corporation’s liabilities.
Types of Business: Based on Size of Operation
Micro Enterprises Net asset value of P3 million and less
Small Enterprises Net asset value of more than P3 million-P15 million
Medium Enterprises Net asset value of more than P15 million-P100 million
Large Enterprises Net asset value of more than P100 million