Business Finance

Learning Objectives

To understand the concept of

business finance.
What is importance of finance in
operation of business?
What are types of business finance?
What are sources of business
finance?
Business Finance
According to B.O.Wheeler
Business Finance is defined as that business activity
which is concerned with the acquisition & conversation of
capital funds in meeting the financial needs & overall
objectives of business enterprise”.
Financial Needs of Business
Purchase of Fixed Assets
Purchase of Current Assets
Preliminary Expenses
Cost of Financing
Selling on Credit
 Kinds of Finance

Fixed Capital Circulating Capital

or Or
Long Term Capital Working Capital
 Working Capital

Working capital is the amount of funds invested

in the current assets of a business. It is a short
term capital.
Types of Working Capital
Revolving Capital
As the capital is repeatedly invested, recovered and
reinvented in a going business.
Permanent or Regular Working Capital
There is constant need of minimum amount of cash for a
running business.

Working capital = current assets – current liabilities

Factors Affecting Working Capital
Nature of the Business
Size of the Business
Length of period of manufacture
Methods of Purchase & Sale of Commodities
Converting Working Assets into Cash
Seasonal Variation in Business
Size of Labor Force
Price level changes
Rate of Turnover
Business Policy
 Types of Business Finance

Short Term Medium Term Long Term

Finance Finance Finance
 Short Term Finance
Purpose of Short Term Finance
Sources of Short term Finance
Trade Credit or Open Book Account
Advance from Customers
Cash Credit
Bank overdraft
Discounting of Bills
Bill of Lading
Advantages of Short term Finance
Maintain uninterrupted flow of production
Able to make prompt payments to workers
Hold the stock of finished goods
Inventory of finished goods into receivables
Medium Term Finance

Sources of Medium Term

Finance
Commercial Banks
Debentures
Loans from Specialized Credit
Institutions
Long Term Finance

Sources of Long Term

Finance
Equity Shares
Ploughing back of Profits
Issue of Right Shares
Debentures
Loans from industrial &
Financial institutions
Leasing
Sources of Company Financing

Sources of Business Funds

Owners Capital
Issue of Equity
Ploughed back profits
Borrowed Capital is Interest Based
Debentures
Bank loans
Loans from Specialized Financial
Institutions
Other Long Term Financial Institutions
Merits & Demerits of Equity & Debt
Financing
Merits of Equity Finance
Permanent source of Capital
No Payment of Interest
Improved Ability to Face Business Recession
Freedom from Financial Worries of Borrowing
Earnings remain with the Firm
Liquidation of Assets
Repayment of Funds
Financial Base
Ability to Borrow
Disadvantages of Equity Financing
Idle cash Balances
Over Capitalization
Weak Control
No advantage of Borrowed Capital
Merits & Demerits of Equity & Debt
Financing
Creditors Funds & Debt Financing
Advantages of Debt Financing
Expansion of Business
Creditors have no Say
Profit
Tax Advantages
Urgent Current Expenses
Saving the Business from Dissolution
Disadvantages of Credit Financing
Payment of Interest
Creditors can sue the Business
Losses
Attraction of Funds
Dissatisfaction among Shareholders
Owners & Creditors Position with
Regard to (1)Risk(2)Income(3)Control
Financial Characteristics of
Owners Capital
Risk
Income
Control
Financial Characteristics of the
Creditors Position
Risk
Income
Control in Business
Distinction Between Owners Fund & Borrowed Fund

Permanent Capital Repayment of Principal

Basis of Control Tax

Profit Risk Capital

Priority as to Payment
Security of Assets
of Reward

Rate of Return Fixed Obligation

Sources of Interest Free Financing in Pakistan

Equity or Owner’s Financing

Issue of Ordinary Shares
Ploughing back of Profit
Interest Free Financing
Participation Term Certificate
Musharika
Mudarbah
Leasing
 Interest Based Financing

Interest is paid on the

borrowed capital. Interest
is the payment made for
the use of money.
Why Interest Paid
Interest Free Banking

Five non interest based

investment
Musharika
Mudarbah
Participation Term Certificate
Investment on the basis of Equity
Participation
Investment Rent Sharing basis
Factors Determining the Requirements
of Fixed Capital

Nature of Business
Size of Business
Types of Business
Technique of Production
Number of Activities
Non Current Assets
Mode of Acquiring Fixed Assets
Sources of Fixed Capital

Owned Capital
Equity Share (Owned Capital)
Ploughing back of Profits (Owned
Capital)
Borrowed Capital
Loans from industrial and
Financial
Ploughing back of Profits
Merits of Ploughing back of Profits
Merits of Ploughing Back of Profits
Advantages to the Company
– Shock Absorber
– Aids in Smooth Running of Business
– Increase in Credit Worthiness of the Company
– Self Dependent Company
– Expansion & Growth of Business
– Redemption of Long Term Debts
Advantages to the Share Holders
– Increase in the Value of Shares
– Increase in Earning Capacity
– Retaining the Control
Advantages to the Society
– Increase in the Rate of Capital
Formations
– Rapid Industrialization
– Increase in Industrial Capacity
– Better Quality of Goods at
Reduced Prices
Danger of Ploughing back of Profit
– Overcapitalization
– Reduces Dividend
– Evasion of Taxes
– Frustration among Shareholders