WEEK: ONE

SESSION: 2

BUSINESS FINANCE

OSMAN BIN SAIF

 Broad OUTLINE of the COURSE
1. Introduction to Finance
2. Legal forms of Organization and the Tax
Environment
3. Financial Environments
4. And 5. Time Value of Money
6. Risk and Return
7. Cost Of Capital
 Broad OUTLINE of the COURSE
8. Discussion and Revision for Mid term
9. Mid Term Exam
10.Bond Valuation
11.Stock Valuation
12. and 13. Capital Budgeting Techniques
14. and 15.Financial Ratio Analysis
16. and 17. Project Presentations
18. Final Exams
 Why do we need to study
finance?

Almost half of all new

ventures fail because
of poor financial
management
-Dun & Brandstreet
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 What is Finance?
• Who needs money?
– Every one? you?
– Can you or a business
survive without cash?
Why?

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 An Introduction to Finance
What is finance?

• Finance is the study of the art and the science of money

management; it is based on the Latin root finis,
meaning the end. In managing ours or our firm’s
money, we consider historical outcomes or endings,”
and we propose future results as a function of
decisions made today. Those outcomes or results are
typically portrayed using financial statements.
 What is Finance?
• Finance is the study of how people and
businesses evaluate investments and raise
capital to fund them. (-- How to get and use
money)
• Three questions addressed by the study of
finance
1. What long-term investments should the firm
undertake? (capital budgeting decisions – how to
spend the money?)

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 The three questions
2. How should the firm fund these investments?
(capital structure decisions -- How to get the
money?)
3. How can the firm best manage its cash flows as
they arise in its day-to-day operations? (working
capital management decisions – how to manage
cash (liquid) money?)
 Personal finance
• Where does money for individuals (personal
finance) come from:
– Our own money in pocket
– Borrows: from friends or credit cards
– Received from Government if entitled to some
benefits
– Earned by doing something or sales of products
and services

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 Personal Finance (Contd.)
• Personal Finance is one of the most important aspects of your
life, although not exciting to most, personal finance directly
relates to your daily life. 

Personal finance by definition is how you manage your money.

But what is money really?

• what money truly is. 

Money = Freedom = Choice = Ability to Fulfill Your Dreams 

 Personal Finance (Contd.)
• Just like a company, we all need money. We need money to live

(food, clothing, and shelter) and we probably want money for a

great number of things (concert tickets, cars, computers, etc.).

The important thing to realize is that money affects how you

lead your life. If you don’t have money you can’t do many of the

things you want in life. Money is simply a tool that gives you

choice along the way. 

 Personal Finance (Contd.)
• Without learning personal finance, you will lead a
completely different life than someone with personal
finance knowledge.
• Living paycheck to paycheck is a common trait of those who
do not have personal finance knowledge.
• Learning about personal finance gives you the knowledge
and understanding to make smart money choices.
• Thus, you become more in control of your own life and are
empowered to do the things that matter most to you.
• Money is power and learning personal finance will teach you
how to become more powerful. 
 Business finance

• Business finance: a business has the same source of money for individuals
– Its own money
– Borrows: from friends, colleagues, banks and lending institutions

– Received from Government grants. Eg. new in deprived sectors

– Earned by sales of products and services
– From venture capitalists (seeking profit for spare funds)

– From private individuals (Business Angels – often seen in entertainment

sector)
– Private companies

– Microloans
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 To obtain funding for a business project 

• Determine how much money is  needed to start your

company
• Prove to your investor that your  company requires the
predetermined  amount of money
• Offer incentives, interest, or collateral  for the investor’s
contribution
• Make arrangements to pay back the  loan

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 Classifying businesses
• Each type of business can have different ways
to finance itself, so we need to look at types of
business ownerships
– Sole trader – owned by one person
– Partnership – owned by two or more and based
on agreement among them
– Limited company: owned by two or more but
separate in law from people who own and control

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 Three Types of Business Organizations

Business
Forms

Sole
Partnerships Corporations Hybrids
Proprietorships

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 Sole Proprietorship
• It is a business owned by a single individual that is entitled to
all the firm’s profits and is responsible for all the firm’s debt.
• There is no separation between the business and the owner
when it comes to debts or being sued.
• Sole proprietorships are generally financed by personal loans
from family and friends and business loans from banks.

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 Sole Proprietorship

• Advantages:
– Easy to start
– No need to consult others while making decisions
– Taxed at the personal tax rate

• Disadvantages:
– Personally liable for the business debts
– Ceases on the death of the proprietor
 Partnership
• A general partnership is an association of two
or more persons who come together as co-
owners for the purpose of operating a
business for profit.
• There is no separation between the
partnership and the owners with respect to
debts or being sued.

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• Advantages:
– Relatively easy to start
– Taxed at the personal tax rate

– Access to funds from multiple sources or partners

• Disadvantages:
– Partners jointly share unlimited liability
 Limited Partnership
• In limited partnerships, there are two classes
of partners: general and limited.
• The general partners runs the business and
face unlimited liability for the firm’s debts,
while the limited partners are only liable on
the amount invested.

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• One of the drawback of this form is that it is
difficult to transfer the ownership of the
general partner.
 Corporation
• Corporation is “an artificial being, invisible,
intangible, and existing only in the
contemplation of the law.”
• Corporation can individually sue and be sued,
purchase, sell or own property, and its
personnel are subject to criminal punishment
for crimes committed in the name of the
corporation.

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• Corporation is legally owned by its current
stockholders.
• The Board of directors are elected by the
firm’s shareholders. One responsibility of the
board of directors is to appoint the senior
management of the firm.
 Corporation Pros & Cons
• Advantages
– Liability of owners limited to invested funds
– Life of corporation is not tied to the owner
– Easier to transfer ownership
– Easier to raise Capital
• Disadvantages
– Greater regulation
– Double taxation of dividends

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 Hybrid Organizations
• These organizational forms provide a cross
between a partnership and a corporation.
• Limited liability company (LLC) combines the
tax benefits of a partnership (no double
taxation of earnings) and limited liability
benefit of corporation (the owner’s liability is
limited to what they invest).

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Thank You