INTRODUCTION

TO BUSINESS
FINANCE
BUSFIN01 – MRS. DINAH CAMPOS
SUBJECT & PROFESSOR

Prepared by:
ANTHONY GABELITE BALANDO
INTRODUCTION TO BUSINESS
FINANCE
BUSINES
S A business is an entity where the skills, energy and enterprise of
owners and partners are linked with money, its sources and
investment, and its success is measured by wealth, or profit
derived from the business.

BUSINESS
FINANCE

Business finance involves the management of financial resources

available to the organization. It refers to money and credit employed in
business. Finance is the basic of business. It is required to purchase
assets, goods, raw materials and for the other flow of economic
activities. Business finance can be defined as “The provision of money
at the time when it is needed by a business”.
ELEMENTS OF
BUSINESS
To be successful, a business, Ernest Jones (1994),
must have the following elements:

First, the business entity must obtain money from the

right sources and invest it in the right places.

PURPOSE Second, it must continue to attain its purpose of

OF GAINING gaining profit;
PROFIT

Third, cash must be available when it is needed, and

CASH
AVAILABILITY
its availability can be crucial in some decision-
making situations.
IMPORTANCE OF BUSINESS
FINANCE
The role of finance in business is also to make sure there are
enough funds to operate and that you're spending and investing
wisely. The importance of business finance lies in its capacity to
keep a business operating smoothly without running out of cash
while also securing funds for longer-term investments.

Capital is obtained from owner’s resources, such as savings; or

from intermediaries like banks. In corporations, these sources of
capital are called shared capital in corporations, those invested
by stockholders, and loan capital those provided by creditors or
lenders

When money is invested in a business it will go to: first, things that are not intended to be sold- the fixed assets, or capital expenditure, and second,
things specifically intended to go into what is to be sold-revenue expenditure, or working capital. Third, the investments may also used for outside
areas of the business.
AREAS OF
FINANCE
Finance as a discipline has three areas: financial institutions, investments
and business finance.
a. Financial institutions covers the creation of financial assets, the
markets for trading securities, and the regulations of financial
markets. Financial assets originate from investment bankers and
financial intermediaries, including commercial banks, savings and
loan associations, and life insurance companies.
b. Investments is concerned with the analysis of individual assets and
the planning for well-diversified portfolios.
c. Corporate or business finance studies the role of financial manager,
his ability to meet obligations as they come due, identifying the best
sources of funds, allocating resources among available investment
alternatives. Funds can be borrowed from financial institutions, or
contributed by investors.
Business finance’s broad areas are:
 Corporate finance deals with the management of companies.
 Financial institutions and markets; and
 Investments deciding for the best portfolio of assets.
In line with these areas of business finance, the manager has to make major
financial decisions for the business. These are financing decisions and
investment decisions.
 Financing decision involve generating funds internally or from external
sources.
 Investment decisions determine the real assets of a business. These assets
generate the cash flows needed to meet operating expenses, pay interest to
creditors, pay taxes to government and dividends to stockholders.
Managers must also ensure that investments are in current assets:
including cash, inventories and accounts receivables.
TERMS RELATED TO BUSINESS
FINANCE
 Financial Accounting and Managerial Accounting - The primary function
in financial accounting is the preparation of financial statements,
including the balance sheet, income statement, and cash flow statements,
whereas managerial accounting help internal executives or managers in
making decisions.
 Financial management is the efficient and effective management of
money, involving planning, organizing, directing and controlling
activities, to attain the objectives of the organization.
FUNCTIONS OF BUSINESS
FINANCE
 Business finance is both an art and science. It is concerned with
allocating the financial resources of the company; procurement of funds
needed; and the efficient and effective utilization of these funds
 Business finance, also known as corporate finance in the business world,
is responsible for allocating resources, creating economic forecasts,
reviewing opportunities for equity and debt financing, and other
functions within your organization. In general, some small businesses
may not have a large business finance department, but nonetheless will
have these functions operating throughout the company. Where the
function does not exist in-house, you might rely on advice from outside
sources to make financial decisions about your business.
Business finance functions are important in an organization. Whether the
organization operates on a daily basis, it is connected to three essential
benefits: low costs, business support and control the environment effectively.
It is said that cash is king and money is the lifeblood of an organization that
wants to succeed.
When there are procedures and principles to follow in an organization the
success and growth of that organization is greatest. Business finance
represents the backbone of an organization. The entire operation may fail if
information is untimely and inaccurate.
ROLES OF FINANCIAL MANAGER
Financial managers have a major role in a company’s management. This
role is essentially the same in all companies that is, to acquire the
necessary funds and to ensure that they are used effectively. In some
companies, the financial manager may not be an independent employee,
particularly for small companies where financial management may be done
by the secretary or accountant. In larger companies, this function may be
done by executives described as the financial managers. These are people
directly involved in making financial decisions.
Three decisions made by Financial Managers identified by Stephen
Ross
 Capital budgeting. This concerns the planning and managing of the
firm’s long-term investments.
 Capital structuring. This evaluates ways in which the firms obtain
and manages the long-term financing to support its long-term
investments.
 Working capital management. This refers to the administration of the
firm’s short-term assets, including inventory, its short-term liabilities-
such as money owed to suppliers.
BUSINESS
ORGANIZATION
When a business is being organized, one of the first decisions to be
made concerns the form of business ownership. The forms can be a
sole proprietorship, partnership or corporation.
 Sole proprietorship is a business owned by one person, such as
small service businesses, retail stores, professional practices. This
is the simplest type of entity to start and is the latest regulated form
of organization.
 Partnership is an association of two or more persons who operate
a business as co-owners by voluntary legal agreement.
a. A general partnership is where partners are liable for the
businesses’ debts. Partners share in gains or losses, and all
have unlimited liability for all partnership debts. How a
partnership gains(and losses) are divided are described in
the partnership agreement or articles of partnership.
b. A limited partnership is composed of partners whose
liability is limited to the amount of capital contributed,
provided a partner plays no active role in the business, or
does not participate in its operation
 Corporation is a legal entity whose assets and liabilities are separate
from those of its owners. Its personality is distinct from its owners.
Forming a corporation involves preparing articles of incorporation ad a
set of by-laws. The board of directors or trustees is the governing body of
a corporation.
The articles of incorporation must contain a number of things, including the
corporation’s name, its intended life, its business purpose, the number of
shares that can be issued.
The by-laws are rules describing how the corporation regulates its existence;
how directors are selected, and what are the functions of each officer.
Organizing a Sole Proprietorship
 Register the business name with the Department of Trade and Industry
(DTI).
 Pay the city of municipal licenses with the local government.
 Apply VAT or non-VAT number.
 Register with the Bureau of Internal Revenue (BIR) the books of
accounts (journals and ledgers), and the business forms to be used
(official receipts, sales invoices)
Organizing a Partnership
A provision of the Civil Code on partnership formation states that:
 Article 1771. A partnership may be constituted in any form except
where immovable property or real rights are contributed there to, in
which case a public instrument shall be necessary.
 Article 1772. Every contract of partnership having a capital of three
thousand pesos or more, in money or property, shall appear in a public
instrument, which must be recorded in the Office of the Securities and
Exchange Commission.
 Article 1786. Every partner is a debtor of the partnership for whatever
he may have promised to contribute thereto.
 Article 1826. A person admitted as a partner into an existing
partnership is liable for all the obligations of the partnership arising
before his admission as though he had been a partner when such
obligation were incurred, except that this liability shall be satisfied
only out of partnership property, unless there is a stipulation to the
contrary.
Classification of Partnerships
A. Based on the objects of contribution or the subject matter:
 Universal partnership refers to the contribution by partner of all
present property or all profits. Universal partnership of all profits
refer to all the profits that the partners may acquire by their industry
or work during the existence of the partnership.
 Particular partnership includes objects which are determinate things
such as their use, fruits, undertaking or the exercise of a profession
or vocation.
B. Based on the liability of partners for obligations:
 A general partnership is where partners are liable for the businesses’
debts extending to their personal property after all the partnerships
assets have been exhausted. Partners share in gains or losses, and all
have unlimited liability for all partnership debts. How a partnership
gains(and losses) are divided are described in the partnership
agreement or articles of partnership.
 A limited partnership is composed of partners whose liability is
limited to the amount of capital contributed.
C. Based on their contributions: B. Based on the type of ownership
 A public corporation is formed or organized for the government or
 Capital partner contributes money, property to the funds of the
a portion of the State.
partnership.
 A private corporation is formed for private purpose or benefit.
 Industrial partner shares work, labor or industry to the business.
 Capitalist-industrial partner contributes money or property as work
or industry as well to the capital of the partnership.
C. Based on their relation to other corporation
 A parent corporation which owns controlling interest in another
corporation, by more than 50%. It has the power to directly or
indirectly elect the majority of the directors of the corporation.
Classification of Corporation  A subsidiary corporation is the investee corporation in which the
parent corporation has controlling interest.
A. Based on source of capital

 A stock corporation is an entity where capital in the form of capital D. Based on their country of origin
stock divided into shares. Corporate earnings may be distributed to
 A domestic corporation is created under the Philippine law.
shareholders as dividends.  A foreign corporation is formed, organized under existing laws
 A non-stock corporation is one where no part of its income is
other than Philippines.
distributable as dividends to members, trustees, or officers.
Nonstock corporations may be formed for charitable, religious,
educational, cultural, social, civic or similar purposes. E. Based on acceptable stockholders

 A close corporation is limited to selected persons members of a

family.
 A open corporation is open to any person who may intend to
become a stockholder or member of the corporation.
DIVIDENDS
Dividends this is the amount of money or items of value received by
stockholders from his investment in a corporation. All assets and
earnings of a corporation are owned by the company and not by its
stockholders which can be transferred upon declaration by the board of
directors for dividends distribution. Dividends may be classified as:
 Cash dividends paid to stockholders. Upon payment to
stockholders, corporate accounts’ retained earnings may decrease
and the cash entry may also decrease. If an entry is made upon
declaration, the immediate effects would be a decrease in retained
earnings and an increase in the current liability for dividends
payable.
 Property dividend is in the form of non-cash assets of a
corporation. For example, Corporation Alpha, invested in stocks of
Beta Corporation, in which Beta Corporation distributed the stocks
to its own stockholders as dividend.
 Stock dividend is in the form of stocks of the issuing corporation,
such that a corporation distributes 15% stock dividend from its
10,000 shares of capital stock outstanding. In this case, 1,500 shares
of its capital stock is the dividend, totaling to 11,500 outstanding
shares.
 Scrip dividend is in the form of promissory notes indicating the kind
of benefits the stockholders shall be entitled to receive in the future.
 Bond dividend is in the form of bond issuance. (An official
document in which a government or company promises to pay back
an amount of money that it has borrowed and to pay interest for the
borrowed money.)
 Liquidating dividend is declared upon dissolution of corporate
operations of return of capital to investors.
Other forms of Dividends
The cash dividend, most common type of dividend, is in the form of
cash payment made by a firm to its owners in normal course of business,
usually made four times a year. Sometimes a firm may pay an extra cash
dividend, indicating that part may or may not be repeated in the future.
Special dividend, but the name usually indicates that this dividend is
viewed as a truly unusual or one-time event and won’t be repeated.
Liquidating dividend is paid when business is to be liquidated, or will be
sold off. Cash dividend reduces cash and retaining earning, except in
case of liquidating dividend which may reduce paid-in capital.
Important characteristics of Dividends
1. Unless a dividend is declared by the board of directors of the
company, it is not a liability. A corporation cannot default on the
undeclared dividend, bankruptcy cannot be declared because of no
dividends. Its amount and payment are decisions based on the
judgment of the board of directors.
2. The payment of dividends by the corporations is not business
expense. Dividends are not deductible for corporate tax purposes,
since they are paid out of the company’s income after taxes.
Dividend Payment: Steps
 Declaration date. Date on which the board of directors passes a
resolution to pay a dividends
 Ex-dividend date. A date (officially set at two business days before the
date of record) to establish those individuals entitled to a dividend. To
make sure that checks go to the right people, brokerage firms and
stock exchange establish this date. If a holder buys the stock before
the declaration date, he is entitled to the dividend. However, if a
holder bought it on the declaration date or after, then the previous
owner will get the dividend.
 Date of record. The date by which a holder must be on record in order
to be designated to receive a dividend. d. Date of payment. The date
that the dividend checks are mailed.