Business Finance

Finance
• Finance is the backbone of any business.
• A business would not be able to run without finance & may get decreased.
• Finance plays an important role, right from the generation of the business idea
to its day-to-day functioning and upto the liquidation stage of a business.

Definitions
According to Khan & Jain: “Finance is the art & science of managing money”
According to F.W. Paish: “The position of money at the time it is wanted”
Finance is the study of how scarce resources are allocated over time.
Finance refers to all activities related to obtaining money and effective use.
 Features

1] Investment opportunities

2] Profitable opportunities

3] Optimal mix of funds

4] System of internal controls

5] Future decision making

Introduction to business finance
• BF is also known as finance function and corporation finance.
• BF concern itself with various financial challenges faced by a business.
• These challenges come in the form of promotion, administration and accounting
structure of the enterprise.

Definitions
1] Money required for carrying out business activities is called BF.
2] Guthmann and Dougall :
“Business finance can be broadly defined as the activity
concerned with planning, raising, controlling and administrating of funds used in
the business”.
Financial Management
It means planning, organizing, directing, & controlling the financial activities such
as procurement and utilization of funds of the enterprise.
It means applying general management principles to financial resources of the
enterprise.

According to Solomon: “FM is concerned with the efficient use of economic

resources, namely, Capital Funds”.

Havard and upton: FM is the application of the planning and control functions to
the finance function.
Scope of finance
1] Financial decision
2] Investment decision
3] Dividend decision

Functions of FM
1] Estimate required capital
2] Determine capital structure
3] Evaluate & select sources of funds
4] Allocate and control funds
5] Distribute profit or surplus
6] Monitoring financial activities
Objectives of financial management

1. Profit Maximization
• A business is set up with the main aim of earning huge profits. Hence, it is the
most important objective of financial management. The finance manager is
responsible to achieve optimal profit in the short run and long run of the
business. The manager must be focused on earning more and more profit. For
this purpose, he/she should properly use various methods and tools available.
Features

• Profit Maximization is also known as cash per share maximization. It helps in

achieving the objects to maximize the business operation for profit
maximization.
• The ultimate objective of any business is to earn a huge amount of return in
terms of profit. Thus, this objective of financial management considers all the
possible ways to increase the profitability of the business concern.
• Profit earning capacity is kind of a parameter for measuring the efficiency of a
particular business. Thus, it shows the entire position of business along with the
measures to improve and increase profitability.
• Profit Maximization is an objective that helps in reducing risk.
• Favorable Arguments for Profit Maximization
The following important points are in support of the profit maximization objectives
of the business concern:
(i) Main aim is earning profit.
(ii) Profit is the parameter of the business operation.
(iii) Profit reduces risk of the business concern.
(iv) Profit is the main source of finance.
(v) Profitability meets the social needs also.
• Unfavorable Arguments for Profit Maximization
The following important points are against the objectives of profit maximization:
(i) Profit maximization leads to exploiting workers and consumers.
(ii) Profit maximization creates immoral practices such as corrupt practice,
unfair trade practice, etc.
(iii) Profit maximization objectives leads to inequalities among the sake holders
such as customers, suppliers, public shareholders, etc.
2] Wealth maximization
Shareholders are the actual owners of the company.
Hence, the company must focus on maximizing the value or wealth of
shareholders. The finance manager should try to distribute maximum dividends
among the shareholders to keep them happy and to improve the goodwill of the
company in the financial market.
The declaration of dividend and payout policy is decided with the help of
financial management.
A proper dividend policy related to the declaration of dividends or retaining the
company's profit for future growth and development is part of dividend
decisions. But this is based on the performance of the company and the amount
of profit earned. Better performance means a higher value of shares in the
financial market. In nutshell, the finance manager focuses on maximizing the
value of shareholders.
Favorable Arguments for Wealth Maximization

(i) Improve the value or wealth of the shareholders. (ii) It provides extract value
of the business concern. (iii) Wealth maximization considers both time and risk of
the business concern. (iv) Wealth maximization provides efficient allocation of
resources.

Unfavorable Arguments for Wealth Maximization

(ii) Wealth maximization is nothing, it is also profit maximization, it is the

indirect name of the profit maximization. (iii) Wealth maximization creates
ownership-management controversy. (iv) Management alone enjoy certain
benefits.
Modern Approach of Financial Management
The modern approach does bring financial managers to consider the analytical and
border point. They asked to consider both the optimum use of resources and
distribution of funds. As the arrangement of funds is an important component
which does mean for short time and long term financial problems. The below
three decisions may taken by the finance manager.

1] Investment Decision
The decision relates to selection of assets which invest by firms and the assets
which firms acquire which might for long term or short term. Capital budgeting is
the process of selecting assets or investment proposals which yield for the long
term. They deal with assets of current which are highly liquid in nature.
2]Financing Decision
The scope of finance indicates the possible sources of raising the finance. The
financial planning decision attempts sources and possible accumulation of funds.
As the decision to ensure the availability of funds whenever required.
As the financial decision made to raise funds at the right time, and financial
decision has to opt for various cost effective methods to run business smoothly.

3]Dividend Decision
The decision taken in regards to net profit distribution which divides into dividend
for shareholders and retained profits. This may concerned with determining the
percentage of profit earned and paid to every shareholder as dividend. The
financial manager makes decisions regarding such profits paid out and works for a
better firm.
This decision made to ensure every shareholder does get a proper share with the
correct financial management approach. 
Financial management is interrelated with other areas. The relation between
financial management with other areas can be defined as follow:

FM with Economics:
• Economic concept like micro and macro economics are directly applied with the
FM approaches.
• Investment decisions, micro and macro environmental factors are closely
associated with the functions of financial manager.
• FM also uses the economic equations like money value discount factor, economic
order quantity etc.
• Financial economics is one of the emerging area, which provides immense
opportunities to finance and economical areas.
FM and Accounting:
• Accounting records includes the financial information of the business concern.
• Hence, we can easily understand the relationship between the FM & accounting.
• In the olden periods both fm and accounting are treated as a same discipline and
then it has been merged as management accounting because this part is very
much helpful to finance manager to take decisions.
• But nowadays fm and accounting disciplines are separate and interrelated.
Fm and production management:
• Production management is the operational part of the business
concern, which helps to multiple the money into profit.
• Profit of the concern depends upon the production performance.
• It needs finance because production department requires raw
material, machinery, wages, operating expenses etc. these
expenditures are decided and estimated by the financial department
and the finance manager allocated the appropriate finance to
production.
Fm and human resource
• FM is also related with human resource department, which provides
manpower to all the functional areas of the management.
• Financial manager should carefully evaluate the requirement of
manpower to each department and allocate the finance to the human
resource department as wages, salary, remuneration, commission,
bonus, pension and other monetary benefits to the human resource
department.
• Hence, fm is directly related with human resource management.
Fm and marketing:
• Produced goods are sold in the market with innovative and morden
approaches.
• For this, the marketing department needs finance to meet their requirements.
• The financial manager or finance department is responsible to allocated the
adequate finance to the marketing department.
• Hence, marketing and fm are interrelated and depends on each other.
Fm and mathematics:
• Modern approaches of the fm applied large number of mathematical
and statistical tools and techniques.
• They are also called as econometrics.
• Economic order quantity, discount factor, time value of money, cost of
capital, capital structure theories, dividend theories, ratio analysis and
working capital analysis are used as mathematical and statistical tools
and techniques in the filed of fm
Finance manager:
• Finance managers are accounting professionals who are responsible for the financial wellbeing
of a company or organization. Finance managers may advise upper management or corporate
officers to determine how and where the company's assets are acquired and allocated.

• Successful finance managers are adept at several of the following skills.

• Leadership
• Problem solving
• Communication
• Analysis
• Interpersonal skills
• Mathematical proficiency
• Attention to detail
• Organization
• Technological skills
• Ability to work independently
Basically, the functions of a financial manager can be categorized into three main
functions. These are:
• Capital structure decision
• Investing and Financing Decision
• The decision about dividend policy

1] Capital Structure Decision

• The main function of a financial manager is to form an optimal capital structure
for the organization. The optimal capital structure depends on the type of
company and its financial capability. Capital structure means the ratio of debt and
equity. The financial manager sets the proportion of debt and equity for a
company. It can be 50/50 ratio or 60/40, or 70/30, or 55/45, or others according
to the decision of managers.
2] Investing and Financing Decision
• Financial managers always concern about the cost of collecting funds and the
return on the invested capital. Where cost is less, the fund should be collected
from there. And where the return is maximized with a lower or moderate level of
risk, funds should be invested there. So it’s a financial manager’s responsibility to
make the right choice which can bring profit for the company.
3] Dividend Policy
• When companies make a profit, a question arises there that whether profit will
be distributed or not. If distributed then what proportion of profit will be
distributed among the shareholders and what will be kept as retained earnings.
As a function of managing funds, the financial manager makes a decision about
dividend policy.
In addition to these, there are many functions/ roles that the financial manager
does. Some of these functions are given below:
• Identifying what amount of funds is required for the company.
• Managing working capital which mainly deals with short-term asset and liabilities.
• Cash forecasting is forecasting of cash inflow and outflows.
• Provides required funds to every department of the company.
• Ensuring optimal use of financial resources.
• Ensuring substantial growth of the company.
• Buying and selling of financial assets.
• Valuation of a company’s stock.
• Maximizing the wealth of the company by increasing the stock price in the
market.