Business Finance

Fall 2022 Session

Syed Sarmad Hasan
 What is Business? (…. Busy-ness?)
Organized activities to produce and/or sell goods and services for profit
 Business Goal

• Create/Enhance Brand Value

• Increase the Market Share
• Satisfy Customers
• To become number 1 (the industry leader, the best….)
• Talent Retention ….(Motivate Employees)
• Efficiency, Effectiveness, Innovative, Service Oriented……
 Triple Bottom Line
• Commercial = Profit
• CSR = corporate social responsibility
• Environment
• Society = People
• Physical = Planet
• Profit, People, Planet
 How is Finance Different
from Accounting?

• Past …………….. Future

• Certain …………. Uncertain
• Strict Rules, standards, frameworks ………Nothing but common sense
• Profit …….. Economic Value
• Accruals ……. Cash
 Finance
Finance is the art & science of managing money (cash)

Earning, spending, saving = inflow, outflow, or no flow

Personal level & Business level

 Role of Finance?
ECONOMIC VALUE
P Business Decisions Corporate Governance
P
R Investment
Decisions Liquidity
R
Future
O Common Financing
Decisions
Decisions
O
Sense
F Distribution
Decisions
F
I Decision Makers are
RATIONAL Business Ethics I
T T
ECONOMIC VALUE
 Investment Decisions
• Which investment option is better?
• What is the criteria?
• What are the important factors?
Cost, Risk, Opportunity cost, inflation, currency exchange rate, time
frame, Quantum mechanics, data availability, data reliability, growth
potential, social factors, environmental factors, ethics …. etc.

Capital Budgeting Techniques: Payback period, Net Present Value, IRR

….
 Financing Decisions
• Owners bring in their money = Equity
• Owners ask others to bring in money & become co-owners = Equity
Equity is non-returnable, no obligation on the co. to distribute profit
• The organization (and not the owners) borrows money
Loan, Over-draft, bonds, lease, conventional banking products,
Islamic instruments
Return the invested amount and also the co. needs to pay something
(interest)
Capital Structure = Debt + Equity
 Distribution Decisions
Distribution of profit among owners
Dividends
From Zero to 100%
The portion not distributed is called RETAINED Earnings = Equity
RE is used for future growth
BM - AGM
 Liquidity Decisions
• Day to day cash requirement
• Current Assets
• Cash Cycle WORKING CAPITAL
• Current Liabilities
 Forms of Business

Businesses are Organized as:

• Sole proprietorship
• Partnership
• Company
 Sole Proprietorship
 Business owned and run by an individual person
All profits are subject to the owner
There is very little regulation for proprietorships
Owners have total flexibility when running the business
Very few requirements for starting—often only a business license
Owner is 100% liable for business debts
Equity is limited to the owner’s personal resources
Ownership of proprietorship is difficult to transfer
No distinction between personal and business income
 Partnership
 Business owned and/or run by more than one person under a contract
Shared resources provides more capital for the business
Each partner shares the total profits of the partnership
Similar flexibility and simple design of a proprietorship
Inexpensive to establish a business partnership, formal or informal
Each partner is 100% responsible for debts and losses
Selling the business is difficult—requires finding new partner
Partnership ends when any partner decides to end it
 Company
 A company is a separate legal entity. It’s income is taxable. When owners receive
income from the company it is again taxable
Limits liability of the owner to debts or losses (personal assets are not at risk)
Profits and losses belong to the corporation (tax advantage)
Ownership can be transferred to others fairly easily (long life)
Complex requirements for starting
Costly & complicated to operate
Hostile takeover threat