Business finance is composed of two words business and finance.

• Business includes all activities connected with trade, industry and commerce.
• Finance many be defined as the provision of money at the time when it is
required.
• Business finance is the process which is concerned with acquisition of funds,
use of funds and distribution of profits by the business firm.

Definition of Financial Management

• Wheeler defines business finance as “that business activity which is concerned
with the acquisition and conservation of capital funds in meeting the financial
needs and overall objectives of business enterprise”
• Financial management refers to that part of the management activity which is
concerned with the planning and controlling of firm’s financial resources.

Finance is life blood and nerve system

Finance is needed

To promote business
To acquire fixed assets
To conduct market survey
To keep men and machine at work
To encourage management to make progress and create values
(Finance is circulated to perform all the functions of a concern)

Financial management helps in

• Financial planning and successful promotion of an enterprise
• Acquisition of funds as when required at the minimum possible cost
• Proper use and allocation of funds
• Taking sound financial decision
• Improving the profitability through financial control
• Increasing the wealth of the investors and the nation
• Promoting and mobilizing individual and corporate savings.
Approaches to finance function
The Traditional approach
• Evolved during 1920 and 1930
• Confined to only procurement of funds on most suitable forms.
Ignored
• Allocation of funds.
• Working capital finance and management.
• No focus on day to day financial problems of organization.
The Modern approach
• Cost of raising funds and return from their use are compared
• Finance function covers financial planning, raising of funds, allocation of
funds , financial control .
• Covers investment decision, financing decision and dividend decision.

Aims of Finance Function

• Acquiring sufficient funds
(Assess needs of an enterprise and find suitable sources)
• Proper utilization of funds (Return≥ cost)
• Increasing profitability (planning and control)
• Maximizing firm’s value

Relationship of finance with other Business Functions

Functional areas of financial Management

• Determining financial needs
 • Selecting the sources of funds
• Financial Analysis and Interpretation
• Cost- Volume- Profit Analysis
• Capital Budgeting
• Working capital management
• Profit planning and control
• Dividend policy
Functions of finance manager
• Financial forecasting and planning
• Acquisition of Funds
• Investment of funds
• Helping in Valuation Decision
• Maintain Proper Liquidity
Sources of Finance
Long term sources
I)OWNERSHIP SECURITIES
1. Equity shares
2. Preference shares
1. Cumulative preference shares
2. Non-cumulative preference shares
3. Redeemable preference shares
4. Irredeemable preference shares
5. Participating preference shares
6. Non-participating preference shares
7. Convertible preference shares
8. Non-convertible preference shares
3. Deferred shares
4. SWEAT Equity
II Creditorship securities
1. Debentures
1. Unsecured debentures
2. Secured debentures
3. Bearer debentures
4. Registered debentures
5. Redeemable debentures
6. Irredeemable debentures
7. Convertible debentures
8. Non-convertible debentures
III INTRNAL FINANCING
1. Retained earnings
2.Depreciation as source of funds

IV SHORT TERM SOURCES

1. Indigenous Bankers
2. Trade credit
3. Installment credit
4. Advances
5. Accounts Receivables
6. Accrued Expenses
7.Commercial papers ( ranges from 91 to 180 days)
8. Commercial Banks
1. Loans
2. Cash credit
3. Overdrafts
4. Purchasing and Discounting Bills
9. Public Deposit (maximum of 36 months)

V TERM LOANS
1. Industrial Finance Corporation of India
2. Industrial Credit and Investment Corporation of India
3. State Financial Corporations
4. Industrial Development Bank of India
5. Small Industries Development Bank of India
6. Term financing by Commercial Banks

Financial planning is a statement estimating the amount of capital and determining its
composition.
1. Adequate funds: (ensure availability of funds)
2. Balancing of costs and risk
3. Flexibility (adjustable as per the changing conditions)
4. Simplicity (less securities)
5. Liquidity
6. Optimum use
7. Economy (Proper debt-equity mix)

CONSIDERATIONS IN FORMULATING FINANCIAL PLAN

1. Nature of the industry
2. Standing of the concern (goodwill, past performance, attitude of management)
3. Future plans
4. Availability of resources
5. General economic conditions
6. Government control

Steps in financial planning

1. Establishing financial objectives (short term objectives and long term
objectives)
2. Formulating financial policies(Procurement, administration and distribution of
business funds)
3. Formulating procedures (to ensure consistency in action)
4. Providing for flexibility

Limitations in financial planning

Difficulty in forecasting
2. Difficult to change ( managerial personnel may not like it)
3. Problem of co-ordination
4. Rapid changes (Once investment made in fixed assets these decisions cannot be
reversed)