INTRODUCTION TO BUSINESS FINANCE

Business concerns need finance to meet their requirements in the economic world. Any kind of business
activity depends on finance. Hence, it is called lifeblood of business organizations. Whether the business
concerns are big or small, they need finance to fulfill their business activities. In the modern world, all
the activities are concerned with the economic activities and very particular to earning profit through
any venture or activities. The entire business activities are directly related with making profit. (According
to the economics concept of factors of production, rent given to landlords, wage given to labor, interest
given to capital and profit given to shareholders or proprietors), a business concern needs finance to
meet all the requirements. Hence finance may be called as capital, investment, fund etc., but each term
is having different meanings and unique characters. Increasing the profit is the main aim of any kind of
economic activity.

What is Business Finance?

Business Finance may be defined as the art and science of managing money. It includes financial service
and financial instruments. Finance also is referred as the provision of money at the time when it is
needed. Finance function is the procurement of funds and their effective utilization in business
concerns.

Types of Finance

Finance is one of the important and integral part of business concerns, hence, it plays a major role in
every part of the business activities. It is used in all the area of the activities under the different names.
Finance can be classified into two major parts.

Private Finance includes the Individual, Firms, Business or Corporate Financial activities to meet the
requirements. Public Finance which concerns with revenue and disbursement of Government such as
Central Government, State Government and Semi-Government Financial matters.

Profit Maximization

Main aim of any kind of economic activity is earning profit. A business concern is also functioning mainly
for the purpose of earning profit. Profit is the measuring techniques to understand the business
efficiency of the concern. Profit maximization is also the traditional and narrow approach, which aims at,
maximizes the profit of the concern. Profit maximization consists of the following important features.

Wealth Maximization

Wealth maximization is one of the modern approaches, which involves latest innovations and
improvements in the field of the business concern. The term wealth means shareholder wealth or the
wealth of the persons those who are involved in the business concern. Wealth maximization is also
known as value maximization or net present worth maximization. This objective is a universally accepted
concept in the field of business. Wealth maximization is one of the modern approaches, which involves
latest innovations and improvements in the field of the business concern. The term wealth means
shareholder wealth or the wealth of the persons those who are involved in the business concern.
Wealth maximization is also known as value maximization or net present worth maximization. This
objective is a universally accepted concept in the field of business.
 INTRODUCTION TO FINANCIAL SYSTEM

The financial system performs the essential economic function of channeling funds from those who are
net savers (who spend less than their income) to those who are net spenders (who wish to spend or
invest more than their income). In other words, the financial system allows net savers to lend funds to
net spenders.

FINANCIAL INTERMEDIARIES

This is an institution or individual that serves as a middleman for different parties in a financial
transaction

MONEY MARKET

The money market is the trade in short-term debt. It is a constant flow of cash between governments,
corporations, banks, and financial institutions, borrowing and lending for a term as short as overnight
and no longer than a year.

CAPITAL MARKET

Capital market is a market where buyers and sellers engage in trade of financial securities like bonds,
stocks, etc. The buying/selling is undertaken by participants such as individuals and institutions. Capital
market consists of primary markets and secondary markets.

TYPES OF FINANCIAL INTERMEDIARIES

1. Direct Financing – obtaining funds directly from households. Direct finance is one of the two methods
of financing in which the borrower borrow funds from financial market without any connection of the
third party institutions. 2. Indirect Financing – a result of Financial Intermediation. Indirect finance is
one of the two methods of financing in which the borrowers borrow money from financial market
through any kind of third party intermediary.

FIVE PARTS OF THE FINANCIAL SYSTEM

1. Money - used as a medium to buy goods & services. It also is a standard unit of measurement and acts
as a store of value. However, money may not be a good store of value since it loses value with inflation.
2. Financial Instruments – these are formal obligations that entitle one party to receive payments or a
share of assets from another party. Examples of tradable financial instruments include loans, stocks, and
bonds.

3. Financial Markets - a place or network where financial instruments can be sold quickly & cheaply.

4. Financial Institutions - firms that connect borrowers and lenders, provide savers and borrowers
access to financial instruments & markets. There are two types of Financial Markets – the primary
market and the secondary market.

5. Central Banks- large financial institutions that handle government finances, they regulate the supply
of money, and they serve as banks to commercial banks
 FINANCIAL INSTITUTIONS

A financial institution is responsible for the supply of money to the market through the transfer of funds
from investors to the companies in the form of loans, deposits, and investments.

TYPES OF FINANCIAL INSTITUTIONS

1. What is Life Insurance?

Life insurance is a type of insurance that compensates your beneficiaries when you die

2. Stock Exchange
3. Brokerage Firms
Brokerage firms are financial institutions that help you buy and sell securities. They act as the
middle man between the buyer and the seller

4. What is a Mutual Fund?

Mutual fund is a basket of various investments, such as stocks, bonds, and cash.

5. Other Financial Institutions

Other financial institutions include pension funds like Government Service Insurance System (GSIS) and
Social Security System (SSS), investment banks, and credit unions; even more are created over time.

Investment Opportunities in Stocks and Bonds

What is a Stock?

A stock is a stake of ownership in a company that is sold off in exchange for cash. A stock is a security in
that company that can also be referred to as equity or a share.

What is a Bond?

While stocks are a stake of ownership in a company, a bond is a debt that the company or entity enters
into with the investor that pays the investor interest on that debt. Essentially, bonds are IOU's that
companies enter into with investors on the pretense that they will repay the money lent in full with
regular interest payments.

What are Treasury bills?

Enjoy the benefits of investing in Treasury Bills. Treasury Bills or popularly known as T-Bills are peso-
denominated short-term fixed income securities issued by the Republic of the Philippines through its
Bureau of Treasury

Financial Instruments

A financial instrument is a monetary contract between parties. We can create, trade, or modify them.
We can also settle them. A financial instrument may be evidence of ownership of part of something,
as in stocks and shares. Bonds, which are contractual rights to receive cash, are financial instruments.
There are four main classes of financial instrument that investors make use of to achieve either income
or capital growth. These are:

1. Equities, also known as stocks or shares 2. Debt instruments, also known as bonds or bills 3.
Derivatives

TYPES OF DEBT INSTRUMENTS:

1. Debentures Debentures are not backed by any security. They are issued by the company to raise
medium and long term funds. They form the part of the capital structure of the company, reflect on the
balance sheet but are not clubbed with the share capital.

2. Bonds Bonds on the other hands are issued generally by the government, central bank or large
companies are backed by a security. Bonds also ensure payment of fixed interest rates to the lenders of
the money.

3. Mortgage A mortgage is a loan against a residential property. It is secured by an associated

property. In a case of failure of payment, the property can be seized and sold to recover the loaned
amount.

4. Treasury Bills Treasury bills are short-term debt instruments that mature within a year. They can
be redeemed only at maturity. They are sold at a discount if sold before maturity.

COMMON STOCKS AND PREFERRED STOCKS

Common stock, sometimes called capital stock, is the standard ownership share of a corporation. In
other words, it’s a way to divide up the ownership of a company; so one share of common stock
represents a percentage ownership share of a corporation. For instance, if a company had 100 shares
outstanding, one share would be equal to one percent ownership of the company.

A preferred stock is a share of ownership in a public company. It has some qualities of a common stock
and some of a bond. The price of a share of both preferred and common stock varies with the earnings
of the company. Both trade through brokerage firms.