Principles of Business Finance

Lecture 2 – BBA2K20
By Hassan Ali Solangi - Lecturer
Sindh University Campus at Thatta
 Chapter 2
The Business and
Financial Environments - I
Business and Financial Environments I
Learning Objectives
■ The Business Environment
o Forms of Business Organizations
• Sole Proprietorship
• Partnerships
• Corporations
• Limited Liability Companies – LLCs
■ Financial Environment
 Introduction
Business to Business
and Financial Finance I
Environments
and Role of Financial Management
The Business Environment
Forms of Business Organization
■ Sole Proprietorship
– Owned by one person, operated for personal
profit.

■ Partnerships
– Owned by two or more people, operated for joint
profit.
 Introduction
Business to Business
and Financial Finance I
Environments
and Role of Financial Management
The Business Environment
Forms of Business Organization
■ Corporations
─ “Legal entity”, owned by individuals,
operated for joint profit.

■ Limited Liability Companies – LLCs

─ Hybrid form including best aspect of
Corporation and Partnership
Business and Financial Environments I
The Business Environment
Forms of Business Organization
SOLE PROPRIETORSHIPS
STRENGTHS: WEAKNESSES:
 Low organizational cost  Unlimited liability
 Income taxed once as  Limited funding
personal income  Proprietor must be all
 Independence  Difficult to develop career
 Secrecy opportunities
 Ease of dissolution  Discontinuity on
proprietor’s death
Business and Financial Environments I
The Business Environment
Forms of Business Organization
PARTNERSHIPS
STRENGTHS: WEAKNESSES:
 Improved funding  Unlimited liability to all
sources partners
 Increased managerial  Partnership dissolved upon
talent death of partner
 Income split by  Difficult to liquidate or
partnership contract, transfer ownership
taxed as personal income
Business and Financial Environments I
The Business Environment
Forms of Business Organization
CORPORATIONS
STRENGTHS: WEAKNESSES:
 Owners’ liability limited  Higher tax Double Taxation
 Large capitalization  High government regulation
Ownership readily  When publicly traded, lacks
transferable secrecy
 Indefinite life  Improper corporate
 Professional structures may lead to
management “Agency Problems”
Business and Financial Environments I
The Business Environment
Forms of Business Organization
LIMITED LIABILITIES COMPANIES
STRENGTHS: WEAKNESSES:
 The members of the LLC
 Difficult to Raise Capital.
are not personally liable
for debts or obligations.  Confusion Across States.
 LLCs enjoy pass-through
taxation; the income  No Perpetual Existence.
earned by the business is
not taxed on members.
Business and Financial Environments I
The Financial Environment
Role of Financial Manager in
Financial Environment
(1)
Firm’s (2)
Operations Investors
Financial (4a)
Manager Financial
Real
Assets
assets (3) (4b)

1. Cash raised from investors, ~~~ 2. Cash invested in firm ~~~ 3. Cash generated by operations ~~~
4A. Cash reinvested in the firm, ~~~4B. Cash returned to investors
Business and Financial Environments I
The Financial Environment
The Flow of Capital
Closely Held Corporations
Business and Financial Environments I
The Financial Environment
The Flow of Capital
Public Corporations
Business and Financial Environments I
The Financial Environment
Financial Markets
■ All institutions and procedures for bringing buyers and
sellers of financial instruments together. (Market where
securities are issued and traded)
Business and Financial Environments I
The Financial Environment
Function of Financial Markets
■ Perform the essential function of channeling
funds from economic players that have saved
surplus funds to those that have a shortage

■ Direct Finance: Borrowers borrow funds directly

from lenders in financial markets by selling them
securities
Business and Financial Environments I
The Financial Environment
Function of Financial Markets
■ Promotes economic efficiency by efficient
allocation of capital, which increases
production

■ Directly improve the well-being of consumers

by allowing them to time their purchases
better