Business Finance –ACC501 VU

LESSON 2
WHY STUDY FINANCE?

Why Study Finance?

· Marketing and Finance

o Marketers have to work with budgets
o Need to get greatest payoffs from marketing expenditures and programs
o Cost and Benefit analysis of projects
o So, finance is vital for:
§ Marketing research
§ Design of marketing and distributions channels
§ Product pricing
· Accounting and Finance
o Accountants are required to make financial decisions as well as understand the implications
of new financial contracts
o Financial analysts make extensive use of accounting information
· Management and Finance
o Business Strategy is always disastrous if financial planning is not adhered to.

What is Business Finance?

· In order to start any new business, the following issues become vital
o What long-term investment should be taken on?
o From where to get the long-term financing to pay for investment? Bring in other owners or
borrow the money?
o How to manage everyday financial activities?

The Financial Manager

To create value, the financial manager should:

· Try to make smart investment decisions.
· Try to make smart financing decisions.

Hypothetical Organization Chart

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Business Finance –ACC501 VU
Business Finance and Financial Manager

· Financial Management Decisions

o Capital Budgeting
o Capital Structure
o Working Capital Management

Financial Management Decisions

· Capital Budgeting
· The process of planning and managing a firm’s long-term investments
· Financial managers concern with how much, when and how likely is cash expected to receive
· Evaluating the size, timing and risk of future cash flows is the essence of capital budgeting

Capital Budgeting Decision

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Business Finance –ACC501 VU
The Capital Structure Decision

Capital Structure

· The value of the firm can be thought of

as a pie.
· The goal of the manager is to increase
the size of the pie.
· The Capital Structure decision can be
viewed as how best to slice up the pie.
· If how you slice the pie affects the size
of the pie, then the capital structure
decision matters.

The Net Working Capital Investment Decision

The Corporate Firm

· The corporate form of business is the standard method for solving the problems encountered
in raising large amounts of cash.
· However, businesses can take other forms.

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Business Finance –ACC501 VU
Forms of Business Organization

· Three major forms

o Sole proprietorship
o Partnership
§ General
§ Limited
o Corporation
§ Limited Liability Company

Sole Proprietorship

· Advantages
o Easiest to start
o Least regulated
o Single owner keeps all the profits
o Taxed once as personal income
· Disadvantages
o Limited to life of owner
o Equity capital limited to owner’s personal wealth
o Unlimited liability
o Difficult to sell ownership interest

Partnership

· Two or more owners (partners)

o General partnership: all partners share in gains and losses and all have unlimited liability for
all partnership debts
o Limited partnership: one or more general partners will run the business and have unlimited
liability but there will be one or more limited partners who do not actively participate in the
business and their liability is limited to their contribution.
· Advantages
o Two or more owners
o More capital available
o Relatively easy to start
o Income taxed once as personal income
· Disadvantages
o Unlimited liability
§ General partnership
§ Limited partnership
o Partnership dissolves when one partner dies or wishes to sell
o Difficult to transfer ownership

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