Introduction to business finance

1.2
What is
Finance
WHAT IS FINANCE?
 Finance is a money Management
 Internal management of the firm whose function primarily
indulge in looking for funds and how to use in funds to
advance company goals and objectives.
Business finance refers to money and credit employed in
business. It involves procurement and utilization of funds so
that business firms may be able to carry out their operations
effectively and efficiently.
DIFFERENCE OF FINANCE IN ACCOUNTING AND ECONOMICS?
 ACCOUNTING
 Recording of transactions in terms of money.
 ECONOMICS
 Real resource (TABLE,MARKERS)
 It focused on real assets , household, government, and
business.
characteristics of business finance
 Business finance includes all types of funds used in business.
 Business finance is needed in all types of organizations large
or small, manufacturing or trading.
 The amount of business finance differs from one business
firm to another depending upon its nature and size. It also
varies from time to time.
 Business finance involves estimation of funds. It is concerned
with raising funds from different sources as well as
investment of funds for different purposes.

Need and Importance

Business finance is required for the establishment of every
business organization. With the growth in activities, financial
needs also grow. Funds are required for the purchase of land and
building, machinery and other fixed assets. Besides this, money
is also needed to meet day-today expenses e.g. purchase of raw
material, payment of wages and salaries, electricity bills,
telephone bills etc
Need and Importance
To meet contingencies
 Funds are always required to meet the ups and downs of
business and unforeseen problems. Suppose, some
manufacturer anticipates shortage of raw materials after a
period. Obviously he would like to stock raw materials. But
he will be able to do so only when money would be
available.
To promote sales
 In this era of competition, lot of money is required to be
spent on activities for promoting sales like advertisement,
personal selling, home delivery of goods etc.
To avail of business opportunities
Funds are also required to avail of business opportunities.
Suppose a company wants to submit a tender but some
minimum amount is required to be deposited along with the
application. In the case of non-availability of funds it would
not be possible for the company to apply.
 Difference between long-term,
medium term and short-term finance
 long term finance is generally needed for the purchase
of fixed assets.
 Medium term finance may be required to modernize
machinery and to improve other facilities.
 Short-term finance is generally required for meeting
expenses on day-to-day operations.
The difference between these three types
of finance are :
Working capital
 Refers all to all things that are being used in the operation of
business whether it is money, equipment, tools, and other
facilities that have a financial value and directly involve in
the business activities.
 Working capital consists of those assets which are either in
the form of cash or can easily be converted into cash, e.g.
cash and bank balances, debtors, bills receivable, stock, etc.
These assets are also known as current assets.
 Working capital is needed for day to day operations of the
business. However, a part of working capital is required at all
times to maintain minimum level of stock and cash to pay
wages and salaries etc. This part of working capital is called
‘permanent’ working capital.
Two sources of capital
 Capital Equity is capital resources that draws out of the
pocket of the owner.
 Capital Loan comes from financing institution such as banks
and other lending organization.
Business Loan divided into categories:
 Short term loan- usually payable within one to two years.
 Medium term loan-is three to five years.
 Long term Loan- payable within five years or more.
Mortgage loan- can be availed with corresponding collateral as an
assurance to the recovery of loans in case the debtor defaults in
its obligatory payments.
 Trade credit the mainstay of this is short term in character in
terms of goods such as product installment purchased plan.
 Credit Instrument is being done through issuance of notes and
other negotiable instrument such as promissory notes,
certificate of bonds and commercial drafts.
 Working capital is referred to the total current assets such
as inventories,cash,account receivable and other liquid
capital.
Formula:
Working Capital=current assets-current liabilities
 Financial reserves are part of sound financial management
as a standby assets to accommodate credit losses, debt
liquidation,contengencies and other unexpected events.
 Budget is planned estimate of cost to be incurred in the
operation of business.
 Business Accounting- It is a device used in business as a
measure of solvency and profit. In 1949(Franciscan Monk)
developed an art of bookkeeping. He is a Father of the
double-entry system.
 Accounting is an art of recording, classifying, and
summarizing in a significant manner and in terms of money,
transaction and events, which are in part at least of
financial character and interpreting.
The difference between fixed and
working capital
PHASES OF ACCOUNTING
1. RECORDING AND Measuring
2. Classifying and summarizing
3.Interpreting
Financial Statement
 Is the product of accounting process prepared and presented
at least annually to be used as a reference for decision
making.
Elements of Financial Statement
1. As of Financial Position
a. Assets- resources controlled by the firm such as cash,
inventories, properties account receivables.
b. Liability – the present obligation of the firm arising from the
past events and the settlement of which expected to result in
an outflow from the firms such as Account payable, notes
payable, mortgage.
2. As of Performance
a. Income – refers to the increase in economic benefits
during the accounting period in the forms of inflow or
enhancement of assets or decrease of liabilities that
resulted in the increase of equity.
b. Expense- It Means decrease in economic benefits or
outflow or depletion of assets or incurrence of
liabilities.
c. Losses – It is decrease in economic benefits may or may
not be in the course of business activities.
3 Basic Accounting Equation
ASSETS=LIABILITIES+EQUITY
 Expanded Equation to determine the profit and loss
summary of the firms operations
 Assets=Liabilities+Equity+Revenue-Expenses
 Accounting System is dual entry represented by debit on
left side and credit on the right sides.
The Account
 Account is a device used to summarize accounting. It is a
detailed record of increase, decrease and balance of each
element that appears in entity's financial statement.
 All assets normally entered in a debit side and entry on the
credit side will decrease the assets value.
 T-Account – is simplest form of account which is composed
of three parts: title debit and credit
Assets – are things of value or resources owned by the firm. It
may be Tangible or intangible.
a. Current assets- representing those are normally converted
to cash.
b. Fixed assets- represents those long lived assets, which
normally used by the firm to produce goods or services such
as property and equipment.
Liability – is the obligation of the firm to settle in the near
future the accounts may be classified either current or long
term liabilities.
Capital – is the value of resource or amount laid down by the
owners of the business organization.
Account Titles
 There are typical accounts titles being used in
accounting system. Assets accounts commonly have the
following title accounts.
1. Cash
2. Account receivable
3. Note Receivables
4. Building
5. Tools and Equipment
6. Furniture and fixtures
7. Inventories
8. Prepaid issuances
Under the Liability accounts is ordinarily referred
a. Account payables
b. Note Payables- is an obligation of the firm to pay in the
future.
Equity – represented by the capital or amount investments
laid by the owners.
Expense Account – includes the following
a. Rent Expense
b. Salary and Wages
c. Traveling expense
d. Light and water expense
e. Telephone expense
f. Supplies expense
g. Miscellaneous expense
h. Insurance Expense
i. Interest expense
j. Interest Expense
k. Taxes and License expense
l. Bad Debts – the uncollectible accounts expeense
 WHAT DO FINANCE IN A ORGANIZATION?
CFO-CHIEF OF FINANCIAL OFFICER
 HE/SHE RESPONSIBLE FINANCIAL DECISION
 TO BUY OR NOT TO BUY(CAMERA,HOUSE,CAR)
 THE BENEFITS HIGHER THAN A COST

FINANACIAL AREA IN FINANCE

1. FINANCIAL MANAGEMENT
 MANAGING OF FINACIAL IN BUSINESSES MAYBE (SMALL OR CORPORATION)
 BUSINESS FINANCE
 CORPORATE FINANCE
2. FINACIAL ECONOMICS
(ELEMENTS)
 FINANCIAL MARKETS
 FINANCIAL INSTITUTION
 FINANCIAL INSTRUMENT
 FIANCIAL MARKET
A.CAPITAL MARKET-LONG TERM
B. MONEY MARKET-SHORT TERM
3.INVESTMENT