Business Finance

• Financial Institution


  An organization that handles financial transactions for individuals, groups and other organizations (profit, non-profit or government owned)
• Some financial institutions are smaller than others, like community based rural banks over large urban based commercial banks
• Depository Institutions

  • Banks
  • Credit unions
  • & saving and loan associations
• Non-depository Institutions

  • Insurance companies
  • Pension funds
  • Securities firms
  • Government-sponsored enterprises
  • Finance companies
• Depository Institutions


  Manage money that is deposited by individuals and organizations
• Non-depository Institutions


  Serve as intermediaries between savers and demanders of funds, or individuals, households, and other businesses who need additional funds to support personal needs or businesses operations
• Non-depository Institutions


  Borrow funds from those who have excess funds (called savers)
• Common Types of Financial Institutions

  • Commercial Banks
  • Savings and Loans
  • Credit Unions
  • Investment Banks
  • Insurance Companies
  • Brokerage Firms
  • Investment Companies
• Commercial Banks accept deposits from individuals and organizations that have excess funds and provide loans to those who need or want to borrow money
• Savings and Loans, also referred to as StL or thrift banks, dedicate the bulk of financial transactions to residential mortgages
• Credit Unions operate with rates offered on savings accounts generally higher or lower on certain types of loans compared to what most banks will offer
• Investment Banks perform the task of intermediary which facilitates the transaction of individuals and institutions in investing
• Insurance Companies operate on the principle of pooling risks wherein premiums are collected from clients in exchange for protection from unexpected events like fire, flood, earthquakes, lawsuits, illnesses, disability, and other related losses
• Brokerage Firms are financial institutions that earn through commissions and facilitate the buying and selling of securities
• Discount Brokerage firms allow clients to do their own research about investment options
• Full Brokerage firms provide clients advice and help them manage their investment portfolios, which are collections of financial products owned by a single investor
• Investment Companies are corporations wherein individuals and other organizations invest in investment portfolios managed by professionals to keep track of market trends and the performance of different financial products (e.g., mutual fund companies)
• Financial Instruments

  • Savings
  • Loans
  • Bonds
  • Security
  • Treasury Bills
  • Insurance products
• Financial instruments are financial products signified by instruments when individuals and organizations deal with each other in completing financial transactions
• Financial instruments are documents signifying legal or binding agreements between two parties, typically having monetary values associated with them
• Most Common Financial Instruments

  • Savings
  • Loans
  • Bonds
  • Security
  • Treasury Bills
  • Insurance products
• Treasury Bills are financial instruments issued by the government, yielding no interest but sold at a discount
• Insurance products are common financial arrangements where an insurance provider states its guarantee to pay covered claims in return for a monthly premium cost
• Financial Market is a means for the buying and selling of stocks, bonds, and other financial instruments, facilitating the exchange of funds between people and organizations with surplus funds and those who want to borrow or need money
• Financial Market channels funds to savings according to BSP
• Financial market channels

  • Fund to savings
  • Exchange of funds between people and organizations with surplus funds and those who want to borrow or need money
• Professors Scott Besley and Eugene Brigham: 'The financial market is sometimes described as a "mechanism rather than a physical location or a specific type of organization or structure"'
• Money market securities

  • Treasury bills
  • Commercial paper
  • Negotiable certificates of deposit issued by government, business, and other financial institutions
• Finance is the allocation of scarce resources which include money
• Finance in business

  • Responsible for managing the aspect of operations that deals with money
  • Concerned with not just the allocation of funds but also with the resources of those funds
• Branches of Finance

  • Public Finance
  • Personal Finance
  • Corporate Finance
• Goal of corporate finance

  Maximize shareholder value through sound financial planning
• Relationship between Accounting and Finance

  Managerial accounting involves the preparation of reports intended to aid internal users in decision making, relying on historical data provided by financial accounting
• Financial Management

  1. Planning, organizing, controlling, and monitoring financial resources with a view to achieve organizational goals and objectives

  2. Deals with decisions that are supposed to maximize the value of shareholders' wealth, ultimately affecting the market's perception of the company
• Problems caused by management of financial resources
• Importance of finance in different areas of operation in an organization

  • Research and Development
  • Employee Relations
  • Marketing Promotion
• Areas where the organization spends on

  • Benefits
  • Learning and development
  • Wages
  • Activities aimed at boosting employee morale
• Marketing Promotion

  Finance will help the marketing department determine the optimal amount of budget to be spent on marketing activities such as advertising and promotion
• Expansion

  Decision makers in an organization find it important to expand. Finance will supply them with historical financial data to see whether past performance can help predict the financial outlook if additional capital expenditure is to be made
• Meeting contingencies

  Every business faces external risks such as natural calamities, major political problems, and big fluctuations in input prices. Finance is involved in managing these risks