Fin

• Finance


  Management of money, banking, investment and credit and science of management of money and other assets
• Finance


  • It is both a science and an art of correct application of the economic and accounting concepts and principles that define the system, structure and process of management, allocation and utilization of financial resources, investment and expenditure
• Financial resources


  Funds of a business which are provided by the owner or by the creditors
• Financial investments


  Resources that are expected to provide income and achieve appreciation or growth of the business
• Financial expenditures


  Operating expenditures and the capital expenditures
• Areas of finance


  • Private finance
  • Public finance
• Private finance


  • Business finance
  • Personal finance
• Business finance


  • Financial management
  • Capital market
  • Financial investment
• Finance officer


  • Plays a crucial role in the whole business organization
  • Acts as the wary financial traffic officer to almost all business transactions with monetary considerations
• Finance officer decision-making function

  • Operating decisions
  • Investing decisions
  • Financing decisions
• Benjamin Franklin: '"Beware of little expenses, a small leak will sink a great ship"'
• Functions of business finance

  • Obtaining money from the right sources
  • Investing money in the right places
  • Continuing to attain the purpose of gaining profit
  • Ensuring cash availability when needed
• Functions of business finance

  1. Allocating the financial resources of the company

  2. Procurement of funds needed

  3. Efficient and effective utilization of funds
• Business organizations


  • Sole proprietorship
  • Partnership
  • Corporation
• Sole proprietorship


  A business owned by one person, such as small service businesses, retail stores, professional practices
• Partnership


  An association of two or more persons who operate a business as co-owners by voluntary legal agreement
• Corporation


  A legal entity whose assets and liability are separate from those of its owners. As a legal person, its personality is distinct from its owners.
• Roles of financial managers

  • Managing investment in non-current assets through evaluation of capital projects
  • Evaluating, obtaining and servicing long-term financial requirements through borrowing, leasing, retaining funds or issuing stocks and securities
  • Distribution of dividends to shareholders
  • Collection and custody of cash and payment of bills
  • Managing investment in current assets such as cash, marketable securities and inventory
  • Obtaining and servicing short-term finance
  • Managing risks associated with changes interest rates and exchange rates
  • Assessing the viability of growth through acquisition of other businesses
  • Planning the future development of business
  • Development and implementation of financial policies
• Sources of capital


  • Equity or capital stock financing
  • Borrowed capital or debt financing or borrowings
• Equity


  Financial resources provided by owners of the business, including the initial, additional investments and earnings retained in the business
• Equity raised by issuing ordinary shares


  • Company is not required to pay dividends to ordinary shareholders, payments of dividends is at the discretion of director
  • If a company suffers a decline in profitability or is short of cash, it can omit the payment of dividends without any serious consequences
• Forms of capital stock

  • Authorized capital stock - maximum number of shares that the business owners are allowed to issue
  • Issued stock - amount of authorized stock subscribed to and paid for in cash, property or services
  • Reacquired stock - stocks can be reacquired by gift from stockholders or by buying some of the company's issued stock
• Debt financing - Borrowings

  Business can borrow from many sources, and the range of sources to choose is generally related to the size of business
• Types of debt financing

  • Current or Short-term debt - due for repayment within a period of twelve months
  • Non-current or Long-term debt - with maturity term of more than twelve months
  • Secured debt - the creditor has claims against the borrower and against assets of the borrower
  • Unsecured debt - the lender has a claim against the borrower but no additional claim to any particular property owned by the borrower
• Types of debt financing

  • Marketable debt - takes the form of securities such as notes, bonds or debentures which are issued to investors and can be traded in a secondary market
  • Non-marketable debt - takes the form of loans arranged privately between two parties where the lender is usually a bank or other financial intermediary
• Financial leverage


  The use of borrowed capital
• Interest


  The cost of borrowed capital
• External short-term financing


  • Liquidity - getting all the funds needed to realize short-run operating objectives
  • Solvency risk factor - primary risk is default on payment of principal and interest
  • Profitability - measured in terms of opportunity cost, and financial expenses such as service charges, interest charges and carrying charges
• External controls


  • Inventory supply services
  • Financial expenses
  • Total quantity of credit available
  • Repayment terms
• Major sources of funds

  • Trade credit market - where raw materials or finished inventories may be purchased on credit
  • Customer loan market - where cash funds can be negotiated
  • Receivables sales market - factoring companies buy outright from manufacturers their open accounts receivables
• Basic types of loans

  • Pure discount loan - debtor receives money today and repays a single lump sum at some time in the future
  • Interest-only loans - debtor pays interest each period and repays the principal at some point in time
  • Amortized loan - debtor repays parts of the loan amount over time, pays interest each period plus fixed amount
• Equity financing


  Permanent in the business entity, reduced by accumulated losses or dissolution, dividends paid to investors, not deductible for income tax purposes
• Debt financing


  Non-permanent, has maturity date with periodic amortizations, investment and other financing charges paid to creditors, deductible for tax purposes giving rise to tax benefits, creditors claims have priority over owners in distribution of assets for liquidation
• Financial management requires maximizing earnings on invested capital and minimizing finance charges on borrowed capital