Intro to Finance and Budgeting

• FINANCING is the act of managing money through providing and properly utilizing funds for business activities, making purchases or investments.
• BUDGETING is the process of creating a plan to allocate resources.
• FINANCE

  • deals with the allocation of assets and liabilities over time under conditions of certainty and uncertainty.
  • the discipline of business administration that focuses on managing how money moves in a firm.
• ACCOUNTING refers to the system of documentation and assessment of the business’s financial transactions.
• ECONOMICS focuses on the allocation of resources and the transactions that occur between entities in an economy.
• FINANCE uses the data provided by the accounting department and applies economic theories in order to come up with a decision that would result in a better management system of the company’s finance.
• CATEGORIES OF FINANCE

  • Public or government finance
  • Corporate
  • Personal
• PUBLIC OR GOVERNMENT FINANCE

  • describes finance in relation to sovereign states and related public entities.
  • encompasses how much money is allocated for the public.
• CORPORATE

  • includes the earnings and expenditure of a corporation as well as the tools and analysis used to allocate financial resources.
• PERSONAL

  • household finance
  • comprises all financial decisions and activities of a household or individual.
  • budgeting, insurance, savings, investing, debt servicing, mortgages, etc.
• AREAS OF FINANCE

  • Financial Management
  • Financial Markets and Institutions
  • Investment
• FINANCIAL MANAGEMENT is the study of means of acquiring funds, managing working capital and fund allocation for long term investments.
• FINANCIAL MARKETS AND INSTITUTIONS

  • the study of money markets (short-term debt), capital markets (long-term debt and equity).
  • attention is given to the manner in which financial traders behave in a global market; the role played in the finance market by different financial institutions; and the effects upon the financial system of national and international policymakers.
• INVESTMENT is the study of techniques used by individuals to manage portfolios and provide financial planning.
• • It is through financial management that an institution can plan, direct, organize, and control the company’s resources.
  • For small businesses, the owner is usually the one that completes this function because all of the business resources are the owner‟s responsibility.
  • For large business organizations, however, a financial or accounting manager is hired for this function alone
• OBJECTIVES OF FINANCIAL MANAGEMENT

  • Support Accounting
  • Provide Decision Information
  • Risk Management
  • Improve Operational Controls
• SUPPORT ACCOUNTING

  • information from the accounting department is retrieved and reviewed by financial managers for accuracy and validation.
  • corrective measures are given to improve the company’s accounting information.
• SUPPORT ACCOUNTING

  • For small businesses, accounting information is essential because it is used to secure external financing from banks, lenders, and investors.
  • This information is significant because it will allow an enterprise to acquire additional funds from potential sources of funds.
• PROVIDE DECISION INFORMATION

  • involves supplying business owners with essential financial or accounting data from the financial manager to support their decision-making process.
• PROVIDE DECISION INFORMATION

  • Financial managers intermediate the gap between the business owner and the operations manager
  • This allows the business owner to lessen the time and the effort to extract the necessary data for decision making.
• RISK MANAGEMENT

  • predicting the possible threats that might affect the firm and implementing ways on avoiding them.
  • ensuring that the company avoids unnecessary risk involving financial situations.
• RISK MANAGEMENT

  • For large business organizations, risk management function is usually the primary objective of financial management
  • Financial rooms can result from business opportunities providing inadequate financial returns, debt financing with unfavorable loan terms, lack of available business credit, and unstable financial investments.
  • Financial managers devote plenty of time in reviewing the company's financial activities to ensure that company absorbs the least amount of risk.
• IMPROVE OPERATIONAL CONTROLS

  • improves operations and workflow by reviewing information from several divisions or departments within the company.
  • ensures that employees are operating within the company guidelines.
  • make suggestions for the improvement of the company’s controls and business operations.
  • reduce waste, limit unnecessary expenditures, and improve employee productivity
• INTERNAL INFLUENCES ON FINANCIAL OBJECTIVES

  • Business Ownership
  • Size and Status of the Business
  • Other Functional Objectives
• Business Ownership

  • has significant impact on financial objectives.
  • a venture capital investor would have quite a different approach vs. a long-standing family ownership.
• Size and Status of the Business

  • dictate the objectives and priorities of the business.
  • Small businesses tend to focus on survival breakeven, and cash flow objectives.
  • Multinational businesses are much more focused on growing shareholder value.
• Other Functional Objectives

  • Almost every other functional objective in a business has a financial dimension – which often brings the finance department into conflict with other functions
• EXTERNAL INFLUENCES ON FINANCIAL OBJECTIVES

  • Economic Conditions
  • Competitors
  • Social and Political Change
• Economic Conditions

  • refer to the present state of affairs in the overall economy of a country or geographical region.
  • demonstrated by Credit Crunch— a phenomenon wherein financial institutions especially banks are providing either credits in amounts that are less than the number of consumers or firms that are willing to pay for them or loans which can only be afforded by people who has more money and assets to spare.
• Economic Conditions

  • The economic downturn forced many businesses to reappraise their financial objectives in favor of minimizing costs and maximizing cash inflows and balances.
  • Significant changes in interest rates and exchange rates also have the potential to threaten the achievement of financial targets, such as ROCE
• Competitors

  • Competitive environment directly affects the achievability of financial objectives.
  • are other businesses or entities offering similar products or services in the same market.
  • cost minimization may become essential if a competitor is able to grow market share because it is more efficient
• Social and Political Change

  • indirect impact
  • refers to shifts in society's norms, values, and government policies.
  • example: legislation on environmental emissions or waste disposal may force a business to increase investment in some areas, and to cut costs in others.
• SOURCES OF FINANCE

  • Equity Shares
  • Preference Shares
  • Deferred Shares
  • No Par Shares
  • Depreciation Funds
  • Retained Funds
  • Financial Institutions
  • Capital
• • Sources of finance signify the ways for organizing various terms of finance into the industrial concern, indicating how companies are managing finance for their requirements.
  • Companies, whether new or already actively existing in the industry, need a sum amount of finance to achieve their long-term and short-term requirements, such as purchasing fixed assets, constructing office buildings, and purchasing raw materials and day-to-day expenses
• EQUITY SHARES

  • aka Ordinary Shares
  • equity shareholders are the real owners of the company, and have the control over the management of the company.
  • equity shareholders are eliigible to get their dividend if the company earns profit.
  • the equity share capital cannot be retrieved throughout the company’s lifetime, and the shareholders’ liability is the value of unpaid value of shares.
• PREFERENCE SHARES

  • parts of corporate securities are referred to as preference shares
  • this kind of share has the right to get the dividend and retrieve the initial investment at the time of the company’s termination.
  • preference shareholders are entitled to get a fixed rate of shares.
• DEFERRED SHARES

  • aka Founder Shares because these shares are normally issued to the founders
  • these shares are issued to the founder at small denominations to control over the management by the virtue of their voting rights.
  • the shareholders have the preferential right to get dividend before the preference shares and equity shares.
• NO PAR SHARES

  • shares that have no face value
  • the company issues such kind of shares which is divided into a number of specific shares without having any specific denomination.
  • the value of share can be measured by dividing the company’s real net worth with the total number of shares.
• DEPRECIATION FUNDS

  • essential part of the internal sources of finance.
  • used to achieve the working capital requirements of the business concern
  • Normally, depreciation changes against a fixed assets of the company at a fixed rate every year, and its purpose is for the assets to be replaced after the expired period.
  • essential to reduce the tax burden and enhance the overall profitability of the company.
• RETAINED FUNDS

  • can also be referred to as self-finance, inter-finance, and plugging back of profits.
  • done by accumulating the profits by a company for its expansion and diversification activities.
  • a part of the total profits is transferred to various reserves such as general reserve, replacement fund, reserve for repairs and renewals, reserve funds, and secrete reserves.