Chapter 1 : Introduction To Business Finance (Note)

finance busiensss

Meaning of Business Finance :

The term business is the related with business . Finance is concerned with decision about money . Business finance is deal with ‘How money is raised’ and used by business . It is an activity concerned with acquisition of fund , use of funds  and distribution of profit by a business form . It is also known as corporates finance . Business finance is concerned with investment decision , financing decision, dividend decision and   working capital management decision .

 

# Function of finance manager (finance)

In a business the finance function involves the acquiring and utilization of funds necessary for efficient operation . The finance function has been classified in to following two parts :introduction  of  finance, financial management

  1. Managerial function/ Executive function :  Managerial finance function involve the following decisions

a. Investment decision :  One of the most important finance function is to intelligently allocate capital to long term asset . This activity is also known as capital budgeting . A companies’ asset and resources are rare and most be put to their almost utilization . A firm should pick where to invest in order to gain the highest  return . so, it is important to allocate capital in those  long term asset , to get maximum return .

 

b . Financial decision :  Financial  decision is important to make wise decision about when , where , and How should business acquire  fund . Because a firm tends to profit most when the market estimation of an organization’s share expands this is not only sign of development for the firm but also it boosts investors wealth . Consequently this relates to the composition of various securities in the capital structure of the company .

 

c. Working capital management decision :  It is the important to maintain a liquidity position of a firm to avoid insolvency firms profitability ,liquidity and risk all the are associated with the investment is current asset . In order to maintain or trade off between profitability and liquidity .It is important to invest sufficient fund in current asset . Since current assets do not earn anything for business therefore a proper calculation most be done before investing in current asset .

 

d. Dividend decision : Earning profit  is a common aim of all the business . A financial manager perform incase of profit ability is to decide whether to distribute all profit or distribute part of the profit to the shareholder and retain the half in the business . It’s the financial manager’s responsibility to decide a optimum dividend policy which maximize the market value of the firm .

 

#   Routine Function :

A company needs to perform some regular activities to complete . It’s managerial activities properly . Routine function are generally do not require managerial involvement to carry out . They are carried out by junior staff in the firm . They perform other effective execution of managerial finance function . Some  of the routine finance function  are as follow :

  • Supervision of cash receipts and cash payment .
  • Safe guarding  of cash balance .
  • Custody and safe guarding of valuable  documents like securities and insurance policies .
  • Record keeping of financial performance of the firm .
  • Supervision of current asset and fix asset .
  • Recording to the top management .

# Goal of the firm 

Goals can be defined as the desired out come for which organization is established . The objective provides a frame work for optimum financial decision making . A firm has a multiple goals such as profit maximization , cost minimization , goals of the firm can be categorized in to following two groups:

A. Profit maximization :   Profit maximization refers to the maximization of rupee income of the business organization . profit is the difference between revenue and cost . Hence profit is maximize only when the difference between total cost and revenue is maximized . According to this goal financial manager should take those actions that increase profit and avoid those actions that should decrease profit .

* Arguements in favor of the profit maximization

  • Understandable
  • Incentive to work
  • Measurement of efficen
  •   Maximize social welfare

   * Critisms of profit maximization

  • Vague\ambitious
  • Ignores time value of money
  • Ignore risk

B . Wealth Maximization : It is also called stock price maximization or shareholders wealth maximization . Shareholders wealth is maximized when the firm is able to maximize the stock prices . But market price is maximized when the net present value of course excel  is maximized . The net present value is difference between present value of future benefits of project and present value of cost . wealth maximization objective is superior to profit maximization objective due to following reasons :

  • wealth maximization objective is clear .
  • It considered time value of money .
  • It considered risk element .
  • It reduces the conflict of interest among the stake holders of a firm .
  • It help to maximize social welfare .