business finance.ppt

7/28/2019 Business Finance.ppt

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Business Finance


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LearningObjectives

To understand the concept of

business finance.

What is importance of finance in

operation of business?

What are types of business finance?

What are sources of businessfinance?


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Business Finance

According to B.O.Wheeler

Business Finance is defined as that business activity

which is concerned with the acquisition & conversation of

capital funds in meeting the financial needs & overall

objectives of business enterprise.Financial Needs of Business

Purchase of Fixed Assets

Purchase of Current Assets

Preliminary Expenses

Cost of FinancingSelling on Credit


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Kinds of Finance

Fixed Capital

or

Long Term Capital

Circulating Capital

Or

Working Capital


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Working Capital

Working capital is the amount of funds

invested in the current assets of a

business. It is a short term capital.

Types of Working Capital

Revolving Capital

As the capital is repeatedly invested, recovered

and reinvented in a going business.

Permanent or Regular Working Capital

There is constant need of minimum amount of

cash for a running business.

Working capital = current assets

current liabilities


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Factors Affecting Working Capital

Nature of the Business

Size of the Business

Length of period of manufacture

Methods of Purchase & Sale of Commodities

Converting Working Assets into Cash

Seasonal Variation in BusinessSize of Labor Force

Price level changes

Rate of Turnover

Business Policy


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Types of Business Finance

Short Term

Finance

Medium Term

Finance

Long Term

Finance


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Short Term Finance

Purpose of Short Term Finance

Sources of Short term FinanceTrade Credit or Open Book Account

Advance from Customers

Cash Credit

Bank overdraft

Discounting of Bills

Bill of Lading

Advantages of Short term FinanceMaintain uninterrupted flow of production

Able to make prompt payments to workers

Hold the stock of finished goods

Inventory of finished goods into receivables


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Medium Term Finance

Sources of Medium TermFinance

Commercial Banks

Debentures

Loans from Specialized Credit

Institutions


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Long Term Finance

Sources of Long TermFinance

Equity Shares

Ploughing back of Profits

Issue of Right Shares

Debentures

Loans from industrial &

Financial institutionsLeasing


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Sources of Company Financing

Sources of Business Funds

Owners Capital

Issue of Equity

Ploughed back profits

Borrowed Capital is Interest Based

Debentures

Bank loans

Loans from Specialized FinancialInstitutions

Other Long Term Financial Institutions


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Merits & Demerits of Equity & Debt

Financing

Merits of Equity FinancePermanent source of Capital

No Payment of Interest

Improved Ability to Face Business Recession

Freedom from Financial Worries of Borrowing

Earnings remain with the Firm

Liquidation of Assets

Repayment of Funds

Financial Base

Ability to Borrow

Disadvantages of Equity FinancingIdle cash BalancesOver Capitalization

Weak Control

No advantage of Borrowed Capital


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Merits & Demerits of Equity & Debt

Financing

Creditors Funds & Debt Financing

Advantages of Debt FinancingExpansion of Business

Creditors have no Say

ProfitTax Advantages

Urgent Current Expenses

Saving the Business from Dissolution

Disadvantages of Credit Financing

Payment of InterestCreditors can sue the Business

Losses

Attraction of Funds

Dissatisfaction among Shareholders


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Owners & Creditors Position with

Regard to (1)Risk(2)Income(3)Control

Financial Characteristics ofOwners Capital

Risk

Income

Control

Financial Characteristics of theCreditors Position

RiskIncome

Control in Business


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Distinction Between Owners Fund & Borrowed Fund

Risk Capital

Permanent Capital

Basis of Control

Profit

Security of Assets

Rate of Return Fixed Obligation

Priority as to Payment

of Reward

Repayment of Principal

Tax


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Sources of Interest Free Financing in Pakistan

Equity or Owners Financing

Issue of Ordinary Shares

Ploughing back of Profit

Interest Free FinancingParticipation Term Certificate

Musharika

MudarbahLeasing


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Interest Based Financing

Interest is paid on the

borrowed capital. Interestis the payment made for

the use of money.

Why Interest Paid


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Interest Free Banking

Five non interest based

investment

MusharikaMudarbah

Participation Term Certificate

Investment on the basis of Equity

ParticipationInvestment Rent Sharing basis


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Factors Determining the Requirements

of Fixed Capital

Nature of Business

Size of Business

Types of BusinessTechnique of Production

Number of Activities

Non Current AssetsMode of Acquiring Fixed Assets


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Sources of Fixed Capital

Owned Capital

Equity Share (Owned Capital)

Ploughing back of Profits (OwnedCapital)

Borrowed Capital

Loans from industrial and

Financial


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Ploughing back of Profits

Merits of Ploughing back of Profits

Merits of Ploughing Back of Profits

Advantages to the Company

Shock Absorber

Aids in Smooth Running of Business

Increase in Credit Worthiness of the Company Self Dependent Company

Expansion & Growth of Business

Redemption of Long Term Debts

Advantages to the Share Holders

Increase in the Value of Shares

Increase in Earning Capacity

Retaining the Control


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Advantages to the Society

Increase in the Rate of Capital

Formations

Rapid Industrialization

Increase in Industrial Capacity

Better Quality of Goods at

Reduced Prices

Danger of Ploughing back of Profit

Overcapitalization

Reduces Dividend

Evasion of Taxes

Frustration among Shareholders

business finance.ppt

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