BUSINESS FINANCE

As ABM students we don’t need to be a

hyper-intellectual human being like

Jimmy Neutron

We don’t agree with Jessie Jane’s Price

Tag because ABM is all about MONEY!

OBJECTIVES:

Define business finance

Be familiar with the role of business

finance

Know the importance of consideration

of risks in financial decision making

Know the relationship of business

finance in other disciplines particularly

accounting.

BUSINESS FINANCE

The study of financing and investment decisions made from theory to practice.

Making of decisions about which investment the business should make.

Management of money an other valuable assets.

You need to be familiar with accounting method, investing strategies and debt management.

ROLE OF BUSINESS

FINANCE

FINANCING: The act of brining money into the

organization

Bus. Fin. Will help us in financing and investment

decision.

Methods of financing are:

a. taking on debt

b. credit arrangements

c. investments on real assets and financial

assets.

The success and failure of business rely on thins

discipline.

BUS. FIN. AND ACCTNG.

ACCOUNTANT is concerned with financial

record keeping, production or periodic

report, statement and analysis.

FINANCIAL MANAGER only makes

decision involving finance and not to

provide financial information.

In a small business, an accountant and financial

manager can be one person.

FINANCIAL MANAGEMENT It starts with a plan

Having cash and resources is not enough

Financial management in business is a must.

FINANCIAL MANAGEMENT:

Deals with decision that supposed to maximize the value of shareholders’ wealth (shares of stocks)

Planning, controlling, directing the financial activities such activities such as procurement and utilizations of funds.

Stocks – forms of ownership in a corp.

SCOPE OF FINANCIAL

MANAGEMENT

1. INVESTMENT DECISION: Investment on fixed

assets (capital budgeting decision) and current

assets (working capital decision)

2. FINANCIAL DECISION: Raising of finance from

various resources

3. DIVIDEND DECISION: Decision on net profits

distribution which are;

a. dividend for shareholders

b. retained profits

OBJECTIVES OF FINANCIAL

MANAGEMENT

1. Ensures regular and adequate supply of funds.

2. Ensures adequate returns of shareholders.

3. Ensures optimum fund utilization.

4. Ensures safety of investments – to achieve

adequate rate of returns.

5. Plan a sound capital structure – so that balance

between debt to equity capital will be

maintained.

FUNCTION OF FINANCIAL

MANAGEMENT

1. Estimation of capital requirements –

such as expected cost and profits, future

programs and policies to ensure increase in

earning capacity.

2. Determination of capital composition –

after estimation, capital structure should be

decided, it involves short-term and long-term

debt equity (D/E) analysis.

Debt / Equity Analysis

Under the solvency financial ratio

measures the amount of debt a company uses to fund

its business. (also called leveraging/risk/gearing)

Ex. Total shares value = P180,000 and

Total Liabilities = P620,000

D/E ratio = 344.44% (high risk)

What if: Total shares value = P620,000 and

Total Liabilities = P180,000

D/E ratio = 29.03% (low risk)

• The higher the ratio is, the more debt a business

uses compared to equity

• A ratio that is too high can potentially cause

problems in your small business.

• The risk of defaulting on, or being unable to repay,

your debt increases as your debt-to-equity ratio rises

• If you fail to make interest payments, creditors might

take your company’s assets or force you into

bankruptcy

FUNC’N. OF FIN. MGMT. (cont.)

3. Choice on the sources of funds

a. Issue of shares and debentures (type of

bond or debt instrument like T-bills that is not secured

by physical asset or collateral, back up only by credit

worthiness and reputation of the issuer, free risks)

b. loans from banks and financial inst.

c. public deposits from bonds.

4. Investment of funds – allocating funds to

profitable ventures for safety investments and regular

returns.

5. Disposal of surplus – or net profit disposal,

done through

a. Dividend declaration

b. Retained profits – for expansion,

innovation and diversification plan.

6. Management of cash – for administrative and

distributive cost.

7. Financial Control – not only procure, plan and

utilize funds but also controls finances through

ratio analysis, financial forecasting, cost profit

control etc.

“BEWARE OF LITTLE EXPENSES, A

SMALL LEAK WILL SINK A GREAT

SHIP”

Activity:

Write everything you’ve learn through a

mind map.