Business Finance

Learning Objectives
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 business finance?

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 Financing Selling on Credit

Kinds of Finance

Fixed Capital or Long Term Capital

Circulating Capital Or Working Capital

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

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 Business Size of Labor Force Price level changes Rate of Turnover Business Policy

Types of Business Finance

Short Term Finance

Medium Term Finance

Long Term Finance

Short Term Finance

Purpose of Short Term Finance Sources of Short term Finance
Trade Credit or Open Book Account Advance from Customers Cash Credit Bank overdraft Discounting of Bills Bill of Lading

Advantages of Short term Finance

Maintain uninterrupted flow of production Able to make prompt payments to workers Hold the stock of finished goods Inventory of finished goods into receivables

Medium Term Finance

Sources of Medium Term Finance
Commercial Banks Debentures Loans from Specialized Credit Institutions

Long Term Finance

Sources of Long Term Finance
Equity Shares Ploughing back of Profits Issue of Right Shares Debentures Loans from industrial & Financial institutions Leasing

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 Financial Institutions Other Long Term Financial Institutions

Merits & Demerits of Equity & Debt Financing

Merits of Equity Finance
Permanent 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 Financing

Idle cash Balances Over Capitalization Weak Control No advantage of Borrowed Capital

Merits & Demerits of Equity & Debt Financing

Creditors Funds & Debt Financing Advantages of Debt Financing
Expansion of Business Creditors have no Say Profit Tax Advantages Urgent Current Expenses Saving the Business from Dissolution

Disadvantages of Credit Financing

Payment of Interest Creditors can sue the Business Losses Attraction of Funds Dissatisfaction among Shareholders

Owners & Creditors Position with Regard to (1)Risk(2)Income(3)Control

Financial Characteristics of Owners Capital
Risk Income Control

Financial Characteristics of the Creditors Position

Risk Income Control in Business

Distinction Between Owners Fund & Borrowed Fund

Permanent Capital Basis of Control Profit

Repayment of Principal Tax Risk Capital

Security of Assets Rate of Return

Priority as to Payment of Reward Fixed Obligation

Sources of Interest Free Financing in Pakistan

Equity or Owners Financing

Issue of Ordinary Shares Ploughing back of Profit

Interest Free Financing

Participation Term Certificate Musharika Mudarbah Leasing

Interest Based Financing

Interest is paid on the borrowed capital. Interest is the payment made for the use of money. Why Interest Paid

Interest Free Banking

Five non interest based investment
Musharika Mudarbah Participation Term Certificate Investment on the basis of Equity Participation Investment Rent Sharing basis

Factors Determining the Requirements of Fixed Capital

Nature of Business Size of Business Types of Business Technique of Production Number of Activities Non Current Assets Mode of Acquiring Fixed Assets

Sources of Fixed Capital

Owned Capital
Equity Share (Owned Capital) Ploughing back of Profits (Owned Capital)

Borrowed Capital
Loans from industrial and Financial

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

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