Business Finance

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1.1 Finance Finance can be defined as the art of and science of managing money money.. Financ Financee is conc concern erned ed with with the pr proce ocess, ss, insti institut tution ions, s, mark markets ets and and instr instrum ument entss invol involve ved d in th thee transf transfer er of mone money y among among indivi individua duals, ls, bu busin siness ess and gove governm rnment ents. s. Manag Manager erial ial finance finance is concerned concerned with the duties duties of the financia financiall manager in the business firm. “Finance” came form Latin word “Finis” means “dealing with the money” .Finance is called the art and science of managing money. “Finance is the process of organizing the flow of funds so that a busi bu sine ness ss can can carr carry y out out its its obje object ctiv ives es is th thee most most effi effici cien entt manner and meet its obligations as they they fall due”. Renneth Midgely & Ronald Ronald Burns. “Finance “Finance is concern concerned ed with the process, process, institution, institution, markets markets and instruments involved in the transfer of money among and between individuals, business and government.” government.” Lawrence Lawrence J Gitman “Finance means to arrange payment for it. They observe that finance may be generally defined as the study of money its nature , behavior , regulation and problems.” problems.” George Christy &Peter Roden

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 System Process Process of Finance Finance Financial Planning: Identi Identifyi fying ng the Ned Ned and and Natur Naturee of  fund Identification of source of fund Screeni Scre ening ng out alter alterna native tive Sourc Sourcee on cost benefits basis.

Investment Decision Phase: Investment Investment option analysis: short term, mid term, long term. Investment Investment of fund.

Divi Divide dend nd & LT fund Mgt Decision Phase: Distribution Distribution of cash inflows Prof Profit it plan planni ning ng and and long long term term fu fund nd management management decision.

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1.2 Functions of Business Finance Business finance has to perform the function of both managerial and routine functions. Financial managers are the planning and controlling device of an organization where they have to perform many many fu func ncti tion onss like like mana manage geri rial al and and rout routin inee withou ithoutt pr prop oper er functioning of a manager no co-ordination is possible within the business arena and it will lead to defeat in success.

Function of Business Finance

Financ ial Information.

Supporti ng Objectives.

Reporti ng fu func ncti tion onss and control.

Figure: Functions of a financial manager.

T he accountant’s role.

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The business finance function (1)

How the finance function supports the pursuit of  business objectives.

management.  By providing information for management. Performance measurement. measurement.  Performance  Decision making.  Control.

prov ovid idin ing g info inform rmat atio ion n for for shar shareh ehol olde ders rs and and othe otherr  By pr external parties.  Published financial accounts.

ensur suring ing the there re is finan finance ce avail availabl ablee for the bu busin siness ess  By en activities.  Short term liquidity and cash flow.  Long term financing and solvency.

2. Finance Function. Finance Fun Function tion has both oth an inte intern rna al and an  The Fin external function within the business.  The four main functions are shown below.

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2.1 The finance function. Recording financial transaction (Internal)  Books of prime entry.  Ledgers.  Asset control.

Treasure management management (Internal / External)  Cash

, working capital tal and foreign exchange management. Management financial risks.  Management  Raising short-medium and long term finance. Finance reporting (External reporting)  Financial statements .  Tax.  Regular information.

Management Management accounts (Internal reporting)  Costing records .  Budgets.  Pricing.  Decision making information.  Per formation evaluation.

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2.2 Managing the finance function.

The finance function is like any department or element of the business. Funds are invested into the finance function and it is posit ositiv ivel ely y contr ontrib ibu ute to th thee econom onomic ic well-b ll-bei ein ng of th thee business.

Now , we can say that how the finance functions is organized depends on the size of the business and its overall organizational structure . In many organizations , particularly large organizations, the finance functions task are centralized.

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1.3 Principal of Business Finance Principles act as guidelines to achieve th thee goal of an orga organi niza zatio tion. n. In orde orderr to take take effi effici cien entt de deci cisi sion onss it is very very essential for a financial financial manager to consider the the principals principals of  fina financ nce. e. Some ome of th thee impo import rtan antt pr prin inci cipl ples es of fina financ ncee are discussed below.

Principle of business Finance (1)P (1)Pri rinc ncip iple le of returns..

risk risk and and

(2)Principle of time value of money.. (3)Principle of cash flow ..

(4)P (4)Pri rinc ncip iple le of pr prof ofit itab abil ilit ity y and and liquidity. (5)Principle of hedging.. hedging..

(6) Principle of diversification. diversification.

(7)Principle of business cycle

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(1) Principle of risk & return: Return is the income received on an investor plus any change in market market price price , and risk is the variabil variability ity of  returns from those those that are expected. expected. Financial Financial decisions often involve alternative courses of action. (2) Principle of time value of money: According to the principle of time value of money the value of a unit of money is different time periods . The value of a sum of money received today is more than its value received after some time.

(3) Principle of cash flow: The numerical and objective effect has to be considered seriously . Non –cash expenses such as depreciation on asset , risk and return have to be adjusted with net cash inflow. (4)Principle of profitable & liquidity: There Th ere is an inve inverse rse re rela latio tionsh nship ip be betwe tween en pr profi ofitab table le and and liquidity . The principle of  profitability and liquidity. An appropriate level of liquidity has to be maintained while ensuring sufficient profitably.

(5)Principle of diversification: The principle of diversification is of vital importance in asset management. management. It is based on the axiom, “don’t pull all your eggs in one basket.” The idea is to spread risk across a number of  assets or investments.

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(6) Principle of hedging: The principle of hedging each asset should be offset with a financing instrument of the same approximately maturity. The principles minimizes the risk that the firm will be unable to pay off its maturing obligations.

Types of assets Temporary current assets Permanent cu current a asssets All fixed assets

Sources of finance Short-term non –spontaneous dept. Long-te -term dept, E Eq quity. Spontaneous current liabilities.

(7)Principle of business cycle: The principle of business cycle suggest any of financial decision should be taken keeping in consideration of the business cycle. This is because there is a close relationship between financial decision and business cycle.

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1.4 Classification Classification of Finance These are basic two types of finance.

(1)Private Finance. (2) Public Finance.

Finance

Private Finance

Personal Finance Public Finance

Business Finance

NonBusiness Finance

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 Private Finance Whe hen n indi indivi vidu dual alss and and orga organi niza zatio tions ns are are de deal alin ing g with with fina financ nce, e, it is kn know own n as pr priv ivat atee fina financ ncee . So fina financ ncia iall planning planning , procure procuremen mentt of funds & uses of funds funds by any indi indiv vidua iduals ls or any any orga organi niza zati tion on is kn know own n as pr priv ivat atee finance.

Private Finance can be classified into three heads Personal finance.  Business finance.  Financing

of

sole trader ship, or joint venture

partnership company.  State owned business finance.  Autonomous business finance.  Non-business finance.

a) Personal Finance: This financing is used to day by day business operation. When an individ ividua uals ls makes akes plan lanning, ing, identifi tificcation tion,, raisi aisin ng, inve investm stmen entt & usin using g of fu fund ndss to carr carry y out out re regu gula larr bu busi sine ness ss effectively then it is known as personal financing.

b)Business Finance: Fina Financ ncin ing g th that at is done done to pe perf rfor orm m th thee fu func nctio tion n of bu busi sine ness ss organization very efficiently is known as business finance.

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c) Non- business finance: Financing activities done by non profit motive firm is known as non business finance. The main objectives of those firms is to provide service rather making profit .

Public Finance: When government or local government itself performs the functions like identification of sources of funds, determining thee req th equi uire reme ment nt and and raisi aising ng of th that at fu fund ndss and and pr prop oper er utilization of those funds is known as public financing.

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1.5 Sources of Business finance The main sources of business finance are as follows: 1. Shares: These are issued to the general public. These may be of two types: (i) Equity and (ii) Preference. The holders of shares are the owners

of the business. •

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Equi Equity ty share hare:: Equi Equity ty Shar Shares es are are thos those e share hares s which doesn’t have any preference rights. That is why these shares are called ordinary shares. The dividend rate on Equity Share is not fixed. It mean eans the the rate rate of divid ividen end d change nge with ith the change of profit. Preferenc Preference e share: share: Preferenc Preference e Shares Shares are are those those shar shares es whic which h have have two two pref prefer eren ence ce righ rights ts over over equi equity ty shar shares es.. Firs First, t, divi divide dend nd is paid paid to thes these e shares res befo efore to equity ity shares ares.. Also lso rate rate of  div dividen idend d is fix fixed on thes these e shar shares es.. Seco Second nd,, on liq liquidat idatio ion n the the capita ital is paid paid back to thes these e shares before the equity shares.

2. Debentures: Thes These e are also lso iss issued to the gener enera al public lic. The holders of  debentures are the creditors of the company.

3. Public Deposits : General public also like to deposit their savings with a popular and well established company which can pay interest periodically and pay-back the deposit when due.

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4. Retained earnings: The The com company pany may not dist distri ribu bute te the the whole hole of its its profits among it shareholders. It may retain a part of  the profits and utilize it as capital.

5. Term loans from banks: Many Many indu indust stri rial al devel evelop opm ment ent bank banks, s, coop cooper erat ativ ive e banks and com commerci ercial al bank banks s grant rant mediu edium m term term loan loans s for for a period of three to five years.

6. Loan from financial institutions: i nstitutions: Ther There e are are many any speci pecial aliz ized ed fin financi ancial al inst instit itut utio ions ns established by the Centr Central al and and State State gover governm nment ents s which which give give long long term loans at reasonable rate of interest. Some of these institutions i nstitutions are: Ind Industrial ial Fina inance Corporati ratio on of Ind India ( IFC IFCI), Industrial

Develo Developm pment ent Bank Bank of India India (IDBI) (IDBI),, Indus Industria triall Credi Creditt and Investment Corporation of India (ICICI), Unit Trust of India ( UTI ), State Finance Finance Corporatio Corporations ns etc. These sources sources of long term finance will be discussed in the next lesson.

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1.6 Managing the Firm's Finances Finance: The business activity concerned with determining a firm's long&-term invest investme ments nts,, obtai obtainin ning g the fun funds ds to pay for those those invest investme ments nts,, and conducting the firm's everyday financial activities. Financial Manager: The manager responsible for planning and controlling the acquisition and dispersal of a company's financial assets. Cash Flow: The pattern in which cash flows into and out of a company. Financial Plan: A business plan for attaining a specific financial position. Inventory: Materials and goods that are held by a company but will be sold within one year. Raw Materials Inventory:

The supplies purchased by a firm for use in its production process. Work&-In&-Process Work&-In&-Process Inventory: The port The portio ion n of a firm firm's 's inve invent ntor ory y cons consis isti ting ng of good goodss part part&&-wa way y through the production process. Finished&-Goods Finished&-Goods Inventory: The portion of a firm inventory consisting of completed goods ready for sale. Trade Credit The granting of credit by one firm to another. Open&-Book Credit: A form of trade credit in which sellers ship merchandise on faith that payment from the buyer will be forthcoming. 16

Promissory Note: A form of trade credit in which a buyer signs a promise&-to&-pay agreement before the merchandise is shipped.

Trade Draft: A form of trade credit in which the seller draws up a statement of  payment terms and attaches it to the merchandise. The buyer must sign this agreement to take possession of the merchandise. Trade Acceptance: A trade draft that has been signed by the buyer. Secured Loan: A loan in which the borrower is required to put up collateral. Collateral: An asset pledged by a borrower; in the event of nonpayment of the loan, the lender has the right to seize the asset.

Pledging Accounts Receivable: Using accounts receivable as collateral for a loan. Unsecured Loan: A loan in which the borrower is not required to put up collateral. Line of Credit: A standing agreement between a bank and a him in which the bank  promises to lend the firm a maximum amount of funds on request. The bank will not necessarily have the funds to lend when they are needed, however. Revolving Credit Agreement: An agreement in which a lender agrees to make some amount of funds available on demand to a firm. The lender guarantees that funds will be available when sought by the borrower. 17

Commercial Paper: A method of short&-run financing in which large, stable companies issue unsecured notes at a certain face value, sell them for less than the face value, then buy them back at the face value at a later date. Factoring: Selling a firm's accounts receivable to another company. Debt Financing: Long&-term borrowing financed from sources outside the company. Prime Rate: The inte The intere rest st rate rate avai availa labl blee to a bank bank's 's be best st (mos (mostt cred credit it wort worthy hy)) customers. Corporate Bond: A bond issued by a business in which the issuing company pays the holder a certain amount of money on a certain date, with stated interest payments in the interim. Maturity Date: The date on which the principal of a bond is paid off. Bond Indenture:

The cont The contra ract ct spel spelli ling ng out out all all the the term termss of the the bond bond,, incl includ udin ing g the the principal amount, the interest rate, and the maturity date. Bond Retirement: The way in which a bond is paid off. Equity Financing: The use of common stock and/or retained earnings to raise money for long&-term expenditures; expenditures; involves putting the owners' capital to work. Leverage: The use of borrowed funds to finance an investment. Investment Grade Bond: A bond that qualifies for one of the top four ratings by the Standard Poor's or the Moody's rating service. s ervice.

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SpecializedFinancial Institutions

1.7

of  Bangladesh. Specialized state financial institutions in Bangladesh were 1.31 in 2009, according to a World Bank report, published in 2010 2010.. Bang Bangla lade desh sh is cons consid ider ered ed as a de deve velo lopi ping ng ec econ onom omy y which has recorded GDP growth above 5% during the last few years. Micro credit has been a major driver of economic deve de velo lopm pmen entt in Bang Bangla lade desh sh and and alth althou ough gh th thre reee fift fifths hs of  Banglades Bangladeshis his are employed employed in the agricult agriculture ure sector, sector, thre threee quarters of exports revenues come from garment industry. The biggest obstac tacles to sustai tainable development in Bang anglade ladesh sh are over overp popu opulati lation on,, poor infr infra astr struc uctu turre, corruption, political instability and a slow implementation of  economic reforms.

Some most important specialized banks of Bangladesh are below:

Bangladesh Shilpa Rin Sangshta (BSRS): It was estab tablish lished ed on 31st Oc Octo tobe ber, r, 1972 1972.. Th Thee owne owners rshi hip p cont contai ains ns 51% 51% by gove govern rnme ment nt and and 49% 49% paid paid by loca locall and and fore foreig ign n indi indivi vidu dual als. s. Th Ther eree are are tota totall 9 memb member erss of whic which h 1 chairme chairmen, n, 1 managing managing director director and 7 directors directors,, governm government ent appoints M.D and there directors and the shareholders appoint the rest4.

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Objectives: 1)Industrial project term loan. 2)Encourage investments. 3)Financial assistance.

Function: 1)Development 1)Development of capital market through co-financing. 2)Allows loan for public limited companies through underwriting. 3)Lending money to govt. and private industrial projects for medium and long term basis.

Investment Corporation of Bangladesh(ICB) It was established on 1st October, 1976. The ownership ownership contains 51% govt. and 49% paid by local and foreign individuals or organizatio tions. There are total tal 11 members of which 1 chairman, 1 managing director and 9 directors, govt. appoints

M.D and two two dire irector tors, Bangl angla adesh esh Bank appoin oints one director, and the shareholders appoint the rest directors.

Objectives: 1)Collect savings. 2)Development 2)Development of capital market. 3)Giving assistance regarding investment. Function: 1)Underwriting 1)Underwriting public issues. 2)Buying shares. 3)Transactions of share and stocks. 20

1.8 Problems Bangladesh

of

Financial

Institution

of 

 Political

instability.  Lack of awareness.  Lack of investment climate. Government interference. interference.  Government  Rate of interest.  Lack of supervision.  Legal problem to realize loan.  Lack of information about the loaners.  Failure to reach the loan to the needy.  Failure to produce collateral.  Problem of determining priority. lem of determining ing the amount  Problem credit.

of 

 Lack

of investment company and merchant

bank

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Reference 1.http://www.google.com/search? 1.http://www.google.com/search? client=opera&rls=en&q client=oper a&rls=en&q=Problems+of+finan =Problems+of+financial+institutions+o cial+institutions+o f+bangladesh&sourceid=opera&ie=utf-8&oe=utf-8 2.http://www.google.com/search? client=opera&rls=en&q client=opera&rls=en&q=Problems+of+finan =Problems+of+financial+institutions+o cial+institutions+o f+bangladesh&sourceid=opera&ie=utf-8&oe=utf-8 3.http://www.tradingeconomics.com 3.http://www.tradingeconomics.com/bangladesh/bran /bangladesh/brancheschesspecialized-state-financial-institutions-per-100-000-adults-wbdata.html 4.http://www.tradingeconomics.com 4.http://www.tradingeconomics.com/bangladesh/bran /bangladesh/brancheschesspecialized-state-financial-institutions-per-100-000-adults-wbdata.html

5.http://www.antiessays.com/topics/report-on-problem-of5.http://www.antiessays.com/topics/report-on-problem-offinancial-institutions-in-bangladesh/0 6. Fundamentals of Finance. By Haruner Rashid. Page No:10-13