bachelor of business finance

bachelor of business finance

Exploring the Role of Finance in Business Management

1. Introduction to Business Finance

This paper is an attempt to examine some of the areas of business finance that are of interest to managers who do not have the time and facilities to consider it in depth. It is also intended for students who are completely new to the subject and need to acquire relevant knowledge in a more applied, less academic form. Small businesses, which are poorly designed and operated, are likely to suffer from inherent financial weaknesses. This is particularly true of businesses with little or no experience in the business environment. They often have limited managerial resources, and considerable strain is placed on these resources because of daily problems that inevitably arise.

When conducting economic activities, one of the major concerns of management of any company is to accomplish the firm’s economic and financial function. The economic function is concerned with the purchase of physical resources, their transformation, and distribution at competitive quality and price levels according to pre-set goals. The financial function deals with obtaining financial resources on the most advantageous terms and disposing of earnings after servicing the obligations of the company.

2. Financial Analysis and Decision Making

The ratios aid decision making by providing a clear understanding of the financial health and condition of the business. Although there is some debate about the number of ratios that are useful in analyzing the financial condition of small businesses, most researchers agree that the emphasis should be on liquidity, profitability, cash flow, and leverage. Should external resources be required, lenders often rely on the firm’s cash flow, profitability, liquidity, and leverage ratios as important credit decision tools. How are these ratios derived and interpreted for decision-making purposes?

Many small business owners do not perceive financial statements as useful tools for decision making. The financial statements are underutilized because they lack relevance. The role of accounting professionals is to transform accounting data into decision-useful information for business managers. Business managers, armed with this accounting expertise, will have more data useful for decision making, and therefore, they can make better-informed decisions and make small businesses more financially robust. One of the basic objectives of financial accounting is to assist business managers in the analysis and interpretation of financial statements. Of primary importance to business managers is the ability to analyze the firm’s financial condition and evaluate the firm’s performance. Particularly, small business managers need to be able to assess their firm’s profitability, liquidity, leverage, and activity ratios.

3. Investment Strategies and Capital Budgeting

Capital budgeting (or investment appraisal) is the planning process used to determine whether an organization’s long-term investments such as new machinery, replacement of machinery, or even new buildings are worth pursuing. The investment is cost-effective, generates value for the company, and ultimately the management. All capital budgeting models consider the adjustments of the financial type. They can exist in different forms such as the equity issue of the company, selling of the bonds, selling of the shares, sales revenues, or working maintenance capital. The original innovation of this work is to have delivered the exact expression about the overall company value for each of the considered investment projects where in each project, the profitability is discounted by the borrowing rate or the derivatives.

We consider the “equal-quality” investment strategy, in which firms invest in the same revenue-enhancing technology but over different horizons. We show that financing frictions are particularly severe when a firm’s horizon is equal to the horizon of its peer firms. Investment is decreased and remains fixed over time, even if earnings rise. This gives rise to the Serieavent effect. When firms have the same horizon but start with different resources, we demonstrate that financing share is greater for a firm with greater initial funds. We also deal with the “reversible capacity” investment strategy, characterized by a high rate of depreciation and net salvage value. Under these conditions, a firm invests little at the start. Subsequently, earnings and market capitalization increase over time, allowing the firm finally to reach the optimal technology capacity.

4. Risk Management and Financial Markets

Business management is always multifaceted. The protection of a business’s income flows from the diversity, usually bundled, of workers’ and managers’/investors’ human capital. This diversification, however, introduces agency problems. Because of its multifaceted nature, business management is always incomplete. The income insurance managers offer cannot provide perfect insurance. The company’s owners are exposed to residual income and accounting risks. In particular, company managers, sitting on income securitizable, can, for their own benefit, reduce income security to owners/investors with majority voting rights.

The reason why corporate assets, as well as the capital market, are traded securities could be found in the inconvertibility of time and lack of liquidity in thought. In articulating investment plans and carrying out investment projects, business managers typically deploy operating, as opposed to financial, assets. When business managers face income statement insolvency, they cannot afford, due to a lack of time in raising more funding, to trade non-operating assets for more capital. Income statement insolvency, i.e. borrower business bankruptcy or, protectively, a desire to avoid such a condition, compels business owners/managers to hedge, with actuarially fair wealth insurance policies, income risk.

5. Conclusion and Future Trends in Business Finance

The company’s stockholder wealth is created by management activities that decrease company risk and management activities that increase company operating return. Decreasing company risk can erase a part of the risk-expected return premium, but the greater portion of the expected-return company risk premium ignored should be used to enhance the company’s ability to put productive assets to work providing tangible accelerated cash-flow returns. It is the value management-preparation efforts that provide the essential theoretical link among all of the financial decisions that lead to wealth creation at the financial and business levels. Similarly, it provides the foundation to link the company’s near-term financial decision-making strategies with the firm’s and economic value creation.

To operate successfully over the long-term, every company, whether at the controller (stockholder) or leadership levels, realizes the necessity and importance of creating, preserving, and enhancing the economic value of their investment in the company. The creation of economic value, in practice, results from the implementation of four closely interrelated management objectives: i) the acceleration of the return on the company’s material and nonmaterial assets to provide a relatively higher and more risk-adjusted superior competitive return on stockholder’s equity; ii) balancing these accelerated returns above with the control and reduction of the potential for competitive loss and damage (i.e. downside risk); iii) maintaining, or preferably reducing, the associated costs to a desirable low level; and iv) financing all the company’s activities at a relatively low cost to achieve all of the prior objectives at a specific, low level of calculated risk.