business finance books

business finance books

Exploring the Fundamentals of Business Finance: A Comprehensive Guide

1. Introduction to Business Finance

Financing is the act of managing an organization’s money. Consequently, business finance is concerned with money. Money is used to purchase things, or assets. Corporations buy assets using money provided by either their owners or by creditors. Money that comes from individuals or groups of individuals who invest in the corporation in exchange for ownership interests (stock) is owned by the corporation’s stockholders. On the other hand, money that comes from individuals or organizations that have loaned money to an organization with the expectation that it will be repaid is owed by the organization. Money owed to creditors is a corporation’s debt. The simplest way to think about it is to view the balance sheet as divided into two parts: one side is what the company owns and the other side is who paid for what the company owns. When you look at it that way, it is easy to see that businesses are primarily financed through one of the two types of financing: debt and equity.

Business finance serves as the cornerstone of business development and economic success. It is of crucial importance to most business entities, whether for profit or not, private or public, large or small. Business entities rely on their finance functions to fund their operations, grow their business, and return wealth to their owners. Any organization that does not have access to sufficient capital to run its operations effectively may soon encounter liquidity problems and/or solvency issues. Generally, business finance, also known as competitive finance, is defined as the activity concerned with the efficient use of capital funds such that objectives of an organization are met. Clearly, the aim of business finance is to satisfy the owner’s goals.

2. Financial Statements and Analysis

The core financial statements most frequently prepared in the United States are based on accounting standards developed by the Financial Accounting Standards Board (FASB) for businesses classified within the jurisdiction of the Securities and Exchange Commission (SEC), the American Institute of Certified Public Accountants (AICPA) for businesses not included within the SEC’s jurisdiction, and the Governmental Accounting Standards Board (GASB) for state and local government entities. These standards are known as generally accepted accounting principles (GAAP).

Financial statements reflect the economic activities associated with a business. They also provide a summary or overall score of the business’s past performance, provide insight into the current financial health of the business, and are the basis for the forecast and valuation of the business as a future going concern.

Understanding the financial performance of a business is critical for investors, analysts, and managers, as well as for participants in a company’s supply chain, competitors, lenders, and bondholders. Financial statements are the means by which companies report this information.

What can financial statements tell you? How can you analyze the financial statements of a business? In this chapter, we provide the answers to these important questions.

3. Capital Budgeting and Investment Decisions

The essential elements of the capital budgeting process are as follows: – Management must choose the types of investment that the business can invest its capital in. – The performance of the past investments must be critically and frequently examined. No business can embark with safety upon a new investment opportunity if its record on past investment has been faulty. – The business must make provision for those investments that keep it in the same position that it now occupies. If it does not, then success will bring potential disaster, because the business will find that its resources and level of activities are not in balance. In a world of certainty, no business could ignore the opportunity to trade off some of today’s resources for resources in the future that are potential pay-off.

Having explored the sources of a business’s finance, we turn next to the question of what the business should do with the finance it has. The broad area of investment decisions is central to this part of the process, but the problem is much broader than that. As soon as a business starts an activity, it is on a track from which it will be very difficult to deviate. Under most systems of accounting legislation, there are definite rules regarding the types of expenditure that a business can choose when it starts an activity. If the business takes a different course, it has to account to the tax authorities for the way that initial investment was managed. Moreover, the object of the start-up investment was to bring into being an economic venture. If that does not happen, then a lost capital venture remains.

4. Working Capital Management

Working capital management deals with a number of practical and important financial aspects like managing cash liquidity, trading positions in equipment, raw materials, semi-finished goods, and finished goods, etc. The skillful management of this complex web of financial transactions has profound implications on the financial health of any institution. Both inadequacy and superfluity of current assets reflect poorly on the operational efficiency, and in turn, the financial integrity of such entities. Conversely, working capital that is effectively funded contributes greatly to the goal of enhancement in shareholder wealth. These principles apply equally to both commercial and not-for-profit organizations. The level of sophistication in managing current assets in any organization will depend on its scale of operations.

Working capital management refers to a collective framework of strategies and techniques that monitor and regulate various components of all the current assets and current liabilities of an organization. All the policy and guidance parameters of working capital management are geared to ensure that an organization’s current assets are always maintained at an optimal level. This results in the effective funding of both short-term operations and long-term expansion aspirations of the entity. Skilled management of working capital allows an organization to maintain smooth, uninterrupted business processes leading to sustained operational growth and ever-rising returns to shareholders.

5. Risk Management and Financial Strategy

Capital structure questions introduce the next three chapters, examining the way in which the issue of longer-term finance should be resolved. The text identifies the numerous capital structure theories advanced and relates these to the extreme conclusions drawn concerning debt and equity finance. Unless they modify the viewpoint of shareholders, such unconditional theoretical conclusions do not reflect all facets of these conclusions. Ideally, businesses structure their capital to guarantee themselves the greatest flexibility for undertaking investment opportunities. Since financing policy will be the major considerate of a business’s investment policy, it follows that a significant step to acquiring this required aspect of versatility will be to structure the firm’s capital policy with the maximum of possible caution.

Companies can structure their financial objectives in a variety of ways. In outline, it is feasible to distinguish between safeguard and risk-taking objectives. Purely safeguard objectives arising from associated expenses and are likely to pertain to an insignificant level of profit. When businesses pursue a more extreme risk-taking policy, they will place themselves at greater risk of operating failure. Therefore, an effective finance strategy will establish levels of financial strength that deal with these elements of risk-bearing in a prudently balanced manner. It will concentrate upon establishing the principles that control the investment, finance, and dividend decisions of the business.