how to get business finance

how to get business finance

Demystifying Business Finance: A Comprehensive Guide for Students

1. Introduction to Business Finance

In setting out the practical and applied dimensions of financial management, the book introduces the major issues, theories, concepts, and institutional aspects of finance; illustrates them with numerous examples; and explains their application to business as well as to the personal finances of individuals. The examples are relevant to various business settings, including manufacturing, trading and service industries, nonprofit organizations, financial institutions and international institutions. The book therefore provides students with a coherent framework to help them solve problems when dealing with financial matters. That being said, we are now in a position to embark on our study of business finance. Our starting point is the financial objective of the firm.

As future managers, every student is expected to be skilled in the choice and use of financial techniques. Finance is therefore an integral part of Business Studies at all levels. However, the very mention of finance is enough to strike fear into the hearts of many students, who often feel that they are entering a highly technical arena where verbal explanations are few, and where complex mathematical and statistical techniques are the norm. There is no doubting the fact that modern finance blends application with analysis to create a unique discipline. Nevertheless, the issues that are fundamental form the bedrock of the practical application of finance. What is the aim of Business Finance? How does the financial market system work? What concept of risk do we use? It is indeed this very application of theory to practice that is the main focus of the book.

2. Key Concepts and Principles in Business Finance

Business finance entails deciding how a business organization can raise capital with the least cost and risk, dispose or redeploy excess capital at opportune times, enhance a firm’s shareholder value, and create dissent-disorder among debt and shareholders. More broadly, business finance involves generating and assessing options for decision-making. In those options, determining the firm’s corporate risk profile and cost of capital also plays pivotal importance by setting up a management objective framework whereby the corporate effect will result in an overall increase in shareholder value. Finance needs of a modern corporate enterprise are classified into three major areas: long-term finance, short-term finance, and working capital management. The perspectives of a modern corporate entity require analyzing and understanding these facilities in both a qualitative and quantitative manner, by utilizing advanced financial management techniques.

2.1 What is business finance? The concept of business plays a crucial role in decision making and determining business profitability. Financial decisions are involved in all types of organizations, both in the public and private sectors. These include business enterprises, households, and governments. The primary role of financial management involves deciding how to invest in the firm’s productive assets, ensure required financing, and pay an appropriate return to investors. The general objectives of all business organizations are to survive and grow, and to achieve these objectives, they need to generate a certain level of positive cash flow and cash streams.

In this chapter, we provide short definitions of key concepts and terminology in business finance to familiarize you with them. This will help you understand and apply financial techniques in making business decisions. We hope you will find these concepts useful in your studies, especially in understanding other financial techniques presented in the subsequent chapters.

3. Financial Statements and Analysis

Traditional financial statements are primarily prepared for management and external parties such as shareholders, creditors, customers, suppliers, employees, and the public sector. The possible negative implications of limited liability on debt contracts and the stock market valuation of companies are described. The limitations of accounting and the financial statement approach are discussed, leading into a brief overview of the usefulness of economic and alternative asset-liability measurement models. Thereafter, a broad description of the preparation of commonly used statements is provided, significantly enhanced by practical examples.

This chapter outlines the purpose and preparation of financial statements. It also deals with the limitations of traditional accounting and its link to stock market techniques such as share valuation. Income measurement issues are addressed, along with accounting for inflation, and the announcement of profits. In addition, some key issues relating to the use and abuse of financial statement analysis by banks are discussed.

4. Investment Decisions and Capital Budgeting

The nature of investments made by companies varies depending on the sector they operate in, and investments in fixed assets are typically made through capital expenditure. Long-term investments often require a significant amount of cash, and companies may spend large sums of money to maintain a competitive position. Making the wrong investment can have long-term consequences, which is why capital budgeting is considered essential. Companies often face the challenge of deciding whether to invest in fixed assets or explore alternative avenues for capital funds, which can lead to growth in fixed assets and increased production capacity.

Investment decisions and capital budgeting are important for companies as they involve making substantial investments in manufacturing products or providing services. These decisions are referred to as capital budgeting decisions and involve long-term investments in a company’s total assets. They may also involve changes in asset composition or replacing existing assets. These decisions are also known as capital structure decisions.

5. Risk Management and Financial Markets

Some degree of risk or uncertainty must always be faced by anyone, including educators who wish to embark on a business venture. A business insurance policy is held by most entrepreneurs. Cut off at some dollars and cents level, accidents which would otherwise be insupportable by the owner-manager. Similarly, a corporation is an insurance policy in the sense that one of the principal advantages of the corporate form is that liability is generally limited to the amount expended to obtain corporate security (e.g., the share price itself). The real advantage of the corporate form becomes apparent when assets of the company are commingled with non-company assets.

In this chapter, our discussion focuses on some of the policies and techniques used by administrators to protect and provide the necessary cash for more profitable projects. The term risk management is used to describe these policies and techniques. How these are closely linked with common forms of business financing, employees’ participation in corporate ownership through profit-sharing plans, and other long-run corporate financial objectives is also discussed in this chapter. The critical role which the corporate treasurer has in the design and execution of those risk management plans is also presented.