Meaning of Business Finance what is business finance PDF

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Meaning of Business Finance Money/ finance required for carryout out the business activities is called business finance. It is the life blood of the business. It is needed to establish a business, to run it, to modernize it and to diversity it. Business finance is an activity or a process which is concerned with acquisition of funds, use of funds and distribution of profits by a business firms. It deals with financial planning, acquisition of funds, use and allocation of funds and financial controls. Financial Management- Meaning and Definition Financial management refers to that part of the management activity which is concerned with the planning and controlling of firm’s financial resources. It deals with planning, organising, directing and controlling financial activities like procurement and utilization of fund and distribution of earnings to owners. “ Financial Management deals with procurement of funds and their effective utilization in the business. - S.C Kuchhal Importance of Finance Management Financial Management is indispensable to any organisation as it helps in: (i) Financial planning and successful promotion of an enterprise. (ii) Acquisition of funds as and when required at the minimum possible cost. (iii) Proper use and allocation of funds. (iv) Taking sound financial decisions. (v) Improving the profitability through financial controls. (vi) Increasing the wealth of the investors and the nation and (vii) Promoting and mobilizing individual and business savings. Objectives of Financial Management or Goals of business Finance Efficient financial management requires the existence of some goals or objectives. But among the various objectives two are most important. They are (i) Profit maximization and (ii) Wealth maximization (i) Profit Maximisation Profit earning is the main aim of every economic activity. A business being an economic institution must earn profit to cover its costs and provide funds for growth. No business can survive without earning profit. Profit is a measure of efficiency of a business enterprise. Profits also serve as a protection against risks which cannot be ensured. Profitability is essential for fulfilling social goals also. A firm by pursuing the objective of profit maximisation also maximizes socio-economic welfare. Thus, profit maximisation is considered as the main objective of business. (ii) Wealth Maximisation Wealth maximisation is the appropriate objectives of an enterprise. The objectives of financial management should be in tune with the organizational objective of survival and growth. For this, the financial management ensures that owners should be able to secure maximum return on their investment. This is possible only when their capital investment increases over a period of time. This is referred as maximizing wealth of owners. The market price of shares is greatly dependent on the performance of the company. This will ensure maximisation of owner’s wealth. Wealth of owners/ Shareholders = Number of shares held × Market price per share. Financial Decisions Financial decisions refer to decisions concerning financial matters of a business firms.

We can classify these decisions into three major groups : 1. Investment decisions 2. Financing decisions 3. Dividend decisions 1. Investment decisions: The investment decision is concerned with how firm’s valuable funds are to be invested in various assets. Investment decision can be of two types- Long term and short term. Long term decision is also called capital budgeting decision. It means allocating resources or capital on a long-term basis. Purchasing a new machine or acquiring a fixed asset or opening a new branch as part of expansion programme. etc., are examples of long term investment decisions. These decisions are crucial for any firm as they affect the earning capacity in the long run. Short-term investment decisions, also called working capital decisions, relate to decisions about the level of cash, inventory and receivables. These are decisions which affect the day-to-day working of a business. These decisions also affect the liquidity and profitability of a business. Factors affecting capital budgeting decisions There are certain factors which will affect capital budgeting decisions: (i) Cash flows of the project: Investments in long term assets generate cash flows over a period. Cash flows can be inflow or outflow of cash. These cash flows should be carefully analysed and evaluated before making a capital budgeting decision. (ii) The rate of return : Rate of return is the criterion for selecting a project. Calculations should be made based on the expected returns from each proposal and risk associated with them. Under normal circumstances, the one with a higher rate of return should be selected. (iii) The investment criteria involved : There are different capital budgeting techniques to evaluate investment proposals. These techniques are Net Present Value, Discounted Cash Flow, Payback Period Method,etc. 2. Financing decisions : Financing decisions is concerned with the quantum of finance to be raised from various long term sources. Broadly there are two sources- shareholder’s fund and borrowed funds. Shareholder’s fund refers to equity capital, retained earnings and reserves. Borrowed funds include debentures, bonds and long term loans from financial institutions. A proper mix of above securities is very much essential. A firm has to decide the relative proportion of each item, cost and risk involved....