TOPIC 1
BUSINESS FINANCE
Business defined:
According to Rowena Cinco
Business is any lawful economic activity which is concerned with making goods
available as well as the rendering of useful services to those who want them with the
intention of gaining a profit. (Cinco, p3)
According to Roberto Medina
Business is any lawful economic activity concerned with the production and/or
distribution of goods or services for profit. (Medina, p.3)
Finance Defined:
According to Bodie and Merton
“Finance is study how scarce resources are allocated over time.”
According to Ferrel and Hirt
“The term Finance refers to all kinds of activities relating to obtaining money and
effective use of it.
According to Schall and Hall
“Finance is a body of facts, principles and theories dealing with raising and using of
money by individuals, businesses and government.”
Business Finance Defined: (Medina, p.25)
- The term business finance refers to the provision of money for commercial use.
- However, it is more than just the provision of money, it is also concerned with the
effective use of funds.
- It can be defined as the procurement and administration of funds with the view of
achieving the objectives of the business.
Financial management is also called managerial finance, corporate finance, and
business finance.
- It is a decision-making process concerned with planning, acquiring and utilizing
funds in a way that achieves the firm’s desired goals.
- This process involves evaluating assets, liabilities, and equity, and making
decisions based on that evaluation.
- Having cash and resources is not enough.
- Financial management in business or Business Finance is a MUST.
The Role of Business in the Philippine Economy
- Business help the economy by providing the necessary employment for the
people, the products they need and want, and the needed taxes for the
government. (Cinco, p.3)
Business Process (Cinco, p.4)
1. Conceptualization – refers to the idea for business. Business experts say, it could
be a hobby, something you really know all about or have experienced.
o Innovating an existing product or creating another product is all part of
conceptualization. We have to know what makes our product different
from the other products offered in the market.
2. Discovery – is a stage in the business process which appraises the outlook of the
business with the following considerations: nature of the industry, government
regulation, potential market, cost and availability of materials needed and
proposed location of the business.
o Some authors refer to this stage as feasibility study stage.
3. Assembling – is the stage of the business process which consists of making all
preliminary plans, entering into contracts, obtaining permits, licenses or
franchises necessary to start the operation of the business.
o It involves the gathering of your resources, what you have and what you
don’t have.
4. Financing – is the stage in the business process that consist in the raising of
funds from personal savings, contribution of partners or stockholders and/or
through loans necessary to start the business.
5. Operation – is the start of the business.
Legal Forms of Business (Cinco, p. 17-23)
1. Single Proprietorship – is a type of business owned and managed by a single
individual.
2. Partnership – owned by two or more people bind themselves to contribute
money, property or industry to a common fund, with the intention of dividing the
profits among themselves.
3. Corporation – is an artificial being created by operation of law, having the right of
succession and the powers, attributes and properties expressly authorized by law
or incident to its existence.
4. Cooperatives – are duly registered organization of persons with a common bond
of interest, who voluntarily joined together to achieve a lawful common social or
economic end, making equitable contributions to the capital required and
accepting a fair share of risks and benefits of understanding in accordance with
universally accepted cooperative principles.
Sole Proprietorship
Advantages:
1. Easy to start
2. No need to consult others while making decisions
3. Taxed at the personal tax rate
Disadvantages:
1. Personally liable for the business debts
2. Ceases on the death of the proprietor
Partnership
Advantages:
1. Relatively easy to start
2. Taxed at the personal tax rate
3. Access to funds from multiple sources or partners
Disadvantages:
1. Partners jointly share unlimited liability
Corporation
Advantages
2. Liability of owners limited to invested funds
3. Life of corporation is not tied to the owner
4. Easier to transfer ownership
5. Easier to raise Capital
Disadvantages
1. Greater regulation
2. Double taxation of dividends
Cooperatives
Advantages:
1. A cooperative organization is owned and controlled by members.
2. It has a democratic control: one member, one vote.
3. This type of organization has a limited liability.
4. Profit distribution (surplus earnings) to members is carried on in proportion to the
use of service; surplus may be allocated in shares or cash.
Disadvantages:
1. A cooperative organization entails longer decision-making process.
2. It requires members to participate for success.
3. Extensive record keeping is necessary in this form of organization.
4. It has less incentive, and there’s also a possibility of development of conflict
between members.
Three Questions Addressed by the Study of Business Finance:
1. What long-term investments should the firm undertake? (capital budgeting
decisions)
Capital Budgeting – provides a framework for making long-term investment
decisions.
2. How should the firm fund these investments? (capital structure decisions)
Capital structure
o The mix of debt and equity/owners’ capital
o Should we use debt or equity/owners’ capital
o A higher ratio of debt against equity/owners’ capital can potentially cause
problems in your business.
o The risk of defaulting on, or being unable to repay your debt increases as
your debt-to-equity ratio rises.
o If you fail to make interest payments, creditors might take your company’s
assets or force you into bankruptcy.
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3. How can the firm best manage its cash flows as they arise in its day-to-day
operations? (working capital management decisions)
Working capital management – how do we manage the day-to-day finances of
the firm?
The Goal of Business Finance (Medina, p.26-28)
1. Maximizing profit and minimize costs – means realizing the highest possible peso
income
2. Maximizing profitability – obtaining a higher rate of return on its investment
3. Maximizing profit subject to cash constraint – the ideal set up that maximize
profits while at the same time maintaining a cash balance that can take care of
cash requirements anytime.
4. Maximizing net present worth – the objective of the firm is to maximize the
current value of the company to its owners.
5. Seeking an optimum position along a risk-return frontier – achieving the best-
possible combination of risk and return.
Definition of risk.
o Uncertainty as to loss is called risk.
o When used in finance, the term applies to the potential incurrence of loss
of money or its equivalent.
