NATURE & SCOPE OF BUSINESS FINANCEwE.ppt

MEANING OF FINANCE
Finance is often defined simply as the management of
money or
“funds” so that money is available at the time when it
is required .
TYPES OF FINANCE
PUBLIC
FINANCE
PRIVATE
FINANCE
 Government
institutions
State govt.
Local self govt.
Central govt.
Personal Finance
Business finance
Finance of non-
profit Organisation.

BUSINESS FINANCE
Business finance refers to money and credit
employed in business. It involves procurement and
utilization of funds so that business firms may be
able to carry out their operations effectively and
efficiently. Business finance involves estimation of
funds. It is concerned with raising funds from
different sources as well as investment of funds for
different purposes.
Busine
ss
Financ
e
Sole-
Proprietary
Finance
Partnershi
p Firms
Finance
Company
or
Corporatio
n Finance

CORPORATE FINANCE / FINANCIAL
MANAGEMENT
Wheeler defines business finance as “that
business activity which is concerned with the
acquision and conservation of capital funds
in meeting the financial needs and overall
objectives of business enterprise.
FINANCIAL MANAGEMENT refers to that part of
management activity which is concerned with the
planning and controlling of the firms financial
resources. It deals with finding out various sources
for raising funds for the firm.

EVOLUTION OF CORPORATE
FINANCE
Corporate finance emerged as a distinct field
of study only in the early part of this century
as a result of consolidation movement and
formation of large sized business
undertakings. In the initial stages of the
evolution, emphasis was placed on the
study of sources and forms of financing the
large sized business enterprise. Economic
recession of 1930 rendered difficulties in
raising finance from banks and other
financial institutions. Thus, emphasis was

IMPORTANCE OF CORPORATION
FINANCE/FINANCIAL MANAGEMENT
Finance is very essential for smooth running of
business. It is the life blood and nerve centre of
business. The importance of corporation finance has
arisen because of the fact that present day business
activities are predominantly carried on company or
corporate form of business. The advent of corporate
enterprises has resulted into:
 the increase in size and influence of the business
enterprises,
 wide distribution of corporate ownership,
 Separation of ownership and management.
As the owners in a corporate enterprise are widely
scattered and the management is separated from the

The importance of financial management can well
be described as the importance of corporate
finance . Financial management is indispensable
to any organization as it helps in:
financial planning and successful promotion of
an enterprise,
acquisition of funds at minimum possible cost,
proper use and allocation of funds,
taking sound financial decisions,
increasing the wealth of the investors and the
nation,
Improving the profitability through financial
controls,

FINANCE FUNCTION
Finance function is the most
important of all business functions.
Business will close down because of
absence of finance thus this
function cannot be ignored. The
need for money is continuous. The
management should have an idea of
using the money profitably. The
inflows and outflows of cash should

APPROACHES TO FINANCE
FUNCTION
1. THE TRADITIONAL APPROACH:
According to this approach, the scope of finance function was
confined to only procurement of funds needed by a business
on most suitable terms. The utilization of funds was
considered beyond the purview of finance function.
LIMITATIONS
The traditional approach to the scope and functions of
finance has now been discarded as it suffers from many
serious limitations
1. Ignores internal decisions making as to proper
utilization of funds,
2. Focus on long term funds and ignores the important
issue of working capital finance and management.
3. Allocation of funds is ignored.
4. Does not focus on day to day financial problems of

THE MODERN APPROACH:
The modern approach views finance function in
broader sense. It includes both raising of funds as
well as their effective utilization of finance. The
techniques models, mathematical programming,
simulations and financial engineering are used in
financial management to solve complex problems
of present day finance. The modern approach
considers the three basic management decisions,
i.e. investment decisions, financing decisions and
dividend decisions within the scope of finance
function.

AIMS OF FINANCE
FUNCTION
 Acquiring sufficient finance: The main aim of finance is to
assess the financial needs of an enterprise and then finding
out suitable sources for raising them.
 Proper utilization of funds: Effective utilization of funds is
very important. It should be used in such a way that
maximum benefit is derived from them.
 Increasing Profitability: The planning and control of finance
function aims at increasing profitability of the concern.
Finance function should be so planned that the concern
neither suffers from inadequacy of funds nor wastes more
funds than required.
 Maximizing Firm’s value: Finance function also aims at
maximizing the value of the firm. Besides profits, the type of
sources used for raising funds, the cost of funds, the
condition of money market, the demand for products are
some other considerations which also influence a firm’s
value.

SCOPE OF FINANCE FUNCTION/FINANCIAL
MANGEMENT
1.Estimating financial requirements
2. Deciding capital structure
3. Selecting a source of finance
4. Selecting a pattern of investment
5. Proper cash management
6. Implementing financial controls
7. Proper use of surpluses

Business Finance
MAXIMIZE OWNER’S ECONOMIC WELFARE: It
can be achieved by:
PROFIT MAXIMIZATION
WEALTH MAXIMIZATION

PROFIT MAXIMIZATION
 Main objective of business
 Survival is not possible
 Earn profit to cover its costs
 Provide fund for growth
 Measure of efficiency and economic prosperity of business
 Fulfill social goals
 Protection against risk.
CRITICISM
1. Exploitation of works and consumers
2. Ambiguity
3. Ignore time value of money
4. Ignores risk factor
5. Dividend policy

WEALTH MAXIMIZATION
• Appropriate objectives of business
• Stock holders current wealth in a firm= Number of
shares owned* Current stock price per share.
• Helps in long run survival and growth of business
• Leads towards maximizing stock holders utility
CRITICISM
1. Not necessarily socially desirable
2. Controversy
3. Possibility of conflict of interest

Measuring Shareholders Value Creation
The two new measures use to determine whether an
investment positively contributes to the shareholders wealth :
 Economic Value Added (EVA)
 Market Value Added (MVA)
ECONOMIC VALUE ADDED (EVA):-
Economic value added is a measure of performance
evaluation that was originally employed by Stern Stewart &
Co. it is very popular measure today which is used to measure
the surplus value created by an investment or a portfolio of
investments.
EVA can be calculated as below:-
EVA = (Net Operating profit after tax - cost of capital x capital
invested)
Or, EVA = (Return on Investment – cost of capital x capital
employed)

MARKET VALUE ADDED (MVA):-
The market value added (MVA) is the sum total of all
the present values of future EVAs.
MVA = EVA1 + EVA2 + EVA3 + ………………..
(1+C)1 (1+C)2 (1+C)3
The market value added (MVA) can also be defined
as the difference between the current market value
of the firm and the book of capital employed by the
firm.

FINANCIAL DECISIONS
Financial decision refers to decision concerning
financial matters of a business firm. There are many
kinds of financial management decisions that the
firm makes in pursuit of maximizing shareholder’s
wealth, viz.., kind of assets to be acquired, pattern of
capitalization, distribution of firms income etc. we
can classify these decisions into three major groups:-
Investment decisions
Financing decisions
Dividend decisions

INVESTMENT DECISIONS
Investment decisions relates to the determination
of total amount of assets to be held in the firm, the
composition of these assets and the business risk
complexions of the firm as perceived by its
investors. It is the most important financial
decision.
 The investment decisions can be classified under to
broad groups:-
 Long-term investment decision
 Short-term investment decision
The long-term investment decision is referred to as the

FINANCING DECISION
Once the firm has taken the investment decision and
committed itself to new investment, it must decide the
best means of financing these commitments. Since,
firms regularly make new investments, the needs for
financing and financial decisions are on going. Hence,
a firm will be continuously planning for new financial
needs.
The third major financial decision relates to the
disbursement of profits back to investors who supplied
capital to the firm. The term dividend refers to that
profits of a company which is distributed by it among
its shareholders. It is the reward of shareholders for
DIVIDEND DECISION

INTER-RELATION OF FINANCIAL
DECISIONS
We have studied above the three major groups of
financial decisions. Although these are different kinds of
financial management decisions yet these decisions are
inter-related because the underlying objective of all
these decisions is the same, i.e. maximization of
shareholders wealth. All these decisions influence one
another and are inter-dependent.
(INTER-RELATION OF FINANCIAL DECISION)
INVESTMENT
DECISION
DIVIDEND
DECISION
FINANCING
DECISION

FACTORS INFLUENCING FINANCIAL
DECISIONS
There are a number of factors that influence the
financial decisions. A list of the important factors
influencing the decisions is given below:
Cost
Risk
Cash flow position
Control considerations
Floatation cost
Fixed operating cost
State of capital market

RISK-RETURN TRADE OFF
Financial decisions of a firm often involve alternative
courses of action. A finance manager has to select amongst
the various alternatives available to him. For example, while
making an investment decision, he has to decide whether,
the firm should go in for a machinery having capacity of
50,000 units or 2,00,000 units. In the same manner the
financing decision may involve a choice between a debt
equity ratios of 1:1 or 2:1, the dividend decision may be
concerned with the quantum of profits to be distributed.
The following figure shows the relationship between
various financial decisions and the risk return trade
off and market value of the firm.

INVESTMENT DECISIONS
CAPITAL
BUDGETING
 WORKING CAPITAL
MANAGEMENT
FINANCING DECSIONS
CAPITAL
STRUCTURE
DIVIDEND DECISIONS
DIVIDEND
POLICY
RISK
RETURN
MARKET
VALUE OF
THE FIRM
(RISK- RETURN TRADE OFF)
The following figure shows the relationship between various financ
the risk return trade off and market value of the firm.

FINANCIAL MANGEMENT PROCESS
Financial
planning and
control
FEED BACK
Shareholders
wealth
Market price of
shares
Risk and Returns
characteristics of
the firm
Financial Decision:
1. Investment
decision
2. Dividend
decision
3. Financing
decision

FUNCTIONAL AREAS OF FINANCIAL
MANAGEMENT
 Determining financial needs
 Selecting the source of funds
 Financial analysis and interpretation
 Cost Volume Profit analysis
 Capital Budgeting
 Working Capital Management
 Profit Planning Control
 Dividend Policy

FUNCTION OF FINANCE MANAGER
Financial Forecasting and Planning
Acquisition of funds
Investment of funds
Helping in valuation decisions
Maintain proper liquidity

NATURE & SCOPE OF BUSINESS FINANCEwE.ppt

NATURE & SCOPE OF BUSINESS FINANCEwE.ppt

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NATURE & SCOPE OF BUSINESS FINANCEwE.ppt