Business Finance Finance is the study of funds management. The general areas of finance are business finance, personal finance (private finance), and public finance

Learning Objectives To understand the concept of business finance. What is importance of finance in operation of business? What are types of business finance? What are sources of business finance?

Business Finance According to B.O.Wheeler Business Finance is defined as that business activity which is concerned with the acquisition & conversation of capital funds in meeting the financial needs & overall objectives of business enterprise”. Financial Needs of Business Purchase of Fixed Assets Purchase of Current Assets Preliminary Expenses Cost of Financing Selling on Credit

Kinds of Finance Fixed Capital or Long Term Capital Circulating Capital Or Working Capital

Working Capital Working capital is the amount of funds invested in the current assets of a business. It is a short term capital. Types of Working Capital Revolving Capital As the capital is repeatedly invested, recovered and reinvented in a going business. Permanent or Regular Working Capital There is constant need of minimum amount of cash for a running business. Working capital = current assets – current liabilities

Factors Affecting Working Capital Nature of the Business Size of the Business Length of period of manufacture Methods of Purchase & Sale of Commodities Converting Working Assets into Cash Seasonal Variation in Business Size of Labor Force Price level changes Rate of Turnover Business Policy

Types of Business Finance Short Term Finance Medium Term Finance Long Term Finance

Short Term Finance Purpose of Short Term Finance Sources of Short term Finance Trade Credit or Open Book Account Advance from Customers Cash Credit Bank overdraft Discounting of Bills Bill of Lading Advantages of Short term Finance Maintain uninterrupted flow of production Able to make prompt payments to workers Hold the stock of finished goods Inventory of finished goods into receivables

Medium Term Finance Sources of Medium Term Finance Commercial Banks Debentures Loans from Specialized Credit Institutions

Long Term Finance Sources of Long Term Finance Equity Shares Ploughing back of Profits Issue of Right Shares Debentures Loans from industrial & Financial institutions Leasing

Sources of Company Financing Sources of Business Funds Owners Capital Issue of Equity Ploughed back profits Borrowed Capital is Interest Based Debentures Bank loans Loans from Specialized Financial Institutions Other Long Term Financial Institutions

Merits & Demerits of Equity & Debt Financing Merits of Equity Finance Permanent source of Capital No Payment of Interest Improved Ability to Face Business Recession Freedom from Financial Worries of Borrowing Earnings remain with the Firm Liquidation of Assets Repayment of Funds Financial Base Ability to Borrow Disadvantages of Equity Financing Idle cash Balances Over Capitalization Weak Control No advantage of Borrowed Capital

Merits & Demerits of Equity & Debt Financing Creditors Funds & Debt Financing Advantages of Debt Financing Expansion of Business Creditors have no Say Profit Tax Advantages Urgent Current Expenses Saving the Business from Dissolution Disadvantages of Credit Financing Payment of Interest Creditors can sue the Business Losses Attraction of Funds Dissatisfaction among Shareholders

Owners & Creditors Position with Regard to (1)Risk(2)Income(3)Control Financial Characteristics of Owners Capital Risk Income Control Financial Characteristics of the Creditors Position Control in Business

Distinction Between Owners Fund & Borrowed Fund Permanent Capital Repayment of Principal Basis of Control Tax Profit Risk Capital Security of Assets Priority as to Payment of Reward Rate of Return Fixed Obligation

Sources of Interest Free Financing in Pakistan Equity or Owner’s Financing Issue of Ordinary Shares Ploughing back of Profit Interest Free Financing Participation Term Certificate Musharika Mudarbah Leasing

Interest Based Financing Interest is paid on the borrowed capital. Interest is the payment made for the use of money. Why Interest Paid

Interest Free Banking Five non interest based investment Musharika Mudarbah Participation Term Certificate Investment on the basis of Equity Participation Investment Rent Sharing basis

Factors Determining the Requirements of Fixed Capital Nature of Business Size of Business Types of Business Technique of Production Number of Activities Non Current Assets Mode of Acquiring Fixed Assets

Sources of Fixed Capital Owned Capital Equity Share (Owned Capital) Ploughing back of Profits (Owned Capital) Borrowed Capital Loans from industrial and Financial

Ploughing back of Profits Merits of Ploughing back of Profits Merits of Ploughing Back of Profits Advantages to the Company Shock Absorber Aids in Smooth Running of Business Increase in Credit Worthiness of the Company Self Dependent Company Expansion & Growth of Business Redemption of Long Term Debts Advantages to the Share Holders Increase in the Value of Shares Increase in Earning Capacity Retaining the Control

Advantages to the Society Increase in the Rate of Capital Formations Rapid Industrialization Increase in Industrial Capacity Better Quality of Goods at Reduced Prices Danger of Ploughing back of Profit Overcapitalization Reduces Dividend Evasion of Taxes Frustration among Shareholders