1. INTRODUCTION TO BUSINESS FINANCE
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2. The Field of Finance
What is finance?
A body of facts, principles, and theories relating to raising and using money by individuals, businesses, and governments.  

3. Finance consists of three interrelated areas, namely:
Money and Capital markets – deals with securities market and financial institutions.
Investments – focuses on decisions made by individual and institutional investors as they choose securities for their investment portfolios; and
Financial management – which involves decisions within firms.

4. Finance relationship with other subjects
Economics
Economics provides:
a structure for decision making
(risk analysis, pricing theory through supply and demand relationships, and comparative return analysis).
a broad picture of the economic environment corporations make decisions.
(Economic variables as GDP, industrial production, disposable income, unemployment, inflation, interest rates and taxes must fit into the financial manager’s decision model and applied correctly.

5. Accounting
provides financial data through income statements, statement of financial position and statement of cash flows from which financial decisions are made.
The financial manager must know how to interpret and use these statements in allocating the business’ financial resources to generate the best return possible in the long-run.

6. Evolution of the Field of Finance
Finance has developed and changed over time.
At the turn of the 20th century
finance emerged as a field separate from economics.
Finance was concerned with financial instruments that were essential to mergers and acquisitions.

7. By the 1930s,
Financial practice revolved around preservation of capital, maintenance of liquidity, reorganization of financially distressed businesses and the bankruptcy process.
By the mid -1950s
Finance moved away from its descriptive definitional nature and became more analytical.
 (allocation of financial capital for purchase of real capital.
analysis also spread to cash and inventory management, capital structure theory and dividend policy.
Emphasis shifted from that of an outsider looking in at the business, to the financial manager making tough day-to-day decisions that would affect the business’ performance)

8.  More recently,
financial management has focused on risk return relationships and the maximization of return for a given level of risk.
The award of the 1990 Nobel Prize in economics to Professors Harry Markowitz and William Sharp for their contributions to financial theories of risk-return and portfolio management demonstrates the importance of these concepts.
In addition, Professor Merton Miller received the Nobel Prize in economics for his work in the area of capital structure theory.
These three scholars were the first professors of finance to win a Nobel Prize in economics, and their work has been very influential in finance over the last 50 years.

9. Financial Management
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.

10. Functions of Financial Management / Financial Management Decisions
To carry on business, companies need an almost endless variety of real assets that must be paid for.
Many of these assets are tangible, such as machinery, factories and offices; and intangibles such as technical expertise, trademarks, and patents.
To obtain the necessary money, the company sells financial assets or securities.
These pieces of papers have value because they are claims on the business’ real assets and cash that those real assets will produce.

11. The financial manager faces four basic decisions:
Capital Budgeting
It is the process of planning and managing a business’ long-term decisions.
The financial manager tries to identify investment opportunities that are worth more to the business than they cost to acquire.

12. Capital Structure
A business’ capital structure (or financial structure) is the specific mixture of long-term debt and equity the business uses to finance its operations.
There are two issues here.
First, how much should the business borrow?
Second, what are the least expensive sources of funds for the business?
In addition to the above, the financial manager has to decide exactly how and where to raise the funds.
The expenses associated with raising long-term capital can be considerable, so different possibilities must be carefully evaluated.

13. Dividend Decision
The financial manager must decide whether profit should be distributed or retained, or distribute a proportion and retain the balance.
The policy (dividend policy) decision must be within the context of the business’ objectives.

14. Working Capital Management
  A business’ short-term assets, such as inventory, and its short-term liabilities, such as money owed to suppliers.
Managing a business’ working capital is a day-to-day activity that ensures the business has sufficient resources to continue its operations and avoid costly interruptions.

15. How much cash and inventory should be kept on hand?
 The following questions must be answered in Working Capital Mgt.
How much cash and inventory should be kept on hand?
Should the business sell on credit?
How will the business obtain short-term credit?
If we borrow short-term, how and when should we do it?

16. The Role of the Finance Manager
The finance manager performs several other functions, including the following:
The routine working capital and cash management decisions.
Dividend decisions
Investment decisions
Financial forecasting
International financial decisions
Portfolio management
Risk management, etc

17. STAKEHOLDERS IN ORGANISATIONS
Shareholders: Also called equity holders are considered as the owners of a company.
In relatively small private companies, shareholders may double as management (managers)
Creditors: Often referred to as payables are outsiders who lend to the firm resources (money, assets, services, etc) to finance and support the firm’s operations.
Creditors have priority over owners when it comes to settlements (and/or distribution).
Creditors’ interest in a firm is for the firm to be in a position to continually service its indebtedness to them by being profitable.

18.   Management: people responsible for planning, organizing, staffing, leading and controlling a business’s effort for the purpose of accomplishing a goal.
Their key interest is to ensure business is profitable so as fulfill their obligation to all stakeholders.
Employees: one who contributes labor and expertise to an endeavor of an employer and is usually hired to perform specific duties which are packaged into a job.
They constitute the workforce of a firm and are the ones who actually carry out a firm’s operations. These encompass past and present employees.
Employees are often interested in the business’ survival and growth so that the firm will be in the position to continue meeting their welfare needs (salary, pension payments, etc)

19.   Customers: These are the patrons of a firm’s products.
No firm can succeed or even exist without a client base. Customers make up the market for firms dealing in a particular product.
Customers are interested in a firm’s survival so it can continue to supply them with products at affordable and competitive terms (price, discount, quantity).
Society (Public): This refers to the community of persons within which a firm operates. They form part of the environment of a firm. The firm’s obligation to them is not to cause harm to society, but to contribute to societal development and welfare.
Other stakeholders include government (interested in firm being law abiding, firm’s ability to honour tax obligations and be socially responsible) and business contact groups ( banks, insurers, lawyers, etc)

20. The Goal of Financial Management
Profit Maximization
Probably be the most commonly cited business goal.
This is not a very precise objective.
Do we mean profit this year?
Then action such as deferring maintenance, letting inventories run down and other short-run, cost- cutting measures will tend to increase profit now.
But these activities are not necessarily desirable.

21. The goal of maximizing profits may refer to some sort of long-run or ‘average’ profits, but that is still ambiguous.
First, do we mean something like accounting net income or earnings per share? These numbers may have little to do with what is good or bad for the firm.
Secondly, what do we mean by long-run? A famous economist once remarked, in the long-run, we are all dead.
More to the point, this goal does not tell us the appropriate trade-off between current and future profits.

22. The financial manager in a corporation makes decisions for the stockholders of the business.
Hence, instead of listing possible goals for the financial manager, we need to answer the question:
What is a good financial management decision from the stockholder’s viewpoint.
The financial manager acts in the shareholders best interests by making decisions that increase the value of the stock.
The appropriate goal of financial management in a corporation is to maximize the current value per share of the existing stock.

23. What is the appropriate goal if the business has no traded stock?
As long as we are dealing with for-profit businesses, only a slight modification is needed.
The total value of the stock in a corporation is simply equal to the value of the owners’ equity.
Therefore a more general way of stating our goal is: To maximize the market value of the owners’ equity.

24. With this goal in mind, it does not matter whether the business is a proprietorship, a partnership or a corporation.
For each of these, good financial decisions increase the market value of the owners’ equity and poor financial decisions decrease it.
 Note that the above goal does not imply that the financial manager should take illegal or unethical action in the hope of increasing the value of the equity in the business.
What it means is that the financial manager best serves the owners of the business by identifying goods and services that add value to the business.

25. The summary financial objectives generally include;
Primary objective: Shareholder wealth maximization
Other objectives (management-centered goals):
Profit maximization
Growth of business(survival) often measured by earnings per share (EPS)
Maximizing market share
Employees’ welfare
Social responsibilities (community and society welfare)

26. Agency Theory
Examines the relationship between the owners and the managers of a business.
Agency relationship arises whenever one or more individuals, called principal(s);
Hires another individual or organization, called an agent, to perform some service, and
Then delegates decision-making authority to that agent.

27. stockholders and managers, and managers and debt-holders.
In financial management context, the primary agency relationships are those between:
stockholders and managers, and
managers and debt-holders.
In privately owned businesses, management and owners are usually the same people.
Management operates the business to satisfy its own goals, needs and financial requirements.

28. However, as a company moves from private to public ownership, management now represents all the owners.
This places management in the agency position of making decisions that will be in the best interest of all shareholders.
Because of diversified ownership interests, conflict between managers and shareholders can arise that will impact on the financial decisions of the business.
Such conflicts are called agency problem.

29. Goals of managers may differ from those of owners.
The forces that give rise to agency problem between management and shareholders include;
Separation of ownership from control: Those who own the company do not manage it.
Information symmetry: management hiding financial and non-financial reports from owners.
Management therefore know it all while shareholders know only what the managers wish them to know.
Goals of managers may differ from those of owners.
For instance, management may:
seek to entrench managerial power by creating job security for themselves,
increase managerial rewards and enhancements,
pursue their own social objectives, such as traveling ostentatiously with their family and undertaking prestigious projects.

30. Agency problem can also exist between management and debt-holders/creditors when management takes decisions which adversely affect the safety of creditors’ debts such as;
Approving excessive dividends, the payment of which may pose danger to future payments of interest and principal.
Going for more debt without considering the implications on existing debt-holders.
Undertaking highly risky business ventures.

31. Suppose you hire someone to sell your car and you agreed to compensate him a flat fee when the car is bought. The agent’s incentive in this case is to make the sale, not necessarily to get you the best price.
If you paid a commission of say 5% of the sales price instead of a flat fee, then this problem might not exist. In much the same way, just as managers are not the owners of the business, they might be tempted to act in ways that are not in the best interest of the owners.

32.   For example, they might buy luxury corporate cars for their travel, or overindulge in expense-account dinners.
They might shy away from attractive but risky projects because they are worried about the safety of their jobs than the potential for superior profits.
They might be engaged in empire building, adding unnecessary or hire employees. Such problems can arise because the managers of the firm may have their own axes to grind.

33. How to resolve Agency problem between shareholders and managers Tying managerial compensation to financial performance of the firm in general, or to the performance of the share value on the stock market in particular. Direct intervention by stockholders to influence the decisions of management through: a. Talking with the firm’s management and making suggestions regarding how the business should be run, i.e. lobbying

34. b. Proposal made by majority shareholder(s) to be voted on at the AGM, even if it is opposed by management.
Threat of firing management if they are not acting in stockholders’ interest.
Threat of takeovers, particularly hostile takeovers (a takeover usually opposed by management) which occurs when the firm’s stocks have been undervalued relatively due to poor management.

35. In the same vein, the agency problem between management and creditors can be resolved by debt-holders as follows:
Debt-holders can protect their interest by securing debt against the company’s assets.
Use of restrictive covenants to restrict the firm from engaging in highly risky ventures, from paying excessive dividends and from engaging in high levels of gearing.