business finance.ppt
TRANSCRIPT
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Business Finance
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LearningObjectives
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 businessfinance?
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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 FinancingSelling on Credit
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Kinds of Finance
Fixed Capital
or
Long Term Capital
Circulating Capital
Or
Working Capital
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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
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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 BusinessSize of Labor Force
Price level changes
Rate of Turnover
Business Policy
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Types of Business Finance
Short Term
Finance
Medium Term
Finance
Long Term
Finance
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Short Term Finance
Purpose of Short Term Finance
Sources of Short term FinanceTrade Credit or Open Book Account
Advance from Customers
Cash Credit
Bank overdraft
Discounting of Bills
Bill of Lading
Advantages of Short term FinanceMaintain uninterrupted flow of production
Able to make prompt payments to workers
Hold the stock of finished goods
Inventory of finished goods into receivables
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Medium Term Finance
Sources of Medium TermFinance
Commercial Banks
Debentures
Loans from Specialized Credit
Institutions
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Long Term Finance
Sources of Long TermFinance
Equity Shares
Ploughing back of Profits
Issue of Right Shares
Debentures
Loans from industrial &
Financial institutionsLeasing
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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 FinancialInstitutions
Other Long Term Financial Institutions
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Merits & Demerits of Equity & Debt
Financing
Merits of Equity FinancePermanent 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 FinancingIdle cash BalancesOver Capitalization
Weak Control
No advantage of Borrowed Capital
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Merits & Demerits of Equity & Debt
Financing
Creditors Funds & Debt Financing
Advantages of Debt FinancingExpansion of Business
Creditors have no Say
ProfitTax Advantages
Urgent Current Expenses
Saving the Business from Dissolution
Disadvantages of Credit Financing
Payment of InterestCreditors can sue the Business
Losses
Attraction of Funds
Dissatisfaction among Shareholders
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Owners & Creditors Position with
Regard to (1)Risk(2)Income(3)Control
Financial Characteristics ofOwners Capital
Risk
Income
Control
Financial Characteristics of theCreditors Position
RiskIncome
Control in Business
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Distinction Between Owners Fund & Borrowed Fund
Risk Capital
Permanent Capital
Basis of Control
Profit
Security of Assets
Rate of Return Fixed Obligation
Priority as to Payment
of Reward
Repayment of Principal
Tax
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Sources of Interest Free Financing in Pakistan
Equity or Owners Financing
Issue of Ordinary Shares
Ploughing back of Profit
Interest Free FinancingParticipation Term Certificate
Musharika
MudarbahLeasing
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Interest Based Financing
Interest is paid on the
borrowed capital. Interestis the payment made for
the use of money.
Why Interest Paid
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Interest Free Banking
Five non interest based
investment
MusharikaMudarbah
Participation Term Certificate
Investment on the basis of Equity
ParticipationInvestment Rent Sharing basis
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Factors Determining the Requirements
of Fixed Capital
Nature of Business
Size of Business
Types of BusinessTechnique of Production
Number of Activities
Non Current AssetsMode of Acquiring Fixed Assets
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Sources of Fixed Capital
Owned Capital
Equity Share (Owned Capital)
Ploughing back of Profits (OwnedCapital)
Borrowed Capital
Loans from industrial and
Financial
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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
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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