Chapter 1

Nature and Function of Business

Finance
Nature of Business
Finance


Refers to the management of the financial
resources of a business organization and the
processes by which they are carried in
accordance with business organizational
objectives
The Ultimate objectives of business are
profitability, growth, stability, and liquidity
Nature of Business
Finance


Concerned with the procurement, allocation,
and utmost efficiency in the utilization of
funds
Thus, the business recognizes the need for
funds and seeks funds at its least cost and
sees to it that these valuable resources are
fully utilized in the business operations as
planned
Nature of Business
Finance


Provision of the financial resources needed in
the operations of the business
Proper allotment of the financial resources
Utmost efficiency in its utilization in
accordance with the business objectives
Nature of
Business Finance

The relevance of the functions of business finance is
that the business is operating with financial and other
resources that are under its control with the aim of
being able to accomplish its planned objective
It is also of basic importance that the supply of the
needed funds be obtained under the available best
terms and conditions of the financial market
Nature of Business
Finance

Funds may be provided by the investors/owners
or institutional lenders/creditors.
The investors/owners may provide the additional
required funds.
In the event that investors/owners are not in the
position to provide the necessary additional
financial resources, then the firm can resort to
available facilities of institutional lenders

Nature of Business
Finance

Institutional lenders are the different financial
institutions, like banks, finance companies,
etc that have different lines of credit facilities
The procurement of this needed capital by
the firm has several features to be
considered such as:
status of the firm
terms of payments
the available sources of financing

Nature of Business
Finance
Status of the Firm

New Firm
Every new firm to be established will always need capital
and management.
The concern is in the aspect of capital which refers to the
funds needed to meet all the immediate cash outlays of the
business
This capital is necessary and must be stated in a document
depending upon the form of business being established,
and such document will be submitted to the proper
government regulatory agency
Working capital is known as the puhunan
This capital initially comes from the founders/owners or
investors.
Whenever their capital is not enough, then outside sources
may be tapped


Nature of Business
Finance

Firm already existing
The firm already existing may likewise need funds
because of possible additional capital for
expansion, establishment of a branch, introducing
a new product line or for the exigency of an
investment opportunity, all of which need a
substantial amount of financial resources.
In a profit oriented firm the need for funds is a
normal condition.


Nature of Business
Finance
Terms of the Payment

The payment of borrowed funds is inevitable, that the
firm must have a predetermined plan for its settlement.
When the firm is intending to pay the obligation for a
short period of time
Short term financing- one year or less
Long-term financing- long period of settlement
A profit-oriented firm has many reasons for the
considering a long period of settlement due to the
substantial amount involved that capability of the firm
does not warrant settlement under a short period, or it
be due to other prevailing circumstances


Nature of Business
Finance

Owners/investors-can be regarded as the primary
and principal source of additional funds because
of their proprietary interest in the firm
Lending Institutions- These are the all the time
ready to lend institutions from the smallest unit of
a fund manager to the biggest universal bank.
They constitute an excellent source of financing
with flexible ways of extending loans to anyone


Nature of Business
Finance
Sources of Financing

The composite of these lending institutions are as
follows:
Commercial banks
Thrift bank
Rural banks
Specialized government banks
Non-bank financial intermediaries
Investment houses
Financing companies
Insurance companies
Pawnshops
Fund managers
others


Nature of Business
Finance
Proper Allocation of the Financial Resources

The allocation of these sensitive resources should be done
in accordance with the firms objectives and plans, and are
to be ranked according to their importance
Financial decisions then become crucial. What has to be
ascertained is whether the added profit expected from the
use of the borrowed funds will adequately compensate for
the costs and risk involved in borrowing
The firm has to maintain a financial position, balancing
profitability with risk and maintaining its standing in the
business world.
Proper distribution of funds should be done with adequately
and within the frame of a time table
Nature of Business
Finance


The resources must be utilized in accordance with
what they are intended for.
It should be done in such a way that losses, wastage,
etc. are minimized, if not avoided
If funds acquired are intended for investment, then
they should be in a kind of investment where risk is
low and under a secured basis.
Careful monitoring every now and then must be done
in order that the company is assured of its goals, so
that the effective control can be applied whenever
necessary
Nature of Business
Finance

Every established business organization strives to
achieve a variety of relevant objectives that are usually
defined in terms of financemoney.
Business organizations try to realize these objectives by
raising financial resources from existing markets, known
as financial markets, and invest them in different types of
assets for the operational needs of the business
The management must choose and evaluate these forms
of fund-raising and investment in consonance with the
existing schemes of the business objectives



Nature of Business
Finance

Finance broadly includes the study of how best to
formulate these decisions.
When a firm raises funds, it creates claim against
itself by means of a debt. It is obligated to pay debt
at all cost when the debt is already due.
Failure or default in payment is a sign of weak
financial position and when aggravating, may led too
bankruptcy.



Nature of Business
Finance

Investment decisions require a great deal of financial
expertise because they are concerned with making a
careful and wise decision in balancing risk on one hand
and cost or the return on investment on the other hand.
Financial decisions with strong financial implications are
carried out by the top management of the firm, the board
of directors.
However, the financial officer of the financial manager
contribute a great deal of knowledge to the decision-
making because it is presupposed that he has a better
understanding of the matter



Nature of Business
Finance

Most business decisions are anchored on an important
asset of the firm, that is, on financial resources
Financial resources are the assets of the firm that are
measurable in terms of pecuniary considerationmoney.
In finance, we refer to this as investment portfolio, the
assets being held by the firm as investment in stocks,
bonds, money market placement etc.
The financial manager can be exactly the business officer
who is knowledgeable in the management of the
companys investment portfolios.



Nature of Business
Finance

Management of a companys investment is one of
the aspects in the management of companys
diversified assets
The financial manager is the one in-charge of the job
of determining the necessary asset-mix most suited
for the firm to hols.



Nature of Business
Finance
The Goals and Objectives of Business Organization
Business organizations are set and in their planning
process the organization is guided and supported by
the statements of goals and objectives

To Earn Profit
To increase the value of the business
To fulfill social responsibilities to the community


Nature of Business
Finance
The firms pay off for investing funds to produce
goods and services sold to satisfy human wants
It is the amount of money left from the firms income
made after all costs of producing, marketing and
distributing of the goods and services have been
paid
In a corporate entity, part of this profit is distributed
to the investors/stockholders in the form of
dividends, and the remainder plowed back into the
business for definite purposes


Nature of Business
Finance
Management always strives to increase the economic
wealth of the firm
Economic wealth consists of money and material
economic goods. It likewise includes the stocks in a
corporate entity and are the assets in a corporate
business.
Increasing the value of the business firm means the
growth of the business.
Its assets appreciate, production capacities increase; thus
the level of the volume of goods and services are higher
and result into higher sales volume. Profit then is also high


Nature of Business
Finance
Business organizations create employment,
generate revenues for the government by means of
taxes it pays and produce goods and services
needed by the society
While it is doing all these, it is morally obligated to
look after the well-being of the workers by providing
good working conditions and environment, declaring
and paying its taxes honestly and controlling
environmental pollution which leads to the detriment
of the health of people living near the business
establishment or its factories


Nature of Business
Finance
Profitability. Usually expressed in terms of earning
per share or return on investment

Growth. Growth leads to the improvement in the
companys ability to compete within its market. It
should mean an increase in the market it is
servicing, an ability to introduce new products, and
develop new techniques to increase the volume of
production or services it is rendering.



Nature of Business
Finance
Survival of the firm. A business firm tries to attain
survival through substantial growth and profitability.
Survival dictates that funds are managed efficiently
in such a way that cash is always available when
needed, and the excess not needed securely
invested

Maximized sales. Primarily, a business is organized
for profit. To maximized profit would require
maximized effort to increase sales. Increased sales
means bigger profit for the company



Nature of Business
Finance
The firms top-management member with expertise
in the management of financial assets of the firm. He
participates in the corporate strategic planning to
make financial decisions to be able to promote the
successful growth of the firm.

An adviser of the firm regarding advantages and
costs in the prevailing market using his expertise
because of his wide imagination and proficiency in
costing.




Nature of Business
Finance
With these very diversified functions he is handling,
in a big organizational set-up, he carries the
designation of vice president for finance and usually
assisted by treasurer and controller having
distinctive functions from each other




Nature of Business
Finance




Treasurer Comptroller
Managing cash for liquidity Preparation of the financial
statements
Formulation of credit
policies
Planning and preparation of
firms budgets
Direct capital budgeting Managing the receivables
Financial analysis Processing of data
regarding finance
Preparation of payrolls, and
payment of bills, taxes, etc.
Nature of Business
Finance
The Financial Manager and Certified Public Accountant

The role of financial manager and a Certified Public
Accountant creates an overlap that requires a few detailed
instructions to separate their distinctive functions in the most
understandable way.
CPA can be a proficient financial manager as he is
knowledgeable of the detailed accounts of the business but a
financial manager who is not a CPA can never function as a
Certified Public Accountant.
A CPA is recognized and licensed by the government to sign
the financial statements of the firm. He is directly involved in
financial planning and some short term decision-making
based upon management records and concerned with the
financial strategies to make the business grow and profit




Nature of Business
Finance
Functions of the Financial Manager

Identification and Analysis. In charge in the management
of the financial assets of corporation. He is responsible for
identifying the present strength and weakness of the
organization
Financial Planning and strategy. Planning the fund,
raising, maximization of profit, financing and expansion
development.
Capital Structure of the organization. The financial
manager is an adviser of an organization regarding the
advantages and costs in investment in the financial
markets and any future plans.
Stock Price and dividends. The financial manager gives
advise to the firm if dividends should be declared or not.





Nature of Business
Finance
Functions of the Financial Manager

Control of cash and other assets. It is also the
intention of the financial manager to strive to achieve
adequate profits as a management goal, done in
such a way that cash is always available when
needed.