Chapter 1

Nature and Function of Business

Finance
 Nature of Business
Finance

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

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

Function 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

Provisions of the
Financial Resources
 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

Provisions of the
Financial Resources
 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

Status of the Firm

 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

Sources of Financing
 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 firm’s 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

Utmost Efficiency in the

Utilization of Financial
Resources
 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

The Importance of
Finance in Business
 Every established business organization strives to achieve a
variety of relevant objectives that are usually defined in terms of
finance—money.
 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

The Importance of
Finance in Business
 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

The Importance of
Finance in Business
 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

The Importance of
Finance in Business
 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 consideration—money.
 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 company’s investment
portfolios.
 Nature of Business
Finance

The Importance of
Finance in Business
 Management of a company’s investment is one of the
aspects in the management of company’s 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

To Earn Profit
 The firm’s pay off for investing funds to produce
goods and services sold to satisfy human wants
 It is the amount of money left from the firm’s 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

To Increase the Value

of the Business Firm
 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

To Fulfill Social
Responsibilities
 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

Most common
objective deal with:
 Profitability. Usually expressed in terms of earning per
share or return on investment

 Growth. Growth leads to the improvement in the

company’s 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

Most common
objective deal with:
 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 Financial
Manager
 The firm’s 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

The Financial
Manager

 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

The Financial
Manager
Treasurer
Managing cash for liquidity
Comptroller
Preparation of the financial
statements
Formulation of credit Planning and preparation of
policies firm’s 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.