MANAGING BUSINESS FINANCE

IRJMST Volume 5 Issue 4 [Year 2014] Online ISSN 2250 - 1959

International Research Journal of Management Science & Technology http://www.irjmst.com Page 27

MANAGING BUSINESS FINANCE

First Author : Miss. Deepika Assistant professor, Motilal Nehru college (eve),

University Of Delhi,Delhi-110021.

email id: [email protected]

Second author: Mrs.Maya Rani

Assistant professor, Motilal Nehru college (eve),

University Of Delhi,Delhi-110021.

email id: [email protected]

Abstract:

As we know finance is the lifeblood of every business, its management requires special

attention. Financial management is that activity of management which is concerned with

the planning, procuring and controlling of the firm's financial resources. Finance is one of

the basic foundations of all kinds of economic activities. Finance is defined as “provision

of money at the time when it is required”. Every enterprise, whether big, medium, or

small, needs finance to carry on its operations and to achieve its targets. Without

adequate finance, no enterprise can possibly accomplish its objectives. So finance is

regarded as the lifeblood of any business enterprise. Funds are needed right from the time

of commencing the business for purchasing fixed assets such as plant and machinery,

furniture and fixtures etc., as well as for the day to day expenses. So here in this article

the main objectives is to have the clear understanding of the managing business finance

in terms of its concept, objectives and scope , various sources of raising finance and

factors influencing the financial requirement of any organisation.

Introduction:

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International Research Journal of Management Science & Technology http://www.irjmst.com 8

Business finance may broadly may be defined as that business activity which is

concerned with the planning, raising controlling &administering of funds in the business.

It involves the estimation, acquisition & administration of funds of any kind used in

meeting the needs & objective of business firms.

“Business finance deals primarily with rising administering and disbursing funds by

privately owned business units operating in non-financial fields of industry.” – by Prather

and Wert

Financial Management means the efficient and effective management of money (funds)

in such a manner as to accomplish the objectives of the organization. It is the specialized

functions directly associated with the top management. The significance of this function

is not only seen in the 'Line' but also in the capacity of 'Staff' in overall administration of

a company. It has been defined differently by different experts in the field.

It includes how to raise the capital, how to allocate it i.e. capital budgeting. Not only

about long term budgeting but also how to allocate the short term resources like current

assets. It also deals with the dividend policies of the shareholders.

“Financial management is the area of business management devoted to a judicious use of

capital and a careful selection of sources of capital in order to enable a business firm to

move in the direction of reaching its goals.” – by J.F.Bradlery



“Financial management may be defined as that area or set of administrative function in an

organization which relate with arrangement of cash and credit so that organization may

have the means to carry out its objective as satisfactorily as possible .“ - by Howard &

Opton.

Objectives of Financial Management:

The main objectives of financial management are:-

1. Profit maximization : The main objective of financial management is profit

maximization. The finance manager tries to earn maximum profits for the

company in the short-term and the long-term. He cannot guarantee profits in the

long term because of business uncertainties. However, a company can earn

maximum profits even in the long-term, if:-

i. The Finance manager takes proper financial decisions.

ii. He uses the finance of the company properly.

2. Wealth maximization : Wealth maximization (shareholders' value maximization)

is also a main objective of financial management. Wealth maximization means to

earn maximum wealth for the shareholders. So, the finance manager tries to give a

maximum dividend to the shareholders. He also tries to increase the market value

of the shares. The market value of the shares is directly related to the performance

of the company. Better the performance, higher is the market value of shares and

vice-versa. So, the finance manager must try to maximise shareholder's value.

3. Proper estimation of total financial requirements : Proper estimation of total

financial requirements is a very important objective of financial management. The

finance manager must estimate the total financial requirements of the company.

He must find out how much finance is required to start and run the company. He

must find out the fixed CapitaLand working capital requirements of the company.

His estimation must be correct. If not, there will be shortage or surplus of finance.

Estimating the financial requirements is a very difficult job. The finance manager



must consider many factors, such as the type of technology used by company,

number of employees employed, scale of operations, legal requirements, etc.

4. Proper utilisation of finance : Proper utilisation of finance is an important

objective of financial management. The finance manager must make optimum

utilisation of finance. He must use the finance profitable. He must not waste the

finance of the company. He must not invest the company's finance in unprofitable

projects. He must not block the company's finance in inventories. He must have a

short credit period.

5. Survival of company : Survival is the most important objective of financial

management. The company must survive in this competitive business world. The

finance manager must be very careful while making financial decisions. One

wrong decision can make the company sick, and it will close down.

6. Maintaining proper cash flow : Maintaining proper cash flow is a short-term

objective of financial management. The company must have a proper cash flow to

pay the day-to-day expenses such as purchase of raw materials, payment of wages

and salaries, rent, electricity bills, etc. If the company has a good cash flow, it can

take advantage of many opportunities such as getting cash discounts on purchases,

large-scale purchasing, and giving credit to customers, etc. A healthy cash flow

improves the chances of survival and success of the company.

7. Reduce cost of capital : Financial management tries to reduce the cost of capital.

That is, it tries to borrow money at a low rate of interest. The finance manager

must plan the capital structure in such a way that the cost of capital it minimised.

8. Reduce operating risks : Financial management also tries to reduce the operating

risks. There are many risks and uncertainties in a business. The finance manager

must take steps to reduce these risks. He must avoid high-risk projects. He must

also take proper insurance.

9. Increase efficiency : Financial management also tries to increase the efficiency of

all the departments of the company. Proper distribution of finance to all the

departments will increase the efficiency of the entire company.

Scope of financial management:



The finance department of an enterprise performs several functions in order to

achieve the above objectives. The scope of finance function is very wide. It

consists of the following activities:

1. Estimating the Requirement of Funds: The finance department must

estimate the capital requirements of the firm accurately for long term and

short term needs. In estimating the capital requirements of the business, the

finance department must take help of the budgets of various activities of the

business e.g. sales budget, production budget, expenses budget etc. prepared

by the concerned departments. In the initial stage, the estimate is done by

promoters but in a growing concern, it is done by the finance department.

Unless the financial forecast is correct, business is likely to run into

difficulties due to excess or shortage of funds. Correct estimates ensure the

availability of funds as and when they are needed. In estimating the

requirement of funds, nature and size of the business, modernization and

expansion plan should be given due consideration.

2. Determining the Capital Structure: By capital structure we mean the kind

and proportion of different securities for raising the required funds. Once the

total requirement of funds is determined, a decision regarding the type of

securities to be issued and the relative proportion between them is to be taken.

The finance department must determine the proper mix of debt and equity. It

should also decide the ratio between long term and short term debts. In

determining these ratios, cost of raising finance from different sources, period

for which funds are required and several other factors should be considered. A

proper balance between risk and returns should be maintained.

3. Choice of Sources of Finance: A company can raise funds from different

sources e.g. shareholders, debenture holders, banks, financial institutions,

public deposits etc. Before raising the funds, it has to decide the source from

which the funds are to be raised. The choice of the source of finance should

be made very carefully by taking a number of factors into account such as cost

of raising funds, conditions attached, charge on assets, burden of fixed

charges, dilution of ownership and control etc. For example, if the company



does not want to dilute the ownership, it will depend on any source of finance

other than investment in shares.

4. Investment of Funds: The funds raised from different sources should be

prudently invested in various assets -short term as well as long term to

optimize the return on investment. In taking decisions for the investment of

long term funds, a careful assessment of various alternatives should be made

through capital budgeting, opportunity cost analysis and many other

techniques used to evaluate the investment proposals. A part of the long term

funds should be invested in working capital of the company. While taking

decision for the investment of funds in long term assets, management should

be guided by three basic principles, viz. safety, profitability and liquidity. In

taking decisions for the investment of funds in working capital, the finance

manager must seek cooperation of marketing and production departments in

estimating the funds which are to be involved in carrying of inventories in

finished product and credit policy of the marketing department and in raw

material and factory supplies of the production department.

5. Management of Cash: It is the prime responsibility of the finance manager to

see that an adequate supply of cash is available at proper time for the smooth

running of the business. Cash is needed to purchase raw materials, pay off

creditors, to pay to workers and to meet the day to day expenses of the

business. Availability of cash is necessary to maintain liquidity and credit-

worthiness of the business. Excess cash must be avoided as it costs money. It

there is any cash in excess, it should be invested in near cash assets such as

investments etc. which may be converted into cash within no time. A cash

flow statement should be prepared by the department to know the correct need

of cash is essential to achieve the goal of profitability and liquidity. The

finance manager should decide in advance how much cash he should retain to

meet current obligations of the company.

6. Financial Controls : The financial manager is under an obligation to check

the financial performance of the funds invested in the business. There are a

number of techniques to evaluate the performance viz. Return on Investment



(ROI), budgetary control, cost control, internal audit, ratio analysis and break-

even point analysis. The financial manager must lay emphasis on financial

planning as well.

SOURCES OF FINANCE:

A firm or business enterprise can raise the funds from some of the following

mentioned sources depending upon its financial needs:

1. Equity share capital: it is an important source of finance and is a

prerequisite for a company. It provides the base on which funds are

raised from the other sources. Equity shareholders participate in the

management of the company through their voting rights. They have

claim on all the profits and assets of the company that are left after

setting all the claims.so they bear the risk of ownership & also get the

reward.

2. Preference share capital: It represents the funds raised through the

issue of preference shares. Preference shares are those shares are

associated with preferential rights of a fixed rate of dividend and

repayment of capital. The payment of the fixed rate of dividend is

done before the ordinary shareholders are given their dividends.

3. Private Finance: It is concerned with requirements, receipts, and

disbursement of fund in case of an individual, a profit seeking business

organization and a non-profit organization. Thus, private finance can

be classified into:

Personal Finance: - Personal finance deals with the analysis of

principle and practices involved in managing one’s own daily

need of fund.

Finance of Non-Profit Organization: - The finance of non-

profit organization is concerned with the practices, procedures

and problems involved in financial management of charitable,

religion, educational, social and other similar organizations.



4. Informal finance: Informal financeis defined as contracts or

agreements conducted without reference or recourse to the legal

system to exchange cash in the present for promises of cash in the

future.

5. Bank loans: Banks are like the supermarket of debt financing. They

provide short-, mid- or long-term financing, and they finance all asset

needs, including working capital, equipment and real estate. This

assumes, of course, that you can generate enough cash flow to cover

the interest payments (which are tax deductible) and return the

principal.

6. Lease financing: A lease is a method of obtaining the use of assets for

the business without using debt or equity financing. It is a legal

agreement between two parties that specifies the terms and conditions

for the rental use of a tangible resource such as a building and

equipment. Lease payments are often due annually. The agreement is

usually between the company and a leasing or financing organization

and not directly between the company and the organization providing

the assets. When the lease ends, the asset is returned to the owner, the

lease is renewed, or the asset is purchased.

7. Initial Public Offerings (IPOs):Initial Public Offerings are used

when companies have profitable operations, management stability, and

strong demand for their products or services. This generally doesn’t

happen until companies have been in business for several years. To

get to this point, they usually will raise funds privately one or more

times.

8. Trade credit: It is spontaneous source of fund that is available in

normal course without many formalities. It is an arrangement to buy

goods or services on account, that is, without making immediate cash

payment. It does not involve any explicit cost in the form of interest

but generally a higher price is charged for goods and services provided



on credit. This source of financing is available for short period of up to

90days.

Factors affecting the choice of source of finance:

When a firm needs finance, it becomes crucial to pick how much finance

they need and for how long. It can ruin or make a business. A firm will

have a wide range of sources to choose finance from such as a bank loan

or overdraft, share capital, venture capital, profit, or trade credit. However,

some sources of cash are suited best for short term while others are best

for long term and some are suited for little injections of cash while others

are suited to huge injections of cash.The type and amount of finance that is

available will depend on several factors. These are as follows:

1. Type of business: a sole trader will be limited to the capital the owner

can put into the business plus any money he or she is able to borrow. A

limited company will be able to raise share capital.

2. The stage of development of the business: a new business will find it

much harder to raise finance than an established firm. As the business

develops it is easier to persuade outsiders to invest in the business. It is

also easier to obtain loans as the firm has assets to offer as security.

3. Amount of money required: a large amount of money is not available

through some sources and the other sources of finance may not offer

enough flexibility for a smaller amount.

4. The amount of risk involved in the reason for the cash: a project

which has less chance of leading to a profit is deemed more risky than

one that does. Potential sources of finance (especially external sources)

take this into account and may not lend money to higher risk business

projects, unless there is some sort of guarantee that their money will be

returned.

5. The state of the economy: when the economy is booming, business

confidence will be high. It will be easy to raise finance both from

borrowing and from investors. It will be more difficult for businesses



to find investors when interest rates are high. They will invest their

money in more secure accounts such as building societies. Higher

interest rates will also put up the cost of borrowing. This will make it

more expensive for the business to borrow.

6. The amount of risk involved in the reason for the cash : a project

which has less chance of leading to a profit is deemed more risky than

one that does. Potential sources of finance (especially external sources)

take this into account and may not lend money to higher risk business

projects, unless there is some sort of guarantee that their money will be

returned.

7. The cheapest option available : the cost of finance is normally

measured in terms of the extra money that needs to be paid to secure

the initial amount . The typical cost is the interest that has to be paid

on the borrowed amount. The cheapest form of money to a business

comes from its trading profits.

8. Tax benefits: interest paid on the borrowed funds provides tax benefit

in the form of deductibility of interest while calculating tax liability,

whereas, dividend is not available for this purpose.

Conclusion:

After writing this article on the basis of secondary data I can conclude that

one needs money to make money. Finance is the lifeblood of any business

and there must be a continuous flow of funds in and out of a business

enterprise because without finance all the business plan are like the

blueprints only. Finance makes the wheels of business to run it smoothly.

There are number of sources available to any business organisation to

finance its business and achieve its objectives.

References:

http://www.tutor2u.net/business/gcse/finance_choosing_right_sources.htm

http://www.tutor2u.net/business/gcse/finance_choosing_right_sources.htm



http://www.askwillonline.com/2011/04/factors-that-affect-choice-of-

finance.html

http://en.wikipedia.org/wiki/Trade_credit

http://marianacademylibrary.blogspot.in/2013/05/nature-and-scope-of-

financial-management.html

http://www.publishyourarticles.net/knowledge-hub/business-

studies/financial-management.html

http://kalyan-city.blogspot.com/2011/09/objectives-of-financial-

management.html

http://en.wikipedia.org/wiki/Financial_management

http://www.herbstfinancial.com/new/herbstfa/content.asp?contentid=20174

80929

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http://www.askwillonline.com/2011/04/factors-that-affect-choice-of-finance.html

http://en.wikipedia.org/wiki/Trade_credit

http://marianacademylibrary.blogspot.in/2013/05/nature-and-scope-of-financial-management.html

http://marianacademylibrary.blogspot.in/2013/05/nature-and-scope-of-financial-management.html

http://www.publishyourarticles.net/knowledge-hub/business-studies/financial-management.html

http://www.publishyourarticles.net/knowledge-hub/business-studies/financial-management.html

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http://kalyan-city.blogspot.com/2011/09/objectives-of-financial-management.html

http://en.wikipedia.org/wiki/Financial_management



MANAGING BUSINESS FINANCE

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