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Business Finance

Finance, Goals, Management

Business finance is all about the acquisition of funds by a business firm and how it uses these funds to achieve its goals efficiently. Business finance is a distinct field of study in India and globally and its evolution as a modern science have led to various developments making it a challenging field globally.

A business firm’s goal should be to maximize equity shareholders’ value through efficient allocation of resources. And this leads to efficient capital formation and a high rate of economic growth.. Business firms also strive to achieve a better market share , technological superiority, and product innovation , to satisfy customers and also to fulfill certain social objectives. These goals may conflict with equity shareholder value maximization, but nevertheless these objectives have to be pursued , and there is a cost of pursuing these goals .Efficient allocation of resources and raising funds to support these goals , is the essence of business finance, and how well the business seizes financial opportunities to pursue these objectives efficiently is the essence of finance theory and practice.

Managers in a business firm are agents of shareholders, and a finance manager’s key activities are financial analysis, planning and control, and managing the firm’s asset and financial structure. Financial planning and control involve interpretation of balance sheet, profit and loss and other financial statements and assessing with the help of these, the financial condition of the firm, forecasting the future and estimating the needs and instituting proper systems of controls to achieve the overall goals outlined above.

Asset structure management involves capital budget, managing resources, credit policy and inventory control, ie in short, managing the assets side of the balance sheet. Managing financial structure involves ascertaining the right proportion of debt and equity, dividend policy, banking and identifying various instruments of funding .ie in short, managing the financing side of the balance sheet.

Financial decisions involve alternative courses of action. A good financial decision generally involves a trade off between risk and return. A greater risk may involve greater return, or a larger possibility of loss as well. Finance is related to the general accounting and economics of the environment as well. .Accounting involves the book keeping, assessing the financial condition of the business firm, whereas the finance function involves assessing new projects, increasing shareholder value and minimising finance costs. Finance function encompasses the overall macro and micro economic principles like growth rates, government reforms, incremental benefits/costs etc, and these better on the mechanics of alternative decisions taken by the finance manager.

To assess the financial performance of the firm shareholders look at three financial statements, the balance sheet, profit and loss account and the statement of sources and uses of funds statement. The balance sheet depicts what is the financial position at the end of the accounting year. The profit and loss answers how the firm performed financially . The sources and uses of funds statement shows us what were the sources of funds and how these funds were used.

The financial decisions of a firm are generally influenced by the type of legal form of organization, the legal framework and the tax laws governing them. The main forms of business are sole proprietorship, partnership, private company and public company. The ability to raise finances and the type of financing and the statutory levy burden are all dependent on the kind of entity the business firm belongs to. For example, a private company cannot issue shares to the public. The legal framework include mainly the government’s Industrial Policy, the Companies Act and the general guidelines by the Securities and Exchange Board Of India.
The tax framework includes the direct and indirect taxes. Direct taxes are taxes on income and indirect taxes are taxes collected by the government like sales tax, excise duty etc.

The financial system is generally governed by an environment which is relevant for financial decisions. This system consists of various financial institutions, banks, intermediaries, financial markets and financial instruments. A good understanding of this system enables a finance manager to take better decisions, and he negotiates loans, invests surplus funds with his effective interactions in the system. Banking requires the relevant expertise and commercial banks, financial institutions and non banking financial corporations cater to short term and long term needs of business. Financial markets consist of money market and capital market. Money market deals with short term debt and capital market deals with long term debt and preference and equity shares.

And finally the essence of business finance is how well the finances are managed. This results in firms adhering to strict financial controls, on the finance activity. These include internal audit, budgeting and cost control. Internal audit is the system of internal checks in the accounting system, so that the control system effectively operates in terms of correct booking of vouchers, legitimate expenditures being accounted for and proper procedures being adhered to. Budgeting and budgetary control are a tool of control for managers to control expenditure of their respective departments. A master budget is supported by budgets pertaining to sales, marketing, production, personnel, selling and distribution costs, purchases, administration, capital expenditure, cash payments etc .Budget targets are evolved and these are monitored by top management from month to month. Variances are analysed, and corrective action is taken.

Costing and cost control, includes tracking costs of producing a good to the cost of ultimate sale. This also includes price analysis, inventory control systems, laying down raw material consumption norms and related cost analysis activity.
Published: 2007-05-14
Author: Amita Shanbag

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