BUSINESS:

Literally, the word „business‟ means busyness. But in economic sense, the word „business‟ means work,
efforts and acts of people connected with production of wealth.

In simple words we can define business as:

Any legal activity which is done for the purpose of earning profit is called business.

Main Points

1. Legal

2. Profit motive

3. Risk

Finance

Finance word means “management of money”. Finance is the art and science of managing money.

Business Finance

It is the art and science of managing company’s/business money.

OR

Business finance is concerned with the sources of funds available to enterprises of all sizes and the
proper use of money or credit obtained from such sources.

OR

“Business finance is to planning, coordinating, controlling and implementing of financial activities of

business institution.”

OR

“Business finance can broadly be defined as the activity concerned with planning, raising, controlling,
administering of the funds used in the business”.

Explanation

The term ‘business finance’ is very comprehensive. It implies finances of business activities. Business can
be categorized into three groups: commerce, industry and service. It is a process of rising, providing and
managing of all the money to be used in connection with business activities. It encompasses finance of
sole proprietary organizations, partnership firms and corporate organizations. No doubt, the
abovementioned organizations have different characteristics, features, different regulations and rules
and financial problems faced by them vary depending upon the nature of business and scale of
operations. However, it should be remembered that the same principles of finance are applicable to
large and small organizations, proprietary and non-proprietary organizations.
Scope of Business Finance

The scope of business finance is very wide. While accounting is concerned with the routine type of work,
business finance is concerned with financial planning, policy formulation and control. Earnest W. Walker
and William are of the opinion that the financial function has always been important in business
management. The financial organization depends upon the nature of the organization whether, it is a
proprietary organization, a partnership firm or corporate body. The significance of the finance function
depends on the nature and size of a business firm. The role of business finance officers must be clearly
defined to avoid conflicts and the overlapping of responsibilities. There are various fields covered by
business finance and some of them are:

1. Financial Planning and Control

Any business firm must manage and make their financial analysis and planning. To make these
planning’s and management, the financial manager must have knowledge about the present financial
situation of the firm. On the basis of this information, he/she regulates the plans and managing
strategies for future financial situation of the firm with in different economic scenario. Financial
budget also relies in these financial plans. Financial budget serves as the basis of control over financial
plans. The firms on the basis of budget, finds out the deviation between the plan and the performance
and tries to correct them. Hence, business finance consists of financial planning and control.

2. Deciding Capital Structure

The Capital structure refers to the kind and proportion of different securities for raising funds.
After deciding about the quantum of funds required it should be decided which type of securities
should be raised. It may be wise to finance fixed assets through long-term debts. Even if gestation
period is longer, then share capital may be most suitable. Long-term funds should be raised. It
may be wise to finance fixed assets through long-term debts. Even here if gestation period is
longer, then share capital may be most suitable. Long-term funds should be employed to finance
working capital also, if not wholly then partially. Entirely depending upon overdrafts and cash
creditors for meeting working capital needs may not be suitable. A decision about various sources
for funds should be linked to the cost of raising funds. If cost of raising funds is very high then
such sources may not be useful for long.
3. Selection of Source of Finance:
After preparing a capital structure, an appropriate source of finance is selected. Various sources,
from which finance may be raised, include: share capital, debentures, financial institutions,
commercial banks loans, public deposits, etc. If finances are needed for short periods then banks,
public deposits and financial institutions may be appropriate; on the other hand, if long-term
finances are required then share capital and debentures may be useful. If the concern does not
want to tie down assets as securities then public deposits may be a suitable source. If
management does not want to dilute ownership then debentures should be issued in preference
to share.

4. Financial Statement Analysis

Another scope of business finance is to
analyses the financial statements. However, it also analyses the financial situations
and problems that arises in the promotion of the business firm. This statements
 consists the financial aspect related to the promotion of new business. Administrative
difficulties arise at the time expansion, necessary adjustments for the rehabilitation of
the firm also in difficulties.
5. Working Capital Management
The financial decision making that relates
to current assets or short-term assets is known as working capital management.
Short-term survival is a prerequisite of long term success and this is the important
factor in business. Therefore, the current assets should be efficiently managed so that
the business won't suffer any inadequate or unnecessary funds locked up in future.
This aspect implies that the individual current assets such as cash, receivable and
inventory should be very efficiently managed. Hence, the efficiency in the
management of working capital ensures the balance between liquidity and
profitability.
6. Capital Building
Financial decision making related to long-term assets is
known as capital budgeting or long-term investment decision. This scope s related
tot eh selection of an investment proposal out of the many related alternatives
available to the firm. However, the acceptance of the proposal depends on the returns
associated with that particular proposal. Here, the capital budgeting technique
measures the worth of the investment proposal. This technique studies the method of
appraising investment proposals. It also analysis the risk and uncertainty, as the
returns from the investment proposal extends into the future. All the returns are
evaluated in relation to the risk.
7. Management of Financing:
Managing financing is yet another important area of business finance. The management of
finance is concerned with the mix of assets or structure of the assets of the firm. As the firm should
always pay special attention to it's assets. The firm should properly mix the ratio of debt and
equity capital while main investment. As capital structure is the ratio of debt and equity
capital. Now, the capital structure consisting of the proper ratio of debt and equity is
known as optimum capital structure. Hence, the financial manager should make
decision regarding optimum capital structure and the ratio of fund to be raised to
maximize the returns for the shareholders.

8. Dividend Management:
Business finance also analyses the policies regarding the dividend, depreciation and reserve. Every
dividend decision is made on the basis of financing decision of the firm. The firm should decide,
how much of profit should be distributed among shareholders as dividend and how much should
be retained as earnings. This decision depends on the priority of the shareholders and the
investment opportunities available to the firm. Here, the financial manager should develop a
sound dividend policy. These were some aspects and scopes of Business Finance. Though,
Business Finance covers a wider scope than this above are limited and important scopes of the
field.

Importance of Business Finance, Business Economics & Finance B Com Notes | EduRev
It takes money to make money, so the proverbial saying goes. Businesses have to consider their
finances for so many purposes, ranging from survival in bad times to bolstering the next success
in good ones. How you finance your business can affect your ability to employ staff, purchase
goods, acquire licenses, expand and develop. While finances are not necessarily as important as
vision and a great product, they are crucial to making the good stuff happen.

Starting Capital

Every new venture needs seed money. Entrepreneurs only have dreams and ideas until they have
some capital to put their ideas in motion. Whether it's a product or service, you will need a way
to create and deliver it -- as well as enough money and time to lay the groundwork of selling and
establishing important relationships. Most business owners face the critical choice between debt
and equity financing. A small business loan leaves you free to own and have absolute control over
your company while it also leaves you lasting financial obligations. Equity gives you cash, but you
have to share the success. The critical decision in your financing will determine how your business
will work from that point onward.

Debt Ratios

Finances are about more than money in your hand. While most businesses have some amount of
debt -- especially in the beginning stages -- too much debt compared with revenues and assets
can leave your with more problems than making your loan payments. Vendors and suppliers often
run credit checks and may limit what you can buy on credit or keep tight payment terms. Debt
ratios can affect your ability to attract investors including venture capital firms and to acquire or
lease commercial space.

Business Cycles

No matter how well your business is doing, you have to prepare for rainy days and even storms.
Business and economic cycles bring dark clouds you can't predict. That's why smart businesses
create financial plans for downturns. Cash savings, good credit, smart investments, and favorable
supply and real estate arrangements can help a business stay afloat or even maintain momentum
when the business climate is unfavorable.

Growth

Success can bring a business to a difficult crossroads. Sometimes to take on more business and
attain greater success, a company needs significant financial investment to acquire new new
capital, staff or inventory. When business managers hit this juncture, they have to wade through
their financial options, which may involve infusions of equity capitals -- perhaps from venture
capitalists. Every situation is different, but smart managers consider the cost of success and their
options for obtaining growth financing.

Payroll
Nothing spells imminent death like a company being unable to make payroll. Even the most
dedicated staff won't stick around long once the paychecks stop. The larger an organization gets,
the larger the labor costs. Above all, companies have to ensure they have enough cash on hand
to make payroll for at least two payroll cycles ahead -- if not more. Financial planning to ensure
your payroll accounts are in strong shape are essential to the integrity and longevity of your
company.

OBJECTIVES OF BUSINESS FINANCE, BUSINESS ECONOMICS & FINANCE B COM NOTES | EDUREV

Setting goals and objectives is vital for any entrepreneur overseeing a new, growing company.
Business owners set different types of objectives, including financial objectives, to give them a
solid plan for moving in the direction of long-term success. Common financial business objectives
include increasing revenue, increasing profit margins, retrenching in times of hardship and
earning a return on investment.

Revenue Growth

Increasing revenue is the most basic and fundamental financial objective of any business. Revenue
growth comes from an emphasis on sales and marketing activities, and is solely concerned with
increasing top-line earnings – earnings before expenses. Companies often set revenue goals in
terms of percentage increases rather than aiming for specific dollar amounts. An entrepreneur
may set an objective of increasing revenue by 20 percent each year for the first five years of a
new company's operations, for example.

Profit Margins

Profit objectives are a bit more sophisticated than revenue growth goals. Any money left over
from sales revenue after all expenses have been paid is considered profit. Profit, or bottom-line
earnings, can be used in a number of ways, including investing it back into the business for
expansion and distributing it among employees in a profit-sharing arrangement.

Profit goals are concerned first with revenue, then with costs. Keeping costs low by finding and
building relationships with reliable suppliers, designing operations with an eye toward lean
efficiency and taking advantage of economies of scale, to name a few methods, can leave you
with more money after paying all of your bills.

Sustainability

At certain times, companies or brands may be primarily concerned with basic economic survival.
Retrenching is a marketing technique – based on a financial objective – that attempts to keep a
brand alive and keep current revenue and profit levels from falling any further during the
“decline” stage of the product/brand life cycle.
Companies may be concerned with financial sustainability during periods of economic turmoil, as
well. Common financial objectives for survival include collecting on all outstanding debts on time
and in full, de-leveraging by paying off debt and keeping income levels consistent.

Return on Investment

Return on Investment is a financial ratio applied to capital expenditures. ROI can be applied to
two basic scenarios. First, ROI is concerned with the return generated by investments in real
property and productive equipment. Business owners want to make sure that the buildings,
machinery and other equipment they buy generates sufficient revenue and profit to justify the
purchase cost.

Secondly, ROI applies to investments in stocks, bonds and other investment instruments. The
same principle applies to these investments, but there is generally no physical, productive asset
used to generate a return. Instead, ROI for investment products is calculated by comparing the
dividends, interest and capital gains realized from investments by the cost of the investment and
the opportunity cost of forgoing alternative investments.

Working Capital Management:

The financial decision making that relates to current assets or short-term assets is known as
working capital management. Short-term survival is a prerequisite of long term success and this
is the important factor in business. Therefore the current assets should be efficiently managed so
that the business won't suffer any inadequate or unnecessary funds locked up in future. This
aspect implies that the individual current assets such as cash, receivable and inventory should be
very efficiently managed. Hence, the efficiency in the management of working capital ensures the
balance between liquidity and profitability.

Concept of Working Capital:

In general sense, the working capital means, the capital which is needed to carry on the day to
day working of the business. Shubin defined the working capital as, ''the funds necessary to cover
the cost of operating the business enterprise." The cost of operating the enterprise includes
purchases of raw materials or finished goods, wages and salaries of staff, payment of other
expenses like rent, insurance, printing, lighting, advertisement etc. The funds need to cover this
cost is called as working capital. Such capital is in the form of different current assets and they
change their form in the ordinary course of business e.g. from cash to inventories, inventories to
receivable and receivables into cash. Hoagland defines it as, “the difference between the book
value of the current assets and the current liabilities. In his view, Gestenberg called it as a
circulating capital. The most widely used concept of working capital is defined as, "the difference
between current assets and current liabilities." This concept is useful to know the liquidity of the
firm.