1.business Finance
1.business Finance
1.business Finance
INTRODUCTION:
The functions of
Financial Manager
1:MANAGERIAL
FUNCTIONS
a) Investment of Long-term asset-mix
decisions
• These decisions (also referred to as capital
budgeting decisions) relates to the allocation
of funds among investment projects.
• They refer to the firm’s decision to commit
current funds to the purchase of fixed assets
in expectation of future cash inflows from
these projects. Investment proposals are
evaluated in terms of both risk and expected
return.
b) Financing decisions
• Financing decision refers to the decision
on the sources of funds to finance
investment projects. The finance
manager must decide the proportion of
equity and debt.
• The mix of debt and equity affects the
firm’s cost of financing as well as the
financial risk. This will further be
discussed under the risk return trade-off.
c) Division of earnings decision
• The finance manager must decide whether the
firm should distribute all profits to the
shareholders, retain them, or distribute a portion
and retain a portion.
• The earnings must also be distributed to other
providers of funds such as preference
shareholder, and debt providers of funds such as
preference shareholders and debt providers.
• The firm’s dividend policy may influence the
determination of the value of the firm and
therefore the finance manager must decide the
optimum dividend – payout ratio so as to
maximize the value of the firm.
d) Liquidity decision
• The firm’s liquidity refers to its ability to meet
its current obligations as and when they fall
due. It can also be referred to as current
assets management. Investment in current
assets affects the firm’s liquidity, profitability
and risk.
• The more current assets a firm has, the more
liquid it is. This implies that the firm has a
lower risk of becoming insolvent but since
current assets are non-earning assets the
profitability of the firm will be low. The
converse will hold true.
Other Routine
Functions:
1. Sole proprietorships
2. Partnerships
3. Joint stock companies or
Public/Private limited companies.
SOLE
PROPRIETORSHIP
Characteristics
• Accounts do not have to be audited
• It caters for personal attention of customers
• Limited to such finances as:
– Personal saving
– Loans from relatives & friends
– Short-term loans from banks.
– Trade credit from suppliers.
• Less legal formalities to form.
• Highly flexible (and adaptable)
• Highly flexible decision-making process.
Other Advantages
• Sole trade usually skilled in the
business (good for competition)
• Profits motivates owners
• High supervision of employees
• Low bureaucracy (less time wasted)
Disadvantages
• Short economic life therefore does not
attract long-term finance, therefore,
limited expansion and growth.
• Unlimited liability
• Success depends on ability or
judgement of owner
PARTNERSHIPS
Definitions
• “The relationship, which exists between
persons carrying on a business in
common with a view of profit.”
Formation of a partnership
1. Orally
2. Actions of the person concerned
3. Agreement in writing.
4. By a deed i.e. an agreement under seal.
Types of Partners
Limited liability.
Perpetual existence (or going concern) which
allows the company to make strategic plans to
raise finance in Capital Markets more easily.
The company can own assets and incur
liabilities on its own accord.
Title to share is freely transferable which
makes these shares more of an investment.
Exception – Private limited companies whose
transfer of shares needs the consent of its
members.
Shares may be used as securities.
Large sources of finance.
Disadvantages
• Equity capital
• Debt finance
• Bills of exchange
• Lease finance
• Overdraft finance
• Plastic money – Debenture finance
• Venture capital
•
TYPES OF FINANCING:
2.)Equity Financing.
3.)Debt Financing.
1.) Personal Financing.
a)Personal Funds:
• Involves both financial resources
and sweat equity.
Any Questions?