BUISNESS FINANCE

BUSINESS FINANCE
MEANING Business finance refers to money and credit employed in business. It involves procurement and utilization of funds so that business firms maybe able to carry out their operations effectively and efficiently.

BUSINESS FINANCE
The following characteristics of business finance will make its meaning more clear:

Business finance includes all types of funds used in business. Business finance is needed in all types of organizations large or small, manufacturing or trading. The amount of business finance differs from one business firm to another depending upon its nature and size. It also varies from time to time. Business finance involves estimation of funds. It is concerned with raising funds from different sources as well as investment of funds for different purposes.

Need and Importance

Business finance is required for the establishment of every business organization. With the growth in activities, financial needs also grow. Funds are required for the purchase of land and building, machinery and other fixed assets.Besides this, money is also needed to meet day-today expenses e.g. purchase of raw material, payment of wages and salaries, electricity bills, telephone bills etc. You are aware that production continues in anticipation of demand.Expenses continue to be incurred until the goods are sold and money is recovered. Money is required to bridge the time gap between production and sales.

SOURCE OF FINANCE

The Long-Term Finance may be Raised by the Companies from the following Sources:-

Capital Market Special Financial Institutions Leasing Companies Foreign Sources a] Foreign Collaborators b] International Financial Institutions c] Non-Resident Indians Retained Profits or Reinvestment of Profits

SOURCE OF FINANCE
Short-Term Finance may be Raised by the Companies from the following Sources :1] Trade Credit 2] Installment Credit 3] Accounts Receivable Financing 4] Customer Advance 5] Bank Credit a] Loan b] Cash credit c] Overdrafts d] Discounting of bills

COST OF PROJECT
The cost of capital is a term used in the field of financial investment to refer to the cost of a company's funds (both debt and equity), or, from an investor's point of view "the shareholder's required return on a portfolio of all the company's existing securities".[1] It is used to evaluate new projects of a company as it is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet.

COST OF DEBT
The cost of debt is relatively simple to calculate, as it is composed of the rate of interest paid. In practice, the interest-rate paid by the company can be modelled as the riskfree rate plus a risk component (risk premium), which itself incorporates a probable rate of default (and amount of recovery given default). For companies with similar risk or credit ratings, the interest rate is largely exogenous (not linked to the company's activities).

COST OF EQUITY
The cost of equity is more challenging to calculate as equity does not pay a set return to its investors. Similar to the cost of debt, the cost of equity is broadly defined as the riskweighted projected return required by investors, where the return is largely unknown. The cost of equity is therefore inferred by comparing the investment to other investments (comparable) with similar risk profiles to determine the "market" cost of equity.

ASSESSMENT OF WORKING CAPITAL

Any enterprise whether industrial, trading or other acquires two types of assets to run its business as has already been emphasised time and again. It requires fixed assets which are necessary for carrying on the production/business such as land and buildings, plant and machinery, furniture and fixtures etc. For a going concern these assets are of permanent nature and are not to be sold. The other types of assets required for day to day working of a unit are known as current assets which are floating in nature and keep changing during the course of business. It is these 'current assets' which are generally referred to as 'working capital'

WORKING CAPITAL
We are by now already aware of the short-term nature of these assets which are classified as current assets. It may be noted here that there may not be any fixed ratio between the fixed assets and floating assets for different projects as their requirement would differ depending upon the nature of project. Big industrial projects may require substantial investment in fixed assets and also large investment for working capital. The trading units may not require heavy investment in fixed assets while they may be carrying huge stocks in trade. The service units may hardly require any working capital and all investment may be blocked in creation of fixed assets.

WORKING CAPITAL

The total current assets with the firm may be taken as gross working capital whereas the net working capital with the unit may be calculated as under: Net Working Capital (NWC) = Current Assets (GWC) Current Liabilities (bank borrowings)

This net working capital is also sometimes referred to as 'liquid surplus' with the firm and has been margin available for working capital requirements of the unit. Financing of working capital has been the exclusive domain of commercial banks while they also grant term loans for creation of fixed assets either on their own or in consortium with State level/All India financial institutions. The financial institutions are also now considering sanction of working capital loans.

The current assets in the example given in the earlier paragraph are financed as under: Current Assets = Current liabilities + Working capital limits from banks + Margin from long-term liabilities

ASSETS
Liabilities Capital Long-term liabilities Margin NWC Liquid Surplus Working capital limits from banks Current Assets Assets Fixed Assets

This is the normal pattern of financing of current assets

OPERATING CYCLE CONCEPT

The day to day business operations of a concern of any nature and, size involves many successive steps and final working results would depend on the effective combination of all these steps. The steps in general may include :

Acquisition and storage of raw material and other stores and spares required for manufacture of any product. Actual production process when the raw material is subjected to different processes to bring it to final shape of finished goods. Storage of finished goods awaiting sales. Sales of finished goods and realisations of sale proceeds

Financial Analysis

Financial analysis (also referred to as financial statement analysis or accounting analysis) refers to an assessment of the viability, stability and profitability of a buisness, subbusiness or project. It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports. These reports are usually presented to top management as one of their bases in making business decisions.

Goals Of Financial Analysis

Financial analysis often assess the firm's:

1. Profitability -its ability to earn income and sustain growth in both shortterm and long-term. A company's degree of profitability is usually based on the income statement, which reports on the company's results of operations;
2. Solvency - its ability to pay its obligation to creditors and other third parties in the long-term;

3. Liquidity - its ability to maintain positive cash flow, while satisfying immediate obligations;

Both 2 and 3 are based on the company's balance sheet, which indicates the financial condition of a business as of a given point in time.

4. Stability- the firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of both the income statement and the balance sheet, as well as other financial and non-financial indicators. etc

Understand, Identify, Analyze and Adjust

Understanding your organizations financial health is a fundamental aspect of responding to todays increasingly stringent financial reporting requirements. To avoid risks, organizations must quickly Identify as certain financial ratios and trends across in liabilities and assets Analyze and adjust planned and forecasted amounts Act to provide regulatory statements as needed

Methods Of Financial Analysis

Financial analysts often compare financial ratios (of solvency, profitability, growth, etc): Past Performance - Across historical time periods for the same firm (the last 5 years for example), Future Performance - Using historical figures and certain mathematical and statistical techniques, including present and future values, This extrapolation method is the main source of errors in financial analysis as past statistics can be poor predictors of future prospects. Comparative Performance - Comparison between similar firms. These ratios are calculated by dividing a (group of) account balance(s), taken from the balance sheet and / or the income statement.

Financial Analysis with MicroStrategy

The MicroStrategy platform offers analytics that can be used to answer key financial questions:

What is the aging distribution of Accounts Payable and Accounts Receivable?

Are there any customers with payment problems; if so, who needs to be notified?

What are the values of assets and liabilities on a given date?

What is the value of assets, liabilities, and owners equity on a given date? What is the breakdown of expenses by business units? Which business units are hitting their targets? What are the revenue trends by business units?