Banking & Finance

(new improved latest edition)

By. Prof Riaz Ahmed Mian

Finance

By. Prof Riaz Ahmed Mian

Business Finance

Business Finance
Defining Finance:
Finance is the basic determinant of
most business decisions. It lies at the base
of every decision making process.

Prof. Riaz Ahmed Mian, HCBF, University of the Punjab

Business Finance contd

Components of Finance
1.

Public Finance:
It is purely a government activity.

2.

Investment Finance:
Corporate companies, multinational
projects, trade groups are always in need
of huge amount of finance as compared to
partnership or sole.
Prof. Riaz Ahmed Mian, HCBF, University of the Punjab

Components of Finance contd

3.

Business Finance:
Business finance means the capital
fund required for meeting the
organizations financial requirements.

Prof. Riaz Ahmed Mian, HCBF, University of the Punjab

Types of Business Finance

I.

Fixed Capital:
Fixed capital, in simple terms, means a
finance which is invested in fixed asset.
II.

Circulating / Working Capital:

In simple words circulating / working
capital is the finance that is invested in current
assets of the business.
4

Factors Affecting Fixed and

Working Capital Requirements:

Greater fixed and working capital will be

required for large scale business.

For capital intensive business larger fixed

and working capital is required while in case
of labour intensive business lesser fixed and
working capital is needed.
(contd)

Prof. Riaz Ahmed Mian, HCBF, University of the Punjab

Factors Affecting Fixed and Working Capital Requirements contd

Larger fixed and working capital is

compulsory in a business which requires
automation.

The trading concerns normally require lesser

capital in comparison with manufacturing concerns
as the operating cycle of manufacturing concerns is
lengthy as compared to a trading concern.
(contd)

Factors Affecting Fixed and Working Capital Requirements contd

The greater the involvement of business risk,

the larger will be the working capital required to
cope up with such risks.

If the organization is involved in multiple

strategic business activities then it will require more
fixed and working capital.
(contd)

Prof. Riaz Ahmed Mian, HCBF, University of the Punjab

Factors Affecting Fixed and Working Capital Requirements contd

Larger fixed capital will be required to

purchase fixed assets on cash while less capital will
be required if organization avails the facility of
leasing.

If the organization sells on cash then less

working capital will be needed while credit sales
require more working capital.

Prof. Riaz Ahmed Mian, HCBF, University of the Punjab

Importance of Business Finance

Initiating Business

Purchase of Assets

Initial Losses

Professional Services

Development

IT (Information Technology
(contd)

Prof. Riaz Ahmed Mian, HCBF, University of the Punjab

Importance of Business Finance contd

Media War

Resource Management

Stock Investments

Combating Risks

Prof. Riaz Ahmed Mian, HCBF, University of the Punjab

10

Sources of Business Finance

(A) Short Term Finance

Bank Overdraft
Bill Discounting
Advances from Customers
Instalment Purchases
Bill of Lading
Financial Institutions
Trade Credit
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Sources of Business Finance

(B) Medium Term Finance
Commercial Banks
Hire Purchase:
Hire purchase means buying on instalments.
It allows the business house to have the required
goods with payments to be made in future in agreed
instalment. Needless to say that some interest is
always charged on outstanding amount.
(contd)

12

Sources of Business Finance

(B) Medium Term Finance
Financial Institutions
Debentures and TFCs
Insurance Companies

13

Sources of Business Finance

(C) Long Term Finance
Equity Shares
Retained Earnings
Leasing
Financial Institutions
Debentures
14

Equity Finance

15

Equity Finance

Equity Shares

Retained Profit

Reserves and Provisions

16

Equity Finance contd

Merits:

Permanent in Nature
Solvency
Credit Worthiness
No Interest
Motivation
No Danger of Insolvency
Liquidation
Increasing Capital
Macro Level Advantages
17

Equity Finance contd

Demerits:

Decrease in Working Capital

Difficulties in Making Regular

Payments

Higher Taxes

Limited Expansion

Lack of Research and Development

Delay in Replacement

18

Debt Finance

19

Debt Finance:

Debt financing means to borrow funds

or to arrange for investments from external
sources.
Large
scale
businesses,
organisations are not able to run all their
affairs from their own capital so it is usual
for them to take loans. The most prevalent
example of this type of finance is the loans
taken from banks. The amount of the loan is
to be repaid in agreed instalments along
with interest at a specified rate.
20

Debt Finance contd

Sources :

Loan

Debentures

Leasing

21

Debt Finance contd

Merits:
Scope for Expansion
Research and Development
High Profit
Ease of working Capital
Revival of Sick Units
Saving from Insolvency
Tax Advantage
22

Debt Finance contd

Demerits:

Interest Payments

Depression

Suit Against Business

Seizing of Collaterals

Risky Investment

23

Leasing

24

Leasing:

Leasing is an old method of financing

which is now gaining popularity almost in
whole world.

Legally, the lease contract is not a sale

of the object, but rather a sale of the usufruct
(the right to use the object) for a specified
period of time.
(contd)
25

Leasing contd

Under leasing there are two parties one

is the owner or lessor of the asset and other is
the lessee or the party that takes the asset on
lease. The lessee takes the asset for use for a
specified period of time and makes rental
payments. The ownership of the asset rests
with the lessor but it is in the possession of
lessee and right of use is also transferred to
lessee.
26

Types of Leasing:
1.

Finance Lease:
Under finance lease all risks and rewards
of ownership of asset are transferred to lessee.
The ownership or title may or may not be
transferred. A finance lease is somewhat like a
hire purchase agreement. Under finance lease
the lessee after paying agreed number of
instalments, is entitled to exercise an option to
become the owner of asset.
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Types of Leasing contd

2.

Operating Lease:
According to International Accounting
Standard (IAS-17) the operating lease is one
which is not a finance lease. Under operating
lease, the lessor gives the right to lessee to use
the asset or property for a specified period of
time, but risks and rewards of ownership are
retained by the lessor.

28

Types of Leasing contd

3.

Sale and Lease Back:

Under sale and lease back agreement, an
asset is first sold to the leasing company or
financial institution. The sale is made at the
genuine market value. After that the asset is
taken back on a lease. This type of leasing is
advantageous for those companies which do
not want to show high debt balances in their
financial statement.
29

Types of Leasing contd

4.

Capital Lease:
This type of leasing is governed by the
financial standard board which is not
applicable in Pakistan. Under this type of
leasing when lessee acquires an asset on lease,
he simultaneously recognizes it as a liability in
the financial statement.

30

Types of Leasing contd

5.

Leveraged Lease:
This type of leasing involves three
parties including a lender, a lessor and a lessee.
The lender and lessor join hands to accumulate
funds to buy the asset. The asset purchased is
then given on the lease to lessee. The lessee
makes periodic payments to the lessor who in
turn makes payment to the lender.

31

Types of Leasing contd

6.

Cross Border Leasing:

Cross border leasing means to operate
lease agreement in other countries. Such type
of leasing is very difficult in present
circumstances. The reasons being that different
accounting treatments, tax charges and
incidental criteria prevail in foreign countries.

32

Types of Leasing Contracts

1.

Closed End Leasing Contract:

Under such contract the lessee is neither
liable for any reduction in the value of asset
taken on lease over and above that, which is
already estimated in the beginning, nor is he
going to enjoy any benefit from the increase in
the value of asset that has occurred during the
lease tenure.
33

Types of Leasing Contracts contd

2.

Open End Leasing Contract:

Under this type of contract the lessee is
bound to pay the amount equivalent to
reduction in the value of asset over and above
the estimated reduction.

34

Advantages of Leasing
1.

Economic Sensibility:
Leasing depicts economic sensibility.
You know that when you use an asset it
depreciates in value.

35

Advantages of Leasing contd

2.

Money Available for other Usage

3.

No Down Payment

4.

Preservation of Working Capital

(contd)

36

Advantages of Leasing contd

5.

Protection Against Inflation:

Leasing is perfectly suitable in the
economy which experiences high inflation
trends. When you take an asset on lease and
promises to make monthly or annual
payments, you become a debtor of leasing
company and leasing company becomes
your creditor.
(contd)

37

Advantages of Leasing contd

6.

Tax Advantage:
When you buy an asset for a heavy
amount you have to show evidences to the
tax authorities that money was genuinely
earned by you.
7.

Saving in Duties, Taxes

(contd)

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Advantages of Leasing contd

8.

Flexibility of Options:
At the end of lease you can purchase the
asset if you intend to use it further.
You can renegotiate the contract of

lease.

You can return the asset to the leasing

company and shift to other new and more
advanced asset.
(contd)

39

Advantages of Leasing contd

9.

Leasing Hedges Against Obsolescence:

Leasing allows you to always remain up
to date with the latest equipment and
technology. If you take equipment on lease
then upgrading to the newer and advanced
technology during or after the lease is very
easy.

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thank U
Best of

Luck