Business & Finance

•Business
•Need for a business enterprise
•Different forms of business enterprises
•Financial resources for business
•Resources of business
•Equity & debt
•Advantages of debt
•Financial stages in business
 Concept of Business
• Business is for making profit for the owners
• Hence also known as commercial
enterprises
• Activities – Trading, manufacturing or
services
• Distinction between commercial
organizations & non-profit organizations
 Business enterprise
• A platform for doing business as above
• Owners could be:
• Single owners – sole proprietorship firms;
• Multiple owners – partnership firms or
• Limited companies governed by The Companies
Act
• Business enterprise a must for doing business
 Financial resources for Business
• Starting point for any business
– Owners’ investment in the enterprise called capital
– In a limited company this is called ‘Equity’
– Important for:
• Proving ownership
• Control
• Profits &
• Loss
 Financial resources for
Business
• Capital important for:
– Showing commitment of owners to the
enterprise
– Taking loans from lenders
– Running the enterprise
• Constitutes the core resource for business
 Financial resources for
business
• Loans from lenders form the second part of
financial resources for business
• Loans not required for some business enterprises
due to:
– Minimum requirement of funds – Service sector
– Profits are high – IT companies
• Loans not mandatory for a business
• Essentially shares risk with owners
 Financial resources for
business
• Enterprise can run only on equity
• Some of the business houses do not want to
increase risk associated with loans -
Reliance
• Short-term working capital assistance in the
form of overdraft or cash credit from banks
 Resources of business
• Different from resources for business
• Are business assets for carrying on business
activity of trading, manufacturing or
services
• Long-term assets or fixed assets &
• Short-term assets or working capital assets
 Basic finance terms to
understand
• Revenue and capital
• Sort-term and long-term
• Long-term resources always available
partly for working capital;
• Working capital not available for long-term
 Equity & debt
•Return in the form of dividend not certain
•Gets paid only in abnormal circumstances
•Promoters different from other investors
•Promoters’ stake a must in business
•Distinction between when promoters get the
capital back and other investors
Overall a very risky proposition and hence returns
could also be high – Infosys etc.
 Equity & debt
• Dividend can be paid only out of profits after tax
• Interest on loans is allowed as expense for the
purposes of tax
• It is paid out of income
• Paid even if the company is in loss
• Debt gets repaid in the normal course of business
• Lender gets security of business assets
 Advantages of debt to an
enterprise
• Shares risk with equity holders
• Increases the earning per share – an
example and the rationale behind this
• Concept of share in a limited company – an
example
• However a ceiling of 2:1 or 3:1 for debt to
equity ratio
 Financial stages in business
• Revenue generation – Operating income
• Operating expenses for product or service
• Profit before tax = Income (-) Expenses
• Payment of taxes to Govt.
• Profit after tax
• Partly distributed as dividends &
• Partly retained as Reserves & surplus
 Measure of financial
performance
• Financial statements of:
– Profit & Loss statement &
– Balance sheet
– P & L – Current year’s performance &
– BS – Cumulative financial position
 Objectives of finance function
• Increase wealth of the shareholders
• Looking out for opportunities of growth
constantly
• Not allowing the operating costs to go up
• Invest in projects that will give return
higher than cost – concept of ROI
 Financial controls in business
• Budgets
– Revenue
– Capital
– Objective – AMC
• MIS reports
• Cash flow statements on a monthly basis
 Overview of Business Finance
• Developments in the last decade of the last century
• Capital market reforms in India – Issue of equity
by limited companies becoming easier
• Issue of borrowing instruments like debentures
and bonds also easier
• Access to international markets
• GDR/ADR, ECB & FCCB
 Overview of Business Finance
• International Financial Reporting Standards by
Indian companies from 01.04.2011 fully
• Difference between accounting and reporting
• Decrease in dependence on bank borrowings at
least for large enterprises
• Impact of technology on corporate finance in India
• New borrowing (debt) instruments available in
India
 Growth of business
• How does business grow?
• Organic growth
• Inorganic growth
• Natural growth opportunities – role of
market
• Created or strategic growth opportunities –
constraints on natural growth