Evolution of Business finance

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Principles of business finance

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1.1 Evolution ,concept of Business Finance : 

1.1 Evolution ,concept of Business Finance Originally ,the finance function was concerned with the procurement of funds and legalistic matters relating to them.Financial management at this stage concentrated on the description of financial markets,types of securities,and techniques of raising funds.the financial manager was not involved in the process of decision making about critical fianancial matters.

Slide 2: 

During the depression of 1930s, the focus of financial management shifted to mergers,reorganisations,fianancial liquidity etc.Financial management however continued as descriptive subject as a discipline untill early 1950s,with major focus on outsider’s view’ rather than insider’s view of finance function.It looked at finance from the point of view of an outsider such as creditors and shareholders,rather than focus on fianancial decision making.Significant developments took place in the field of financial mangement during the second half of 1950s.the focus shifted from the outsider’s view of the finance function to the insider’s view.Greater attention was paid to the administrative aspects of financial management such as cash budgeting and forecasting,management of assets,control of expenses etc.

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Mathematical models were developed and applied to the management of cash and inventory management.Concepts and techniques of capital budgeting and cost of capital were developed to help the financial executive in decision making.It is going through a process of further change and development.thus the concept of finanace function has substantially changed,and still it is going through a process of further change and development along with the evolution of the content of finance as a management activity.

1.2 Financial Objectives : 

1.2 Financial Objectives (A) Macro-Level Approach---At macro level ,the objective of financial management is to make an intensive and economical use of scarce capital resources.Prudence and care is required to operate on a safe and sound basis.thus the reasonable and inevitable risks of business operations should be avoided.

Slide 5: 

(B)– Micro level Approach__-At micro level.the objectives of financial management are considered at firm level.the goals of fianance can be reasonably associated with the overall goals of business.The fianacial objective of the firm should be maximisation of owner’s economic welfare.Two widely discussed approaches or criterion or goals of maximising owner’s welfare are the following: 1) Profit Maximisation or maximisation of Return 2) Wealth Maximisation

1) Profit maximisation : 

1) Profit maximisation Maximisation of profits is the main objective of a business enterprise.Investors in shares,Purchase the shares of a company,in the hope of getting maximum profits from the company as dividend.It is possible only when the company’s goal is to earn maximum profits out of its available resources.financial management aims to safeguard the economic interest of the persons who are directly or indirectly connected with the company.i.e shareholders,creditors and employees.these must get the maximum return for their contributions.

2) Wealth maximisation : 

2) Wealth maximisation According to experts like Prof.Solomon Ezra, The ultimate objective of fianancial management should be wealth maximisation.This criterion is based on the concept of cash flows(inflows and outflows) generated by the decisions.Its inflows are greater than outflows,it will maximise the wealth to the owners.Wealth maximisation means maximising the net present value(or wealth) of a course of action,which is the difference between the gross present value of the benefits of that actionnnn and the amount of investment required to achieve those benefits.

Slide 8: 

A fianancial action which has a positive net present value creates wealth.A financial action resulting in negative net present value should be rejected. The wealth maximisation objective is consistent with the objective of maximising the owner’s economic welfarei.e their wealth,which is reflected by the market value of company shares.It implies the fundamental principle to maximise the market value of its shares in the long run in order to work out a normalised market price.the management can make decisions to maximise the value of its shares on the basis of day to day fluctuations in the market price.

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In order to raise the market price of its shares over the short run it may temporariry divert some of its funds to some other accounts or cut some of its expenditure to the minimum at the cost of future profits.this will result in the fall of the share price in the market in the long run.the financial management should ensure its shareholders that the value of their shares will be maximised in the long run.

Functions of business finance : 

Functions of business finance Main Finance functions 1.Estimating the requirements of funds.Long term as well as short term funds requirements ,the investments in fixed assets and those in various current assets etc.should be estimated through the techniques of budgetury control and long range planning

2. Financing decisions or capital structure decisions : 

2. Financing decisions or capital structure decisions Each source of funds involves different considerations regarding cost,risk and control.Keeping these in mind,a proper mix of various sources has to be worked out.Long term funds investments are to provide for the needs of the core working capital. Funds should be procured at optimum costs with the least risk and the least dilution of control of the present owners.These decisions come under the broad term-- the finance decisions

Investment Decisions : 

Investment Decisions Long term funds should be invested in various projects only after an in-depth analysis has been carried out through capital budgeting techniques and uncertainty analysis.Asset management policies are to be laid down regarding various items of current assets also.These include policies relating to management of inventories,bookdebts,cash,tradecreditors,etc

Dividend Decisions : 

Dividend Decisions From the economic point of view, the amount to be retained or to be paid to the shareholders would depend on whether the company or the shareholders can make a more profitable use of the funds. In practice,a large number of other considerations like the trend of earnings,the trend of share market price,the requiements of funds for future growth,tax status of the shareholders,etc are also kept in mind.

Subsidiary finance Function : 

Subsidiary finance Function Supply of funds to all parts of the organisation Evaluation of financial performance Financial negotiations with bankers,financial institutions and other suppliers of credit Keeping track of stock exchange,quotation and behaviour of stock market prices Financial control Keeping the records of all assets

Recurring and non recurring functions : 

Recurring and non recurring functions Recurring functions are of routine nature.These are performed by low level assistants like accountants,accounts assistants,etc, following are recurring functions__ Record keeping and reporting Preparation of various financial statements Cash management Credit management Custody and safeguarding the different financial securities Providing top management with information on current and prospective financial conditions of the business as a basis for policy deciisons on purchases,marketing and pricing

Non-Recurring Functions : 

Non-Recurring Functions These are Executive or managerial functions-Involves significant decisions require administrative skill, dinancial competence and technical foresight on the part of financial executive.Financial management requires the following important functions Financial forecasting- Investment decisions Management of corporate Asset structure The Management of income Management of cash Deciding about new sources of finance To contact and carry negotoations for new financiang Analysis and appraisal of financial performance Advising the top management

1.6 Significance of business finance in modern business world : 

1.6 Significance of business finance in modern business world Successful promotion Smooth running of an enterprise Coordination of functional activities Focal point of decision making Determinant of business success Measure of performance