Business Finance: An Overview Video Lecture | Business Studies (BST) Class 12 - Commerce

business finance and overview once upon
a time a rich father was so angered by
son's behavior that he ordered him to
report to office the very next day the
son was ordered to act as the finance
manager for one day and warned that
should he make any mistake he would lose
his inheritance the unhappy young man
decided to drive into the forest but his
father had grounded the car so he
decided to walk a little into the forest
he discovered a small hut with an old
lady spinning cotton heck I never
expected to find anybody in this
forsaken place you seem like the old
woman from a fairy tale you are exactly
how the newspapers painted you out to be
spoilt and ill-mannered Hey
how do you know so much about me just
because I live in the forest it does not
mean that I'm cut off from civilization
I get all the information on my mobile
phone I know that your father has
threatened to disinherit you if you do
not mend your ways what do I do
I know more about parting than about
finance can you help me finance is not
tough let me help you out
hey no offense meant but things have
changed so much the real world is
different from living alone in the
forest you know certain things are
fundamentally the same irrespective of
whether you live in a palace or a hut
like common sense which you certainly
lack my boy so let's get cracking
what is finance
finance is the science of funds
management the general areas of finance
are business finance personal finance
and public finance the term business
finance refers to the money required for
business purposes and the ways by which
it is raised
thus it involves procurement and
utilization of funds so that the
business firms will be able to carry out
their operations effectively and
efficiently you know the definition but
are you aware why finance is necessary
in business
well I never bothered to find out why is
finance necessary financing business is
required at all stages not only it is
necessary not for trading purpose but
also to meet day-to-day expenses besides
there's always a time lag between
production of goods sale of the same and
its actual realization also
uncertainties in business make it
necessary to have surplus funds for the
organization
business finance is thus defined as
those activities which are related to
provision and management of funds for
the satisfactory conduct of a business
business finance is mainly developed
around three major objectives first to
obtain an adequate supply of capital for
the needs of the business second to
conserve and increase the capital
through better management third to make
profit from the use of funds which is an
overall objectives of a business
enterprise finance management is thus a
decision-making process used in
allocating resources to maximize the
value of the firm resource allocation
involves three major decision areas
capital budgeting financing dividend
policy
capital budgeting capital budgeting
decides which investments are to be made
with the firm's resources it is the
responsibility of the finance manager to
prudently invest the funds so that the
rate of return is higher than the cost
of procuring the same financing
financing decides whether to use debt or
equity to obtain the resources necessary
to invest in a business project dividend
policy dividend is payable on shares if
the funds of the organization are lying
unutilized they should be returned to
the shareholders so that the forum is
not burdened with unnecessary dividend
outflow the key objectives of financial
management would be to create wealth for
the business generate cash and provide
an adequate return on investment bearing
in mind the risks that the business is
taking and the resources invested there
are three key elements to the process of
financial management they are goal of
profit maximization goal of return
maximization goal of wealth maximization
goal of profit maximization this is
generally regarded as the main objective
of the company it is utmost necessary
for a business enterprise to earn
profits for its very survival in a world
of cutthroat competition goal of return
maximization the second goal of
financial management is to safeguard the
economic interest of the persons who are
directly or indirectly connected with
the company that is shareholders
creditors and employees all such
interested parties must get the maximum
return for the contributions but this is
achieved only when the company earns
higher profits or sufficient profits to
discharge its obligations to them goal
of wealth maximization value of a
business enterprise is represented by
the market price of the ordinary share
of the company over the long run which
reflects the company's investment and
financing decisions it is therefore the
goal of financial management to ensure
that the value of the company's shares
will be maximized in the long run
in fact the performances of the company
can well be evaluated by the value of
its share well all these themes praveen
dressing and you know it is so
understandable that finance has to
consider all these things yes if you
think logically these things are really
essential importance of investment
decision a firm's resources are scarce
in comparison to the users to which they
can be put a firm therefore has to
choose where to invest these resources
so that they able to earn the highest
possible return for their investor
as the investment decision therefore
relates to how the firm's funds are
invested in different assets investment
decision an investment decision can be
long term or short term a long term
investment decision is also called a
capital budgeting decision a capital
expenditure is an outlay of cash for a
project that is expected to produce a
cash inflow over a period of time
exceeding one year because capital
expenditures can be very large and have
a significant impact on the financial
performance of the firm great importance
is placed on project selection this
process is called capital budgeting a
few more details on capital budgeting
this is getting more and more confusing
why can't you just invest and forget
yong-man you take so much of trouble to
organize a party besides you are
concerned about what your friends would
say and where the page 3 would feature
your party handling company's funds is a
much larger game you are handling the
money of a millions of shareholders who
have you pose they sleep in you can you
let them down Bulova a bad decision
would mean loss of profits for the
company Wow why didn't I think of this
aspect now let me tell you about the
significance of capital budgeting sure
significance of capital budgeting the
success and failure of a business
indicates how well the available
resources are being utilized all types
of capital budgeting decisions are
subject to risk and uncertainty it is
the main tool of financial
management capital budgeting offers
effective control on cost of capital
expenditure projects it helps the
management avoid over investment and
under investment features of capital
budgeting cash flows of the project when
a company takes an investment decision
involving a huge amount it expects to
generate some cash flows over a period
these cash flows are in the form of a
series of cash receipts and payments
over the life of an investment these
cash flows should be carefully analyzed
before considering a capital budgeting
decision the rate of return these
calculations are based on the expected
returns from each proposal and the
assessment of risk involved the
investment criteria involved the
decision to invest in a particular
project involves a number of
calculations regarding the amount of
investment interest rate cash flows and
rate of return these techniques are
applied to each proposal before
selecting a particular project
financing decisions the most important
decision for management is finalizing on
the source of funds to avail for an
enterprise there are two major sources
of funds one shareholders funds two
borrowed funds shareholders funds refer
to equity capital and retained earnings
borrowed funds refer to finance raised
as debentures or other forms of debt
factors influencing financing decision
dividend decision dividend is that
portion of profit which is distributed
to shareholders the decision involved
here is how much of the profit earned by
the company after paying tax is to be
distributed to the shareholders and how
much of it should be retained in the
business for meeting the investment
requirements since the firm does not
require funds to the extent of
reinvested retained earnings the
decision regarding dividend should be
taken keeping in view the overall
objective of maximizing shareholders
wealth
factors affecting dividend decision
stability of earnings age of the
corporation liquidity of funds need for
additional capital trade cycles
government policies taxation legal
requirements past dividend rates ability
to borrow policy of control repayments
of loan
regularity and stability in dividend
payment
some interesting facts
and some more you are so good I have
understood everything perfectly how can
I thank you
hmm how can buy me some shares in your
company yes I bill you have helped me so
much can I provide you with a mobile
phone with the latest gadgets Clint oho
I'll stick to the shares the young man
went back happily with the knowledge
gained to everybody surprised he proved
himself a very able finance manager he
still parties hard and he still takes
time out to visit the old lady in the
woods and what about the old lady
after becoming a shareholder in the
company she earned handsomely through
dividends she was motivated to start her
own company dealing in cotton and who
helped her why the young man of course
he is one of the directors in her
company which only goes to prove that
one good turn deserves another