In the words of Parhter and Wert, "Business finance deals primarily with raising, administering and disbursing funds by privately owned business units operating in nonfinancial fields of industry".
According to the Encyclopedia of Social Sciences, "Corporation finance deals with the financial problems of corporate enterprises. These problems include the financial aspects of the promotion of new enterprises and their administration during early development, the accounting problems connected with the distinction between capital and income, the administrative questions created by growth and expansion, and finally, the financial adjustments required for the bolstering up or rehabilitation of a corporation which has come into financial difficulties".
IMPORTANCE OF FINANCIAL MANAGEMENT
Finance is the lifeblood of business organization. It needs to meet the requirement of the business concern. Each and every business concern must maintain adequate amount of finance for their smooth running of the business concern and also maintain the business carefully to achieve the goal of the business concern. The business goal can be achieved only with the help of effective management of finance. We can't neglect the importance of finance at any time at and at any situation. Some of the importance of the financial management is as follows:
Financial Planning
Financial management helps to determine the financial requirement of the business concern and leads to take financial planning of the concern. Financial planning is an important part of the business concern, which helps to promotion of an enterprise.
Acquisition of Funds
Financial management involves the acquisition of required finance to the business concern.
Acquiring needed funds play a major part of the financial management, which involve possible source of finance at minimum cost. (Anon. (n .d))
NEEDS OF FINANCE
We all need finance:
 To expand the business.
 To relocate the business.
 To take over a new company.
 To replace fixed assets.
 To increase number of staffs.
 To solve cash flow problems.
 To set up a new technology.
 To start up a new business.
 For copying up with debts.
To start up a new business
If you're planning on starting a business, chances are you'll need some form of capital, which simply refers to the money that finances your business.
One reason for the failure of many small businesses is that they undercapitalize their business. Therefore, it is important that you know how much money you will actually need to start and to run your business until you reach your break-even point-the point when your sales revenue equals your total expenses
To expand the business.
In order to keep up with demand, your business needs to expand. Before you can execute an expansion plan, you need to develop a way to finance it. Explore as many sources of finance for expansion as you can in order to find the arrangement that best suits you and your business. Arnold Anderson. (N. d)
To take over a new company.
A takeover, or acquisition, on the other hand, is characterized by the purchase of a smaller company by a much larger one. This combination of "un equals "can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. A larger company can initiate a hostile takeover of a smaller firm, which essentially amounts to buying the company in the face of resistance from the smaller company's management
To relocate the business.
There are various reasons for a small business owner deciding to relocate his/her business. Business may be spiralling downwards, however the owner believes business is suffering purely because of location rather than management issues or the product/service itself. Rather than selling, relocating may be a viable option.
Labour needs cannot be met.
Shifting client base: to keep in touch with clients the business may need to relocate to stay competitive.
Internal sources
Personal savings
Personal savings are the savings done by an individual or company for the future plans
Personal saving equals disposable personal income minus spending for consumption and interest payments. The personal saving rate is personal saving as a percentage of disposable personal income.
Advantages and disadvantages:
•Advantage: unlimited, the more you save the more you have to spend
•Advantage: You have full control of your personal savings and you decide what to do with it.
•Advantage: no interest
•Disadvantage: it takes time to save up money
• Disadvantage: temptation to spend some of your savings is never too far away.
Retained profit
Retained profit is the profit kept in the company rather than paid out to shareholders as a dividend. Retained profit is widely regarded as the most important long-term source of finance for a business. (Jim riley. (2009)
Advantages
Self-dependence
Saving on interest
Maintaining secrecy
No mortgaging required
Stability in dividend payment:
Issue bonus shares
Disadvantages
Profit deprivation:
Misuse of funds:
Possibility of overcapitalization
Wastage (Anon. (n .d).
Working capital
Current assets minus current liabilities. Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth. Also called net current assets or current capital.
Advantages and disadvantages
Lack of working capital, or cash flow, is the main reason why so many good business's, go under. It's crucial. Advantages, you can pay your suppliers, pay your staff, and pay yourself a wage, and can expand your business. Disadvantages are, you can't expand, can't pay your staff, can't pay yourself, and can't pay your suppliers.so in a nutshell, no cash flow, or working capital, no viable business. Anon. (n.d)
Sales of fixed assets
Sale of Fixed Assets represents cash inflow from the sale of fixed assets.
Advantages
Making a Profit
Reducing Debt
Disadvantages
Tax Consequences
Reduced Value
(Chris Joseph. (n.d)
EXTERNAL SOURCES
EQUITY SHARES
An equity share is an incremental portion of ownership in a company. Commonly referred to as shares of stock, the more equity shares of a given company an investor holds, the greater the percentage of the overall company he owns. The term equity shares refers to a company's ordinary shares of stock, which differ from preferred shares of stock by the inclusion of voting rights on major executive decisions. (Nicholas B. Sisson . (n.d)
Advantages of equity shares:
Advantages of company: The advantages of issuing equity shares may be summarized as below:
I. Long-term and Permanent Capital
II. No Fixed Burden
III. Credit worthiness
IV. Risk Capital
V. Dividend Policy
Advantages to Investors: Investors or equity shareholders may enjoy the following advantages:
I. More Income
II. Right to Participate in the Control and Management
III. Capital profits
IV. An Attraction of Persons having Limited Income
V. Other Advantages
Disadvantages of equity shares
Disadvantages to company: Equity shares have the following disadvantages to the company:
I. Dilution in control
II. Trading on equity not possible
III. Over-capitalization
IV. No flexibility in capital structure
V. High cost
VI. Speculation
Disadvantages to investors: Equity shares have the following disadvantages to the investors:
I. Uncertain and Irregular Income
II. Capital loss During Depression Period
III. Loss on Liquidation
Preference shares
"Preference shares are created on the occasion of a capital increase by the decision of the shareholders at an (extraordinary where applicable) general meeting "Pascal Quiry, Yann Le Fur, Antonio Salvi, Maurizio Dallochio, Pierre Vernimmen (2011).
ADVANTAGES
No Legal Obligation for Dividend Payment
Improves Borrowing Capacity
No dilution in control
No Charge on Assets
DISADVANTAGES
Costly Source of Finance
Skipping Dividend Disregard Market Image
Preference in Claims
Debentures
Unsecured debt backed only by the integrity of the borrower, not by collateral, and documented by an agreement called an indenture. One example is an unsecured bond.
ADVANTAGES
Benefit of Tax
Cheaper Source of Finance
No Dilution in Share of Profits
Benefit of Leverage
Disciplinary Effect
DISADVANTAGES
Rigid Obligation
Enlarge Leverage Ratios
Restrictive Covenants
Bad for Low Inflationary Conditions
Anon. (n.d).
BANK OVERDRAFT
When an individual or company takes out more from an account and the balance drops below the allowed amount by the financial institution.
ADVANTAGES
An overdraft is flexible - you only borrow what you need at the time which may make it cheaper than a loan.
You only pay for the funds you use.
It's quick to arrange.
There is not normally a charge for paying off the overdraft earlier than expected.
Disadvantages
It has to be rearranged regularly. An arrangement fee is usually payable when credit is extended, perhaps during the term of the facility.
It can be called in by the lender at any time.
You face administration fees if you exceed the agreed limit.
LOANS
A loan in terms of small business finance is a sum of money advanced to a business that must be repaid, with interest at some point in the future. The lender must bear the risk that the borrower may not repay the loan. The interest rate charged is the price for that risk. A loan is money, classified as debt, for temporary use. (Rosemary Peavler. (n.d).
Advantage
Speed
A bank loan can be secured quickly; in less than an hour,
Uses
A bank loan can be used in a number of ways
Disadvantage
Fees
Some loans carry a prepayment penalty, preventing the borrower from paying the note off early without incurring extra cost.
Limitations
There are a number of limitations on the transaction. Good credit is often required to borrow money, and there are stipulations on how the money can be used.
Cash Flow
Leasing
A legal document outlining the terms under which one party agrees to rent property from another party. A lease guarantees the lessee (the renter) use of an asset and guarantees the lessor (the property owner) regular payments from the lessee for a specified number of months or years. Both the lessee and the lessor must uphold the terms of the contract for the lease to remain valid.
Advantages
1. Leasing Permits Alternative Uses
2. Leasing Arrange Faster and Cheaper Credit
3. Leasing Increases Lessee's Capacity to Borrow
4. Leasing Protects against Obsolescence
5. Boon for Small Firm
6. Absence of Restrictive Convenience
7. Trading On Tax Shield
Disadvantages of Leasing
Major disadvantages of leasing are as follows:
1. Deprived On Ownership
2. Deprived Of the Asset IN Case Of Default
HIRE PURCHASE
A system by which a buyer pays for a thing in regular installments while enjoying the use of it.
Advantages
Can save the business money
You can set your own rates
Disadvantages
Many people may not want to hire but to buy instead
Government grants
An award of financial assistance in the form of money by the federal government to an eligible grantee with no expectation that the funds will be paid back. The term does not include technical assistance which provides services instead of money, or other assistance in the form of revenue sharing, loans, loan guarantees, interest subsidies, insurance, or direct appropriations
Advantages
Government grants can provide huge monetary rewards with only one proposal. Some government grants can be total in the millions of dollars.
Those who usually receive government grants find it easier to increase money from the other government and also from private sources.
These grants then can be also prestigious and can give your organization an instant credibility and public exposure.
Disadvantages
Government grants are usually on reimbursement system, so if you are on a cash-strapped organization, you may face hardships.
Preparing government grant proposals usually needs/requires hard work and also tons of research and planning in it. They are not easy to write.
Debt factoring
The sale of a business' invoices to a third party. The third party is charged with processing the invoices, and the business lending the invoices is able to receive loans based on the expected payments on the invoices.
Advantages
Can improve cash flow for the particular business without being derailed by the debtors.
It helps to protect the business from bad debts especially when using non-recourse factoring.
Inexpensive debt collections through the use of the factor who handles the transactions on your behalf.
Disadvantages
In case of recourse factoring, your business could suffer from bad debt liability since these debts becomes your responsibility.
One of the disadvantages of factoring is that it can be an expensive method of obtaining financing. Selling account receivables at a discount could impact on the business capital.
External influence on your business from the factor. This will however depend with the contract or agreement you enter into and whether it allows the factor to change business practices.
Invoice discounts
TASK 1
Medium sized bakery with an annual turnover of 1 million dirhams decided to buy a new machinery to expand its business and the estimated price of equipment is AED 60,000.Appropriate sources of finance which can be used are medium term loan, retained profit and bank loans.
• Medium term loans - In a medium term loan, there is no need to pay more interest for the load and the loan can be taken in future, but there is no tax benefit in medium term loans and there is a risk if the loan is not paid in the limited period of time.
• Retained profit - In a retained profit, the equity is built and the value of the shares increases but there is tax on dividends no matter what you do with it.
• Bank loans - Bank loans has many was of usage such as borrowing money for car, furniture or machinery but some bank loans carry prepayment penalty and there are many limitations for the bank loan transactions.
Therefore, I recommend Medium side bakery to use Retained profit as there are no need for interests in this system and the money saved by the company can be paid.
TASK 2
Al Ahli club is restructuring their club into a professional club and their aim is no create an internally recognized image to take part in international tournaments. The sources of finance which can be used to improve their club are government rents, long term loans and sponsorships.
ï¶ Government grants - are the grants given by the government for the benefit of public usage but it is a long process as it takes a long time.
ï¶ Long term-loans - are available for all individual , small business and large business and long terms provide all the funding's to this business but the interests are higher in rate and Long-term bank loans require applicants to meet strict financial and credit criteria that are not always necessary with short-term loans.
ï¶ Sponsorships - are done to attract public attraction towards particular sponsorship and to promote their brand image but the cost of sponsorships are high and it takes time for the sponsorship process.
Therefore, I recommend government grants can be used as it gives benefit to the society and as football is the national game of United Arab Emirates, Ministry of youth sports will be interested in giving grants to AL Ahli club.
TASK 3
Mr. Rafiq an employee who has retired form DIB after serving 25 ears received 5 million dirhams from the bank and is planning to build up a nursery but the premises are valued up to 2 million dirhams. The sources of finance Mr. Rafiq can use are Personal Savings, Medium term loans and Business angels.
• Personal Savings - are unlimited and Mr. Rafiq will have full control of his personal savings and can decide what to do with his personal savings but it takes time to save the money as in personal savings.
• Medium term loans - There is no need to pay more interest for the load and the loan can be taken in future, but there is no tax benefit in medium term loans and there is a risk if the loan is not paid in the limited period of time.
• Business angels - are the private people who give up guaranteed loans with no high fees and invest money in risky situations but can also turn in into devils if their payment is not made and they little follow on money.
• Therefore, I recommend Mr. Rafiq to use 1 million from his personal savings and another 1 million by using Business angels to start up there nursery as business angels would be interested to give such an high amount and wont charge interest to Mr. Rafiq too.
• Personal Savings - are unlimited and Mr.Rafiq will have full control of his personal savings and can decide what to do with his personal savings but it takes time to save the money as in personal savings.
• Medium term loans - There is no need to pay more interest for the load and the loan can be taken in future, but there is no tax benefit in medium term loans and there is a risk if the loan is not paid in the limited period of time.
• Business angels - are the private people who give up guaranteed loans with no high fees and invest money in risky situations but can also turn in into devils if their payment is not made and they little follow on money.
• Therefore , I recommend Mr.Rafiq to use 1 million from his personal savings and another 1 million by using Business angels to start up there nursery as business angels would be interested to give such an high amount and wont charge interest to Mr. Rafiq too.
BIBLOGRAHY
Anon. (n.d). introduction to financial management . Available: http://www.newagepublishers.com/samplechapter/001683.pdf. Last accessed 18th February 2013.
Arnold Anderson . (n . d). Sources of Finance for Expansion. Available: http://www.ehow.com/list_6674301_sources-finance-expansion.html. Last accessed 18th February 2013.
Jim riley. (2009). Q&A - What are retained profits?. Available: http://www.tutor2u.net/blog/index.php/business-studies/comments/qa-what-are-retained-profits. Last accessed 18th feburary 2013.
Anon. (n.d). Retained Profit. Available: http://www.altiusdirectory.com/Finance/retained-profit.html. Last accessed 18th Feburary 2013.
Anon. (n.d). What are some advantages and disadvantages of working capital?. Available: http://answers.yahoo.com/question/index?qid=20090125093626AA13w8p. Last accessed 18th Feburary 2012
Chris Joseph. (n.d). Advantages & Disadvantages of Sale of Assets. Available: http://www.ehow.com/info_8615419_advantages-disadvantages-sale-assets.html. Last accessed 18th February 2013.
Pascal Quiry, Yann Le Fur, Antonio Salvi, Maurizio Dallochio, Pierre Vernimmen (2011). Corporate Finance: Theory and Practice Wiley Desktop Editions. 3rd ed. chennai: John Wiley & Sons, 2011. 470
Anon. (n.d). Benefits and Disadvantages of Debentures. Available: http://www.efinancemanagement.com/sources-of-finance/130-benefits-and-disadvantages-of-debentures. Last accessed 19th February 2013.
Rosemary Peavler. (n.d). Loan - What is a Loan?. Available: http://bizfinance.about.com/od/glossaryoffinanceterms/g/What_is_a_Loan.htm. Last accessed 19th February 2013.
Nicholas B. Sisson. (n.d). Define Equity Share. Available: http://www.ehow.com/about_7325170_define-equity-share.html. Last accessed 20th February 2013.
http://accountlearning.blogspot.com/2012/04/advantages-and-disadvantages-of-leasing.html
http://www.entrepreneur.com/encyclopedia/term/82162.html
http://wiki.answers.com/Q/Advantages_and_disadvantages_of_debt_factoring
