204 - Business Finance [Unit 1: Environment] [BBA II, Rajasthan University]

BUSINESS FINANCE
UNIT 1: SYLLABUS
Business Finance: Environment
(as per University of Rajasthan)
Business Financing, Corporate Financing
Financial Forecasting, Fundamentals of Stock Market
Concept, Finance and Other Discipline

- The term Finance revolves around the management of money or

financial resources of business firm.
- Finance is the study and discipline of money, currency and

capital assets. It is related with economics, the study of production,

distribution, and consumption of money, assets, goods and

services.
- Business Finance refers to capital and credit funds invested in the

business.
BUSINESS FINANCE - UNIT 1: ENVIRONMENT 1/4
MEANING
OF FINANCE

- Finance is the foundation of business and no business can start

without finance.
- Finance is treated as life blood of every business organization.
- Concept of finance has changed considerably with change in time

and circumstances.
- Finance is study management, it administers and control the

money.
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CONCEPT
OF FINANCE
BUSINESS FINANCE - UNIT 1: ENVIRONMENT

Business Finance involves a set of administrative functions in an

organization which relate with arrangement of cash and credit so

the the organization may have the means to carry out its objectives

as satisfactory as possible.
Guthman and Dougal defines Business Finance as:
"Business finance can be broadly defined as the activity concerned

with planning, raising, controlling, administering of the funds used

in the business"
L. G Gitman defines Finance as:
“Finance is the art and science of managing money.”
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DEFINITION
OF BUSINESS FINANCE

PUBLIC FINANCE
It is related to financial activities which

takes place in Government.
It analyzes how authorities collect the

revenue and how they spend it in public

interest.
INSTITUTIONAL FINANCE
It refers to funds collected by financial

institutions from individuals and

accumulate sufficient amount for

investment to earn profit.
Financial Institutions include: banks,

insurance companies, financial

corporations which have funds of people.
BUSINESS FINANCE
It includes financial management related

to sole trade, partnerships and companies.

It deals with procurement and

management of funds needed for

business activities
INTERNATIONAL FINANCE
It focuses on funds flow beyond national

boundaries.
It is the study of flows of funds between

individuals and organizations across

national borders and development of

methods for handling flows more

efficiently.
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AREAS
OF FINANCE

In these other discipline, we can include
- relationship of finance with production
- relationship of finance with marketing
- relationship of finance with personnel
Relationship shows balanced behaviour of officers of finance

department and other department’s officers.
FINANCE AND OTHER DISCIPLINES
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OTHER DISCIPLINES
RELATIONSHIP WITH PRODUCTION
Finance department checks the budget of production department and allow funds for

production department.
For producing goods, it needs raw material, labor and other expenses.
For paying all expenses, production department needs money and fund which will be fulfilled

by finance department.
IN FINANCE AND OTHER DISCIPLINES
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OTHER DISCIPLINES
RELATIONSHIP WITH MARKETING
Marketing department need money for paying salesmen, advertising budget and other

promotional expenses.

For this marketing department makes his marketing budget and it is cleared by finance

department.

Sometime finance department will not approve specific marketing expenses but marketing

department need that type of expenses for increase in sales.

This will create conflict. Good relations will be helpful for both departments.

Sometime, marketing department obtains big order for supplying the goods, at that time

finance department should help marketing department for arrangement of money for

buying raw material and supplying faster without any delay.
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OTHER DISCIPLINES
RELATIONSHIP WITH PERSONNEL
Personnel is that science which manages the employees of company and finance.
If personnel department and finance department work together with co-operation, both

departments can satisfy the objectives of company.
It is the objective of company to satisfy employee by fulfilling their financial needs. It is also

objective of company to reduce the misuse of fund by paying excess salary that required cost

of doing work by employee.
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It is concerned with financial management of profit seeking

business organizations.
Business Finance can be defined as activity concerned with

planning, raising, controlling and administering the funds used in

the business.
Business Finance deals with the financial planning, acquisition of

funds, use and allocation of funds and financial control.
BUSINESS FINANCE

- Corporate finance deals with the financial problems of corporate

enterprises.
The problems include:
- financial aspects of promotion of new enterprises
- their administration during early development
- the administrative questions created by growth and expansion
- financial adjustments required for rehabilitation of corporation
which has come in financial difficulties
CORPORATE FINANCE

- Forecasting is determining what is going to happen in the future

by analyzing what happened in the past and what is happening

now.
- It’s a planning tool that helps businesses adapt to uncertainty

based on predicted demand for goods or services.
- Financial forecasting is a financial plan that estimates the

projected income and projected expenses of a business, and a solid

financial forecast contains both macroeconomic factors and

conditions that are specific to the organization
FINANCIAL FORECASTING
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A budget represents business' cash flow,

financial positions, and future goals and

expectations for a set fiscal period.

Financial forecasting and planning work

essentially offers an insight into business'

future which help make budgeting

accurate.
ANNUAL BUDGET PLANNING ESTABLISHING REALISTIC BUSINESS GOALS
IMPORTANCE
OF FINANCIAL FORECASTING
Accurate forecasting will help predict

whether (and by how much) business will

grow or decline.
As such, management can set realistic

and achievable goals and manage

expectations.
IDENTIFYING PROBLEM AREAS Investors use a company's financial

forecast to predict its future performance

and the potential ROIs on their

investments.

Additionally, regular forecasting shows

investors that you are in control and have

a solid business plan prepared for the

future.
ATTRACTS INVESTOR
Financial forecasting can help

management to identify ongoing

problems by analyzing the business' past

performance.
Additionally, management can identify

potential problems by getting an insight

into what the future holds.
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- A Stock Market is a regulated market place that allows securities

like shares, bond, etc to be bought and sold.
- The securities listed on stock exchange for trading.
- Stock exchange perform role of secondary markets to allow the

change of ownership of securities.
- Brokers and Dealers are regulated professionals who specialises

in trading securities on the stock exchange.
- A broker helps security holder to buy and sell securities and

receives commission for securities rendered.
FUNDAMENTALS OF STOCK MARKET/EXCHANGE
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FUNCTIONS OF STOCK MARKET/EXCHANGE
IN FUNDAMENTALS OF STOCK MARKET
ECONOMIC BAROMETER
The rise or fall in the share prices

indicates the boom or recession cycle of

the economy. Stock exchange is also

known as a pulse of economy or

economic mirror which reflects the

economic conditions of a country.
PRICING OF SECURITIES
The stock market helps to value the

securities on the basis of demand and

supply factors. The securities of profitable

and growth oriented companies are

valued higher as there is more demand

for such securities.
SAFETY OF TRANSACTIONS
The companies which are listed they also

have to operate within the strict rules and

regulations. This ensures safety of dealing

through stock exchange.
Stock exchange authorities include the

companies names in the trade list only

after verifying the soundness of company.
CONTRIBUTES TO ECONOMIC GROWTH
This process of disinvestment and

reinvestment helps to invest in most

productive investment proposal and this

leads to capital formation and economic

growth.
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1/2

FUNCTIONS OF STOCK MARKET
LIQUIDITY
The main function of stock market is to

provide ready market for sale and

purchase of securities. The presence of

stock exchange market gives assurance

to investors that their investment can be

converted into cash whenever they want.

The investors can invest in long term

investment projects without any

hesitation, as because of stock exchange

they can convert long term investment

into short term and medium term.

PROMOTES HABITS OF INVESTMENT
The stock market offers attractive

opportunities of investment in various

securities. These attractive opportunities

encourage people to save more and

invest in securities of corporate sector

rather than investing in unproductive

assets such as gold, silver, etc.
PROVIDES SCOPE FOR SPECULATION
To ensure liquidity and demand of supply

of securities the stock exchange permits

healthy speculation of securities.
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2/2

ROLE OF STOCK MARKET/EXCHANGE
READY MARKET
Stock exchange is a convenient meeting

place for buyers and sellers of second-

hand securities. Investors who have a

preference for liquidity (i.e. cash) can sell

their securities; and those who wish to

invest in securities can buy the same.
SAFE MARKET
A stock exchange functions according to

a recognised code of conduct and is

subject to strict statutory regulations.
Since the establishment of SEBI

(Securities and Exchange Board of India)

in the year 1988, dealings in securities at

stock exchanges have become further

safer.
EVALUATION OF SECURITIES
Stock exchange determines prices of

various securities (in terms of their real

worth) through the interplay of demand

and supply forces.
CONTROL OVER COMPANY MANAGEMENTS
Stock exchange very directly exercises

control over the managements of

companies, whose securities are listed

with it. Those companies whose securities

are listed with a stock exchange have to

abide by the rules and regulations of the

stock exchange.
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1/2

ROLE OF STOCK MARKET/EXCHANGE
AGENCY OF CAPITAL FORMATION
It draws the savings of the man in the

street into productive investment

channels. Since stock exchange provides

a safe and convenient market for liquidity

and investment purposes; people are

induced to save and invest in securities.
QUALITATIVE COMMERCIAL DEVELOPEMENT
Stock exchange aids in the process of

ensuring qualitative industrial and

commercial development of the

economy. This is so, because, through

stock exchange people keep shifting their

investment from inefficient companies

(which do not pay good dividends) to

efficient companies (which promise high
returns on investment). This shifting

process of investment is specially

important for a country where savings are

scarce.
CONTROL OVER COMPANY MANAGEMENTS
Stock exchange very directly exercises

control over the managements of

companies, whose securities are listed

with it. Those companies whose securities

are listed with a stock exchange have to

abide by the rules and regulations of the

stock exchange.
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2/2

Bombay Stock Exchange (BSE) was incorporated in year 1875 and is

the oldest stock exchange in Asia.
National Stock Exchange (NSE) was incorporated in year 1992 and is

leading stock exchange of India.
Over the Counter Exchange of India(OTCEI) was incorporated in

year 1990 to help small and medium enterprises for raising capital

to expand business.
All the stock exchanges are regulated by Securities Exchange Board

of India (SEBI) which is located in Mumbai.
ABOUT STOCK EXCHANGES
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1/2

- BSE dominated the equity market for long time.
- But it had flaws such as it was manually operated, had undesignated market makers, inferior

transparency of market.
- This resulted in 1992 Harshad Mehta scam which forced regulators, Finance Ministry and SEBI to

reform existing equity market.
- SEBI introduced Screen Based Trading System in BSE and NSE which made market more efficient.
- Screen Based Trading refers to fully computerised trading system that ensures transparency,

liquidity and market efficiency for trading.
SCREEN BASED TRADING SYSTEM
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2/2

- An "INDEX" is defined as statistical indicator which provides a representation of value of securities

listed.
- Indices often serve as a barometer for a particular market.
- These benchmarks based on which economic and financial performance is measured.
- A stock index reflects the price movements of shares
- A bond index captures the manner in which bond prices go up and down.
- For a long time, people are tracking markets for their daily ups and downs using various indices of

market performance, those indices include: Dow Jones, S&P, Morgan Stanley Capital Markets (MSCI),

Lehmann Brothers, Nasdaq Composite index, FTSE 100, etc..
- India have best known indices which are known as SENSEX and NIFTY
INDICES
8/15
1/3

- The Sensex was launched on 1986 and is India's most tracked index.
- It is both a economic trend indicator and an investable index used to track the performance of

India's 30 largest and most financially sound companies.
- These companies are listed on the BSE (previously known as the Bombay Stock Exchange) and

represent some of the biggest and most important sectors of the Indian economy.
- The evolution of the Indian economy has shaped and changed the methodology of the Sensex. It

was calculated based on the market cap when it was first launched but shifted to a free-float

capitalisation method in September 2003.
SENSEX
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2/3

- NIFTY is a market index which was introduced in 1996 by NSE.
- NIFTY meaning is a derivation from the mix of two words, i.e. “National Stock Exchange” and “fifty”
- It is collection of top performing 50 equity stocks that are actively trading in the index. It is also

known as CNX NIFTY or NIFTY 50
- NIFTY contains host of indices and those are:
NIFTY 50, NIFTY I.T, NIFTY BANK, NIFTY NEXT 50
- NIFTY 50 follows the trends and patterns of blue-chip companies i.e. most liquid and largest

securities.
- It is owned and managed by India Index Service & Products Limited (IISL). IISL is an Indian

specialized company which focuses on an index as its focus product.
NIFTY
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3/3

- SEBI was establish by Government of India in 1988
- SEBI later upgraded as fully autonomous body in year 1922 with

defined guidelines and responsibilities.
- SEBI is responsible for protecting interest of investors who're

investing in securities.
- SEBI is also responsible for regulating the securities in market.
SECURITY EXCHANGE BOARD OF INDIA (SEBI)
11/15
1/5

PURPOSE OF SEBI
The purpose of SEBI is to provide environment that paves the way for mobilisation and

allocation of resources.
It provides practices, framework and infrastructure to meet growing demands.
It meets the needs of following groups:
- Issuer: SEBI provides a marketplace that can be utilised for raising funds
- Investors: It provides protection and supply of accurate information that is maintained on

regular basis.
- Intermediaries: It provides a competitive market for the intermediaries by arranging proper

infrastructure.
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2/5

OBJECTIVES OF SEBI
PROTECT INVESTORS
It involes protecting interests of investors
by providing guidance and ensuring that

investment is done safe
PREVENT FRAUDS
Preventing fradulent practices and

malpractices which are related to trading

and regulation of activities of stock

exchange.
DEVELOPS CODE OF CONDUCT
SEBI develops code of conduct for

financial intermediaries such as brokers,

underwriters, dealers, etc.
MAINTAIN BALANCE
SEBI maintain a balance between

Statutory Regulation and Self Regulation
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3/5

FUNCTIONS OF SEBI
SEBI has following functions:
- Protective Function
This function implies role of SEBI in protecting the investor interest and also that of

other financial participants.
- Regulatory Function
This function involve establishment of rules and regulations for the financial

intermediaries along with corporates that helps in efficient management of market.
- Development Function
It refers to steps taken by SEBI in order to provide the investors with a knowledge of

the trading and market function.
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4/5

STRUCTURE OF SEBI
SEBI board comprises of 9 members.
The following consist of board members:
1 Chairman - Appointed by Central Government of India
1 Board Member - Appointed by Central Bank of India (RBI)
2 Board Members - From Union Ministry of Finance
5 Board Members - Elected by Central Government of India
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5/5

- Financial environment is a part of an economy with the major

players being firms, investors and markets.
- This sector represents a large part of a well-developed economy

as individuals who retain private property and 'have the ability to

grow their capital.
- Firms are any business that offer goods or services to consumers.
- Investors are those individuals or businesses which put their

capital into businesses for financial returns.
- Markets represent the financial environment that makes this all

possible
FINANCIAL ENVIRONMENT
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COMPONENTS
IN FINANCIAL ENVIRONMENT
FINANCIAL MANAGERS
Financial managers are responsible for

deciding how to invest a company’s funds
to expand its business and how to obtain

funds. The actions taken by financial

managers to make financial decisions for

their respective firms are
referred to as financial management.
FINANCIAL MARKETS
Financial markets represent forums that

facilitate the flow of funds among

investors, firms, government agencies.
Each financial market is served by

financial institutions that act as

intermediaries.
INVESTORS
Investors are individuals or financial

institutions that provide funds to firms,
government agencies, or individuals who

need funds.
It is focused on investors by their provision

of funds to firms.
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Financial instruments refer to trade-able securities of financial markets.
These financial instruments may represent cash, ownership interest or contractual right to

pay/receive money.

Two Types of Instruments: Cash and Derivative:
- Cash instruments are the one whose value is directly determined by the market e.g.

deposits and loans.
- Derivative Instrument is derived from underlying asset e.g. forward, options, swap etc.
COMPONENTS
IN FINANCIAL ENVIRONMENT
FINANCIAL INSTRUMENTS
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204 - Business Finance [Unit 1: Environment] [BBA II, Rajasthan University]

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204 - Business Finance [Unit 1: Environment] [BBA II, Rajasthan University]