2. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
What is Finance?
“The activity concerned with planning,
developing, managing, administering and
increasing of the capital used for business
purposes is known as finance”.
The overall assessment, acquisition, and
conversation of capital funds to accomplish
important objectives of a business enterprise
including the financial requirement is called
business finance”
3. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
Areas of Finance
Financial Management (Corporate Finance)
• How much to invest
• Where to invest, etc
Capital Markets
Investments
• Security analysis
• Portfolio theory
• Market analysis
4. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
Finance v/s Accounting
• Finance refers to the ways in which a
person or organization generates and uses
capital—in other words, how a given party
manages their money. This often encompasses
activities such as investing, borrowing, lending,
budgeting, and forecasting.
• Accounting, on the other hand, refers to
the process of reporting and communicating
financial information about an individual, business,
or organization. Rather than making strategic
financial decisions, accounting captures an
accurate snapshot of a party’s financial position at
a specific point in time.
5. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
Forms of Business Organizations…
• The Sole Proprietorship
• The Partnership
–General Partnership
–Limited Liability Partnership
• The Corporation
–Limited Liability Corporation
–S Corporation
–C corporation
6. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
Comparison Chart
7. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
Sole Proprietorships
The Original Form of Business
Advantages
Simple
Single Taxation
Disadvantages
Unlimited Liability
Limited Growth
Attracting Capital
• This form of business happens “automatically” when a person does
business of his or her own and does not have some other type of business
organization.
8. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
Partnerships
The Other Common Law Form of Business
Advantages
Still Simple
Single Taxation
More human and capital
resources
Disadvantages
Unlimited Liability*
Limited Growth Potential
Limited avenues for
Attracting Capital
9. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
Partnerships- Basic Concepts
Partners in a business are like spouses, they
depend greatly upon each other, must cooperate,
can create liability for each other, and often end
up with irreconcilable differences
• Forming a partnership- no formality required!!!
• Characteristics of partnership – no limited liability
•Advantages/disadvantages
10. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
• Limited Partnership
Limited partnerships have only one general partner with
unlimited liability, and all other partners have limited liability.
The partners with limited liability also tend to have limited
control over the company, which is documented in a partnership
agreement.
• Limited Liability Partnership
Limited liability partnerships are similar to limited partnerships,
but give limited liability to every owner. An LLP protects each
partner from debts against the partnership, they won't be
responsible for the actions of other partners.
11. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
Corporations
Advantages
Limited Liability
Growth potential
Disadvantages
Double Taxation
Complexity
Greater access to talent
Ease to access financial
resources
Continuity of existence
Separate legal entity
A statutory form of business, heavily regulated and
complex in creation and operation
12. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
Limited Liability Company (LLC)
Advantages
Limited Liability
Flexibility
Disadvantages
People Resources
A very new creation that merges the basic sought
after benefits of Limited Liability and Single Taxation
with little administrative complexity. It is a US
concept mostly)
Ease of Creation
Legal Uncertainty
Single Taxation
13. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
LLC- Basic Concepts
• Owners are called “Members”
• Usually created by filing “Articles of
Organization” with state.
• Many states allow single owner LLC’s
• Often an “operating agreement” is created
between members to govern their
relationship, obligations and rights.
14. Introduction to Business Finance (Fall 2016)
Corporations
The corporate entity is the most complex,
the most administratively burdensome type
of all business organizations.
It also has the greatest variance, coming in
small, medium, and large, and from one to
one million owners.
15. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
Corporations
• Shareholder/Board Member/ Officer/ Employee
• Corporations must comply with specific laws
(often Corporate Code) of the state incorporated
in.
• Securities Laws apply to publicly traded
corporations and sometimes other corps and other
business organizations
• Corps must also comply with own Articles of
Incorporation and Bylaws (if any).
16. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
Types of Corporations
• Small or “S’ Corporation
• Public Corporation
Single taxation, but limited to 75 shareholders who are United States
citizens or residents.
Defined more by securities laws than anything else. “Publicly traded”
More restricted than other corporations..
17. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
Goal of a Corporation
“Creating Value”
19. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
Intrinsic Value
Management’s goal should be to maximize
intrinsic value and not current market price.
20. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
Stockholder Manager Conflicts
• Principal agent relationship
• Agency problem
21. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
How to resolve:
• Compensation packages
• Direct Stock Holder Intervention
• Corporate Raiders – Hostile Takovers
22. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
There can be various possible goals of a
corporation at different points in time …
• Survival
• Avoid financial distress and bankruptcy
• Beat the competition
• Maximize sales or market share
• Minimize costs
• Maximize profits
• Maintain steady earnings growth
23. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
The goal of financial
management is to maximize
shareholders’ wealth.
24. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
In a Corporation, the owners are
different from service providers…
Board of Directors
Management
Assets
Debt
Equity
Shareholders
Debtholders
25. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
Financial Management involves
the investment, the financing
and the management of a
company’s assets with an
objective of value creation.
26. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
Higher profits do not necessarily
mean higher firm value !!!
Agree or Disagree???
27. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
The agency relationship is the relationship
between the shareholders and the
management of a firm. The agency
problem is the possibility of conflict of
interests between these two parties.
28. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
Managers will not work in the interest
of shareholders unless it is in their own
best interest…
• Management compensation schemes
– Stock options
• Monitoring of management
– Voting rights of the shareholders
– Proxy votes????
• The threat of hostile takeover
29. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
• Research about any one hostile takeover in
detail.
• Name of the companies
• Reason of takeover
SIZE OF THE TAKEOVER
Mode of takeover
Result of the takeover (Successful or not)
30. Introduction to Business Finance (Fall 2016)
Introduction to Business Finance (Fall 2016)
http://study.com/academy
/lesson/the-role-and-
responsibilities-of-
financial-managers.html
