International Peace Leadership College

Mayagay II, Sampaloc Tanay, Rizal

BOOK DIGEST of Business Finance

by Roberto G. Medina, Ph.D.

in Basic Finance

Submitted by:

Rovelyn G. Jeresano

BSBA- Marketing Management III

Submitted to:

Dr. Zosimo D. Maglangit, CPA, Ph.D.

Chapter 1 The Nature and Aims of Business

In spite of the obstacle that hinders the economic growth, the Philippine economy
continues to grow and does not fare well in comparison with the countries on the Far East. Since
business success has always been associated with economic growth, an adequate capital is the
main requirement for the business firms to exist.

The economic growth lies in the ability of private individuals to achieve economic
objectives by engaging in business activities. These business activities are responsible for
bringing into market a wide array of products and services such as high technology items like
cellphone models, video equipment, portable computers and many more. This also includes the
businesses that provide mankind with basic necessities like food and shelter. Such activities are
a mean to developing the economy and profit-making has been adapted as a measure to motivate
enterprising persons to engage in business.

Any entity is still a business if it is intended for profit making since business is any
lawful economic activity concerned with the production and/or distribution of goods or services
for profit.

Business is consisted of three main divisions: (1) commerce; (2) industry; and (3)
services.

Commerce

This includes the business firms which are engaged in buying and selling of goods and
services like the supermarkets, dry goods stores, sari-sari stores and many others.

Industry

Under the industry there are four classifications: (1) genetic industries which are the
businesses in agriculture, forestry and fish culture. (2) Extractive industries which are the
business in the extraction of goods from natural resources like mining, lumbering, hunting and
fishing. (3) Manufacturing industries are those who convert raw materials into finished products.
(4) Construction industries are the firms engaged in building infrastructures like airports,
seaports, dams and highways.
Services

These are the businesses that sells services to buyers and are classified as: (1) recreation;
(2) personal; and (3) finance

Business firms are established primarily for profit but sometimes, short-term and long
term profits are sacrificed just to attain other goals such as:

1. Political influence
2. Family control of the business; and
3. Community involvement.
 Chapter 2 Organizing a Business

Organizational stage is a very important aspect in the life cycle of a business because
much of what will happen to the firm in the later stages depends on the first steps in the
organization process. The activities undertaken in establishing a corporation is more
sophisticated and may take a year or several years before actual operation begins unlike the
small business because of the magnitude of capital to be used.

In engaging to business, a person or group has two options (1) to buy an existing business
or (2) to create a business that he will operate. And if a person chooses the latter, he will be
called an entrepreneur.

The entrepreneurs’ functions are:

1. Supply the capital of the firm.

2. Organize production by buying and combining inputs
3. Decide on the rate of output in the light of his expectations about demand
4. Bear the risk involved in these activities

In business prospecting, one must look and list for business opportunities then make a
choice for the list of business opportunities he made. Business opportunities come in several
form:

1. Increasing demand for basic commodities due to an increase in population

2. Rising prices of existing products like construction materials
3. Relaxation of government policies like the lifting of importing restrictions
4. Development of new service concept like the issuance and delivery of passports thru
courier service
5. Development of a new product concept like the engine that runs on water
6. Increasing demand for specialized services like manpower export services, health
and fitness services management consultancy and skills training
7. The increasing requirements of the wholesale and retail industry

In business promotions, you have to discover and explore business opportunities with the
purpose of converting it into a going concern. This is composed of three steps:
 1. Discovering the idea for a new business
2. Determining the feasibility of the idea
3. Assembling the needed resources to start the business.

The person responsible for the formation of a company is the promoter. He studies the
opportunities for a new business and makes the business blueprint, arranges the initial funds
skills requires and put the business into work.
Chapter 3 Fundamental Concepts and Tools of Business Finance

Finance is the study of the acquisition and investment of cash for the purpose of
enhancing value and wealth. It is categorized into two types: (1) public finance (2). Private
finance

Public finance deals with the revenue and expenditure patterns of the government and
their various effects on the economy while the private finance deals with the general finance not
classified under public finance and subdivided into: (1) personal finance (2) the finance of non-
profit organizations; and (3) business finance

Business finance is the provision of money for commercial use. However, it is more than
just the provision of money. It is also concerned with the effective use of funds.

Business finance is concerned with three aspects:

1. Small business finance

2. Corporation finance
3. Multinational business finance

There are various goals for business finance and are expressed as follows:

1. Maximizing profit
2. Maximizing profitability
3. Maximizing profit subject to cash constraint
4. Maximizing net present worth, and
5. Seeking an optimum position along a risk-return frontier

Financial information presented to various interested parties is called financial statements.

Finance managers are the one responsible for managing the financial activities of a firm and are
naturally the most concerned about getting relevant information through the use of financial
statements. There are two types of important financial statements from the point of view of
business finance. These are (1) balance sheet (2) the profit and loss statement.

The balance sheet is the statement produced periodically and normally at the end of a
financial year and is composed of asset, liabilities and the interest of the owner while the profit
and loss statement represents the revenues realized from the sale of commodities and services
produced by the company, as well as the costs and expenses incurred in connection with the
realization of the said revenues. It is also called the income statement.

Financial statements and budgets of the firm are the concern of the owners, the management,
creditors, government and prospective investors. Budget is the estimate of income and
expenditure for a future period.

Budgets are essential elements in planning and control of the financial affairs of the business.
There are three type of budget: (1) The sales budget (2) the materials and purchases budget (3)
the production budget.

Annual report is sent out each year by the company to its stockholder or members that
contains the:

1. The balance sheet

2. The profit and loss statement
3. The auditor’s report, and
4. The chairman’s report.

Chapter 4 Financial Markets

Depending on the quality of decisions made by the management regarding the firm’s
financial activities will determine the financial success of any business firms. However, the
quality of decisions will depend on how well the management understands the environment
under which business finance operates.

Firms can be confronted by capital deficiency one time or another. This happens when an
opportunity for investment comes up. Firm owners either invest additional capital from their own
money or they borrow capital from any lending firms.

There are two methods by which financial markets transfer funds: (1) direct finance (2)
indirect finance
 Direct finance is the lending by ultimate borrowers with no intermediary while the indirect
finance is the lending by an ultimate lender to a financial intermediary that then relends to
ultimate borrowers.

Financial markets can be classified as follows:

1. Primary market – a financial market in which newly issued primary and secondary
securities are traded for the first time
2. Secondary market – a financial market through which existing financial securities are
traded.
3. Money market –are the financial market on which debt securities with an original
maturity of one year or less are traded.
4. Capital market- the portion of the financial market where trading is undertaken for
securities with maturity of more than one year
5. Bond market- the market for debt instrument of any kind
6. Stock market – the financial market where the common and preferred stocks issued by
corporations are traded
7. Mortgage market – the portion of the financial market which deals with loans on
residential, commercial, and industrial real estate and on farmland
8. Consumer credit market – the market involved in loans on autos, appliances, education,
and travel
9. Auction market – the one where trading is conducted by an independent third party
according to a matching of prices on orders received to buy and sell a particular security
10. Negotiation market – when buyers and sellers of securities negotiate witch other
regarding price and volume, either directly or through a broker or dealer, they are
engaged in the financial market
11. Organized market – the financial market with fixed trading rules
12. Over-the-counter market – the market consisting of large collection of brokers and
dealers, connected electronically by telephones and computers that provide for trading in
unlisted securities
13. Spot market – securities are traded for immediate delivery and payment
 14. Futures market – the market where contacts are originated and traded that give the holder
the right to buy something in the future at a price specified by the contract
15. Options market – one where stock options are traded
16. Foreign exchange market – the market where people buy and sell foreign currencies

Chapter 5 Capital Budgeting

One of the most important segment of business finance is capital budgeting. In this
segment includes the relevant concepts pertaining to investment, valuation, risk, and uncertainty.

The objectives of capital budgeting is to:

1. Establish priorities
2. Cash planning
3. Construction planning
4. Eliminating duplication; and
5. Revising plans

Chapter 6 Working capital

Working capital is the part of the capital of the company which is continually circulating.
It is described in two ways: (1) gross working capital, which is the total amount of the firm’s
current assets (2) working capital, which is the total amount of current assets minus current
liabilities.

Working capital is needed for replenishment of inventory, provision for operating

expenses, support for credit, and provision of a safety margin. Working capital must possess the
following:

1. Adequate enough to cover financial requirements

2. Liquid enough to meet current obligations
3. Conserved through proper allocation and economical use
4. Used in the attainment of the profit objectives
Chapter 7 Sources of Short-term Capital

Short-term financing is one of the three business finance functions that deals with the
demand for and supply of short-term funds which may either be secured or unsecured.

Short-term credits have its advantages. It is easier to obtain, less costly and offers
flexibility to the borrower but it also has its disadvantages. It mature more frequently and are
more costly than long-term debts at times.

The providers of short-term funds are the (1) trade creditors (2) commercial banks (3)
commercial paper houses (4) finance companies (5) factors (6) insurance companies, and (7)
company accruals.

Chapter 8 Corporate Stocks

Stock financing refers to the selling of stock to raise funds for the long-term financing
requirements of the firm. Stocks, unlike bonds have no maturity periods. Also, common stocks
are not interest-bearing unlike bonds. And it does not require collateral.

The interest of the owners of a corporation is defined as the capital stock and is divided
into shares, the issued stock which is issued and sold while the unissued stock are those that are
not yet issued.

There are two major classification of corporate stock. First is the common stock and the
second is the preferred stock.

Common stock are the class of stock issued by all corporations and which represents the
real equity capital while the preferred stock is the class of stock which has a claim on assets
before common stock, in the event that the firm is dissolved; and it also has a prior claim to
dividends up to a specified amount or rate.

Chapter 9 Corporate Bonds

Bonds are the alternative source of long-term financing. It is defined as the long-term
debt of a firm or the government set forth in writing and made under seal. Bonds has two kinds.
The government bonds and corporate bonds.