Business Finance

C. King
Objectives

 Difference between money market and capital market

 Ways by which individuals manage personal income
 Forms of savings
 Forms of investments
Money Market

Money can be borrowed from commercial banks, credit unions, hire purchase
companies etc. These institutions are usually more concerned with short-term
lending but it is not uncommon to lend for longer periods e.g. mortgages.
Capital Market

These specialise in long-term lending almost entirely to business and industries.

They include insurance companies, pension funds, stock exchange, development
banks and other government agencies
Ways of Managing personal income

 (a) allocation of income relative to commitments through the use of a

budget;
 (b) savings;
 (c) investment; and,
 (d) financial advising.
Budget

A budget can be made an essential part of money management. It is a document showing all
sources of income and the ways in which it will be used for a certain period. A comparison
can then be made between the planned and actual expenditure. If necessary, adjustments
can be made during or after the specified planning period. A budget is essential to living
within your means and saving enough to meet your long-term goals.

Example
The 50/30/20 budgeting method offers a great framework. It breaks down like this:
 50% of your take-home pay or net income (after taxes, that is) goes toward living
essentials, such as rent, utilities, groceries, and transport
 30% is allocated to lifestyle expenses, such as dining out and shopping for clothes
 20% goes towards the future—paying down debt and saving both for retirement and for
emergencies
Savings

Saving should be included in one’s management of money.

Saving is the difference between income available for
spending(disposable income) and actual consumer
expenditure
It also can be defined as deposit in a safe place that allows
the saver to access the whole of their money at any time
Forms of Savings

 (a) Sou sou (meeting-turn, partner, box hand) – It is a rotating saving

club where a group of persons corporate by contributing an equal
amount of money into a fund. The total pool (hand) is then paid to
one member of the group and the process continues until everyone in
the group gets a pay out

 (b) deposits in financial institutions- money can be kept safe and earn
a modest amount of interest in a saving account at a financial
institution
Types of savings cont…

Short term fixed deposit – an amount of money is place with a financial

institution for a fixed term at a fixed rate of interest
Investment

Investment is simply doing without consumption today in order to use the money
to create capital to generate future returns
Form of investments

(a) Mutual funds

(b)stock market;
(b) government securities
- bonds, debentures;
Forms of Investments

1. Mutual funds- A mutual fund is made up of a pool of

money collected from many investors, for the purpose of
investing in securities such as bonds, stocks and other money
market instruments. The combined holdings of the mutual
fund are known as its portfolio. Investors buy shares in
mutual funds. Mutual fund managers invest the fund’s capital
in order to achieve capital gain for the funds investors
2. Government securities

A government security is a bond or other type of debt

obligation that is issued by a government with a promise of
repayment upon the security's maturity date. Government
securities are usually considered low-risk investments
because they are backed by the taxing power of a
government
Stocks and bonds

Stocks are shares in the ownership of a business, while bonds are a form
of debt that the issuing entity promises to repay at some point in the
future.
 Priority of repayment. In the event of the liquidation of a business,
the holders of its stock have the last claim on any residual cash,
whereas the holders of its bonds have a considerably higher priority,
depending on the terms of the bonds. This means that stocks are a
riskier investment than bonds.
 Voting rights. The holders of stock can vote on certain company
issues, such as the election of directors. Bond holders have no voting
rights.
Debentures

A debenture is a type of bond or other debt

instrument that is unsecured by collateral.(unsecured
loan) Since debentures have no collateral backing,
debentures must rely on the creditworthiness and
reputation of the issuer for support. Both corporations
and governments frequently issue debentures to raise
capital or funds
Why do company issue debentures, when they can borrow money from Bank. ... When bank lend
money they generally place restriction on how that money can be used. ex- borrowed fund can
be used only for capital expenditure or they limit companies ability to raise additional funds till
this loan is repaid. etc.
Stock Market

This is the market place where buyers and sellers of securities (all stocks and shares) can
meet to buy and sell. The Stock Exchange is responsible for making arrangements for the
trading of shares. It also sets the rules of operation of the Stock Market and ensures that
members adhere to the rules at all times.
In the Caribbean Barbados, Jamaica and Trinidad have stock markets on which cross border
trading is allowed. That is, it is possible to buy shares from the stock market of another
country. Since the shares which are being trading on the stock exchange were already sold
once, the stock exchange is said to be the market place for second hand trading.

On a stock market there are various risks and benefits. Usually, the higher the risk the
higher the gain. It is often wise to spread investments across high and low risk investments
to minimise losses.
Terms in the Stock Exchange

 Bull market- Investors buy or hold on to shares in the anticipation of a rise in

price. As the prices are rising in this market, investors will make a profit by
selling at the higher price.
 Bear Market- In anticipation of a fall in price, investor will sell shares in order
to minimise losses. They may buy back the shares at a relatively low price. In
this market prices tend to be falling.
 Stag market- Investors buy new shares, with the aim of reselling at a profit
when second hand deal starts on the stock exchange
Financial Advising

A Financial Advisor is a finance professional who provides consulting and advice

about an individual’s or entity’s finances. Financial advisors can help individuals
and companies reach their financial goals sooner by providing their clients with
strategies and ways to create more wealth, reduce costs, or eliminate debts.
Types of short term financing

 Promssory note
 Installment credit
 Trade credit
 commercial bank loans,
 indigenous credit or private money lenders,
 advances from customer
 factoring
 venture capitalists,
 crowd funding,
 angel investors
Types of short term financing

 A promissory note is an unsecured promise by a party to another person to

pay a specified sum on demand or on a fixed date. Basically it is putting the
terms of a loan in writing, including how and when the money will be paid
back. It binds the borrower to the agreement by law
 Installment Credit (Hire purchase) enables business (or individual) to buy a
product or service and pay the amount owed in monthly instalments until the
last instalment of repayment is paid, at which point the buyer becomes the
actual owner of the item
Types of short term financing

 Trade credit- is the loan extended by one trader to another when the goods
and services are bought on credit. Trade credit facilitates the purchase of
supplies without immediate payment. Trade credit is commonly used by
business organisations as a source of short-term financing.

 Commercial bank loan – All commercial banks offer an overdraft facility. This
is a form of short term finance provided for business
 Bank loan is a type of credit created by the bank to a business or individual.
It is extended for a specific period of time, usually on a fixed interest term
Types of short term financing

 Indigenous credit or private money lenders- a money lender is a person whose

business is to lend money to others. Private money lending, as the name
implies, means borrowing money from an individual investor. They charge
high rate of interest but lend in situations where other lenders would not
lend. Real estate investors use private lenders to finance deals that either
won't qualify for a traditional loan or can't wait the usual 30 days or so that a
conventional mortgage loan needs for approval.

 Advances from customer – It is not unusual for customers to pay in advance

for goods and services they have yet to receive, and even to finance start-up
businesses. E.g. if someone wants some furniture to be mad it is not
unreasonable for the person doing the work to receive advance payment
Types of short term financing

 Factoring: debt factoring is the provision of finance by

one business (called the factor) to another firm (the
client)by discounting unpaid invoices that the client has
issued to customers. The factor pass to the client up to
80% of the debt they are owed and the factor collect the
full amount from the client customer as payment becomes
due
 Venture capitalist- is a private equity investor that
provides capital to companies exhibiting high growth
potential in exchange for an equity stake. This could be
funding startup ventures or supporting small companies
that wish to expand but do not have access to equities
markets.
Types of short term financing

Angels investors: specialize in investing in early stage or

startup companies in exchange for equity ownership interest.
Basically angel investors group together the funds of many
investors and invest in a group of start up, thus spreading
the risk

Crowd funding - is the practice of funding a project or

venture by raising small amounts of money from a large
number of people, typically via the Internet.
Types of Long term financing

 (a) loans from government agencies;

and,
 (b) mortgages, debentures, shares,
insurance, investment and unit trusts
Loans from government agencies

 Government offer support to businesses. The support tends to take three

forms:
 Government grants- A grant is a sum of money awarded to your business from
the government that you don't have to pay back. It's awarded to your business
to assist in its development, often for a specific purpose. Grants are generally
limited to certain types of organization and usually support critical recovery
initiatives, innovative research, and many other programs
 Government loans – Government may loan the money directly via a publicly-
owned bank e.g CDB or indirectly through a regional business loans fund.
Strignent criteria is usually attached.
 Government equity investment – The government purchase an ownership
stake in the business rather than lending it money
Mortgage

 Mortgage are special type of long-term source of finance for buying properties
where monthly payment are spread over a number of years and the property
acts as a collateral against the loan until it is repaid
 Debentures – is a common long term loan taken out by companies. These loans
are usually repayable on a fixed date with a fixed rate of interest
 Shares (equity capital) – it involves giving up part of the ownership of the
business to others.
 Insurance companies – provides long term loans to businesses using some of the
funds they accrue in order to meet claims from their customers
 Capital investment refers to the funds invested in an enterprise to further its
business objective. For example, such inputs maybe provided to help the
business to acquire capital assets such as manufacturing machines or plants that
are expected to make it more effective over a number of years
 Unit trust – collect money from many small investors and use the pool of
money they collect to buy shares, bonds, property or cash assets in other
investments. This include providing interest bearing loans to business.
Capital

Capital refers to the finance that is invested in the business in order to acquire
assets that the business needs to trade or produce
Fixed capital includes item such as buildings, machinery and other equipment
with a long life which are used many times over in the production of goods and
services and the creation of further wealth

Working capital – the firms short-term assets which are turned over fairly quickly
in the course of the business. They include stock, work-in progress, finish goods
and other items required in the day to day operations of the business
Sources of Personal Capital

.
(a) friends and family;
(b) personal savings;
(c) government grants;
(d) loans;
(e) equity;
(f) venture capital; and,
(g) crowd funding.
Single Entry bookkeeping

 This is a simple and straightforward method of bookkeeping in which

each transaction is recorded as a single-entry in a journal. This is a
cash-based bookkeeping method that tracks incoming and outgoing
cash in a journal.
 In single-entry bookkeeping, you maintain a cash book in which you
record your income and expenses. Start with your existing cash
balance for a given period, then add the income you receive and
subtract your expenses. After you factor in all these transactions, at
the end of the given period, you calculate the cash balance you are
left with.
Single Entry book keeping

A typical cash book will have the following information:

 Date: The date on which the transaction takes place

 Description: A brief note on the transaction
 Transaction value: The value can be either incoming (debit) or outgoing
(credit)
 Balance: Running total of how much cash you have in hand
Double-Entry Bookkeeping
 This is a method of recording transactions where for every
business transaction, an entry is recorded in at least two
accounts as a debit or credit. In a double-entry system,
the amounts recorded as debits must be equal to the
amounts recorded as credits.
 The key feature of this system is that the debits and credits should
always match for error-free transactions.
Double-Entry Bookkeeping

 The double-entry bookkeeping system works on the basic

accounting equation, which is as follows:
Asset=Liability + owners equity
 Assets: The money that the company owns
 Liabilities: Anything that the business owes
 Owner’s equity: Owner’s investment in the company
 Income: Money the business earns by selling its products
 Expense: Money the company spends to run the business
 You should always remember that each side of the equation
must balance out. This is how we arrive at the term
“balancing the books
How is double-entry bookkeeping better
than single-entry?
 Recording method: Single-entry bookkeeping gives a one-sided picture of
transactions recorded in the cash register. In double entry, changes due to one
transaction are reflected in at least two accounts.
 Error detection: In double entry, debits and credits must always be the same.
If that is not the case, then there is an error. This makes it easy to spot errors
and ensure that they are not carried forward to other journals and financial
statements. In single entry, there is no method for error correction or
detection.
 Company size: The single-entry system is only appropriate for small
enterprises, whereas the double-entry system can be used by all sizes of
businesses, including large ones.
How is double-entry bookkeeping better
than single-entry?
Preparation of financial statements: The information recorded in a single-entry
system isn’t adequate for financial reporting or preparing profit and loss
statements. Bigger organizations rely on these reports to track their
performance, so they need the extra information captured by double-entry
accounting.
 The Income statement Profit and Loss a/c

This shows the net income or loss over a specified period. It is broken into three
main sections:
 Revenue -includes all revenue that is recognized during the period
 Cost of Sales - takes into account all costs that are directly related to
producing and selling a product. This may include materials purchased or
direct labor costs paid during the period. -
 Operating Expenses -includes everything else you spent money on in the
period that wasn’t directly linked to a sale. This includes line items like rent,
utilities, bank fees, wages and salaries, and sales and marketing expenses.
Subtracting cost of sales from revenue gives you gross profit.
When you subtract all operating expenses from the gross profit, you’re left with
net income.
Balance Sheet

The purpose of the balance sheet is to reveal the financial status of a business as
of a specific point in time. The statement shows what an entity owns (assets) and
how much it owes (liabilities), as well as the amount invested in the business
(equity).
A balance sheet is also called a 'statement of financial position' because it
provides a snapshot of your assets and liabilities — and therefore net worth — at
a single point in time (unlike other financial statements, such as profit and loss
reports, which give you information about your business over a period of time).
Balance sheet

There are 3 different sections in a balance sheet, represented by the following

formula:
 Assets – liabilities = owner's equity

 It is called a balance sheet because, at any given moment, each side of this
equation must 'balance' out.
Cash flow statement

A cash flow statement is a financial statement that summarizes the amount of

cash and cash equivalents entering and leaving a company. The cash flow
statement measures how well a company manages its cash position, meaning how
well the company generates cash to pay its debt obligations and fund its
operating expenses
Evaluation

 Define the term ‘budgeting’

 State two purpose of budgeting
 State TWO differences between savings and investment
 Discuss two factors that can influence the level of savings by consumers in
your country

 List TWO methods of savings that are available to individuals

 Identify TWO sources of short term financing and TWO sources of long term
financing