BASIC OF FINANCE
Definition of Finance
Finance is defined in numerous ways by different groups of people. Though it is difficult to give a perfect definition of Finance following selected statements will help you deduce its broad meaning.
1. In General sense,
"Finance is the management of money and other valuables, which can be easily converted into cash."
2. According to Experts,
"Finance is a simple task of providing the necessary funds (money) required by the business of entities like companies, firms, individuals and others on the terms that are most favorable to achieve their economic objectives."
3. According to Entrepreneurs,
"Finance is concerned with cash. It is so, since, every business transaction involves cash directly or indirectly."
4. According to Academicians,
"Finance is the procurement (to get, obtain) of funds and effective (properly planned) utilization of funds. It also deals with profits that adequately compensate for the cost and risks borne by the business."
1. In General sense,
"Finance is the management of money and other valuables, which can be easily converted into cash."
2. According to Experts,
"Finance is a simple task of providing the necessary funds (money) required by the business of entities like companies, firms, individuals and others on the terms that are most favorable to achieve their economic objectives."
3. According to Entrepreneurs,
"Finance is concerned with cash. It is so, since, every business transaction involves cash directly or indirectly."
4. According to Academicians,
"Finance is the procurement (to get, obtain) of funds and effective (properly planned) utilization of funds. It also deals with profits that adequately compensate for the cost and risks borne by the business."
Features of Finance
1. Investment Opportunities
In Finance, Investment can be explained as a utilization of money for profit or returns.
Investment can be done by creating physical assets with the money (such as development of land, acquiring commercial assets, etc.),
carrying on business activities (like manufacturing, trading, etc.), and acquiring financial securities (such as shares, bonds, units of mutual funds, etc.). Investment opportunities are commitments of monetary resources at different times with an expectation of economic returns in the future.
2. Profitable Opportunities
In Finance, Profitable opportunities are considered as an important aspiration (goal).
Profitable opportunities signify that the firm must utilize its available resources most efficiently under the conditions of cut-throat competitive markets.
Profitable opportunities shall be a vision. It shall not result in short-term profits at the expense of long-term gains.
For example, business carried on with non-compliance of law, unethical ways of acquiring the business, etc., usually may result in huge short-term profits but may also hinder the smooth possibility of long-term gains and survival of business in the future.
3. Optimal Mix of Funds
Finance is concerned with the best optimal mix of funds in order to obtain the desired and determined results respectively.
Primarily, funds are of two types, namely,
1. Owned funds (Promoter Contribution, Equity shares, etc.), and
2. Borrowed funds (Bank Loan, Bank overdraft, Debentures, etc.).
The composition of funds should be such that it shall not result in loss of profits to the Entrepreneurs (Promoters) and must recover the cost of business units effectively and efficiently.
4. System of Internal Controls
Finance is concerned with internal controls maintained in the organization or workplace.
Internal controls are set of rules and regulations framed at the inception stage of the organization, and they are altered as per the requirement of its business.
However, these rules and regulations are monitored at various intervals to accomplish the same which have been consistently followed.
5. Future Decision Making
Finance is concerned with the future decision of the organization.
A "Good Finance” is an indicator of growth and good returns. This is possible only with the good analytical decision of the organization. However, the decision shall be framed by giving more emphasis on the present and future perspective (economic conditions) respectively.
In Finance, Investment can be explained as a utilization of money for profit or returns.
Investment can be done by creating physical assets with the money (such as development of land, acquiring commercial assets, etc.),
carrying on business activities (like manufacturing, trading, etc.), and acquiring financial securities (such as shares, bonds, units of mutual funds, etc.). Investment opportunities are commitments of monetary resources at different times with an expectation of economic returns in the future.
2. Profitable Opportunities
In Finance, Profitable opportunities are considered as an important aspiration (goal).
Profitable opportunities signify that the firm must utilize its available resources most efficiently under the conditions of cut-throat competitive markets.
Profitable opportunities shall be a vision. It shall not result in short-term profits at the expense of long-term gains.
For example, business carried on with non-compliance of law, unethical ways of acquiring the business, etc., usually may result in huge short-term profits but may also hinder the smooth possibility of long-term gains and survival of business in the future.
3. Optimal Mix of Funds
Finance is concerned with the best optimal mix of funds in order to obtain the desired and determined results respectively.
Primarily, funds are of two types, namely,
1. Owned funds (Promoter Contribution, Equity shares, etc.), and
2. Borrowed funds (Bank Loan, Bank overdraft, Debentures, etc.).
The composition of funds should be such that it shall not result in loss of profits to the Entrepreneurs (Promoters) and must recover the cost of business units effectively and efficiently.
4. System of Internal Controls
Finance is concerned with internal controls maintained in the organization or workplace.
Internal controls are set of rules and regulations framed at the inception stage of the organization, and they are altered as per the requirement of its business.
However, these rules and regulations are monitored at various intervals to accomplish the same which have been consistently followed.
5. Future Decision Making
Finance is concerned with the future decision of the organization.
A "Good Finance” is an indicator of growth and good returns. This is possible only with the good analytical decision of the organization. However, the decision shall be framed by giving more emphasis on the present and future perspective (economic conditions) respectively.
Stages of Finance
- Equity is invested in stages or rounds. A successful business will pass through all of these.
- Seed capital for the feasibility and design comes from personal savings, and contacts
- Start-up – commencing trading - will come from grants and loans
- Angels will tend to come in when trading starts
- Expansion comes from angels and VCs
- Further growth will come from VCs.
Role of Business Finance
Businesses are, in effect, investment agencies or intermediaries. This is to say that their role is to raise money from members of the public, and from other investors, and to invest it. Usually, money will be obtained from the owners of the business (the shareholders) and from long-term lenders, with some short-term finance being provided by banks (perhaps in the form of overdrafts), by other financial institutions and by other businesses being prepared to supply goods or services on credit (trade payables (or trade creditors)). Businesses typically invest in real assets such as land, buildings, plant and inventories (or stock), though they may also invest in financial assets, including making loans to, and buying shares in, other businesses. People are employed to manage the investments that is, to do all those things necessary to create and sell the goods and services in the provision of which the business is engaged. Surpluses remaining after meeting the costs of operating the business – wages, raw material costs, and so forth – accrue to the investors. Of crucial importance to the business will be decisions about the types and quantity of finance to raise, and the choice of investments to be made. Business finance is the study of how these financing and investment decisions should be made in theory, and how they are made in practice.
Investor's Criteria
- A product that fulfills a quantifiable need
- Ability to protect the concept
- A sustainable market
- A management team that can deliver
- They will want answers to questions about the market and your ability to deliver:
- How big is the market?
- How can you prove this?
- How can you show the price is right?
- How realistic are your costs?
- What‟s your track record?
- What‟s the most relevant experience of the team?
- Questions about the finance need to be answered.
- You and the investor need to know what you need the money for. It goes without saying you need to know how much you need and for how long, but is is surprising how many investees are not clear about this.
- What stage are you at in the business launch? Are you looking into the feasibility, developing a prototype, launching the product, or expanding?
- How will you eventually repay the finance – the exit strategy? Common ways are:
- Public Listing (on the stock market)
- Shares are sold to the public. This is very expensive but permanent, investors can sell their shares when they need to take over Management Buy Back
- What have you put in?
- What‟s the least you can live on? Bear in mind they don‟t invest in lifestyles. If you can‟t live on less than £60,000 their attitude will be “get a job”.
- Be brutal in asking what the business really needs. Do you really need plush premises?
- If you won‟t sacrifice, why should they?
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