Introduction to Business Finance

Business finance is the branch of managerial study that deals with how a firm raises money, where it puts that money to work, and how the resulting profit is shared or reinvested. Every business, whether a small trading shop in Kathmandu or a large manufacturing company, needs funds to buy assets, pay wages, hold inventory and grow. The discipline that plans, arranges and controls the flow of these funds so that the firm meets its goals is what we call business finance. In Grade 12 the subject is studied from the point of view of the manager who has to make the money decisions, so the emphasis is on decisions, their logic, and the effect they have on the value of the firm.

Concept and meaning of business finance

Finance, in the widest sense, is the science and art of managing money. When this management is carried out inside a business organisation it becomes business finance. It covers the activities of estimating how much capital the firm needs, deciding the best mix of sources from which that capital will be drawn, and directing the use of the funds into assets and operations that earn a return greater than their cost.

A commonly used definition describes business finance as that administrative area concerned with the arrangement of cash and credit so that the organisation may carry out its objectives as satisfactorily as possible. In modern practice the subject is also called financial management or corporate finance. Its central concern is captured in a single question: how should a firm acquire and use funds so that the wealth of its owners is maximised?

The scope of business finance is usually explained through the three core decisions a firm repeatedly faces.

• Investment decision (capital budgeting): choosing which long-term assets and projects the firm should commit money to, and how much to hold in current assets. This decides the left-hand side of the balance sheet.
• Financing decision: deciding how those assets will be paid for, that is the proportion of debt and equity the firm should use. This decides the right-hand side of the balance sheet and gives rise to the study of capital structure.
• Dividend decision: deciding how much of the earned profit should be paid out to shareholders as dividend and how much should be retained inside the business for future growth.

The single objective that ties these three decisions together is the maximisation of shareholders' wealth, measured by the market value of the firm's shares, rather than the narrower and short-sighted aim of maximising accounting profit. Wealth maximisation is preferred because it accounts for the timing of returns, the risk attached to them, and the long-run health of the firm, none of which simple profit figures capture.