Business finance refers to the financial management and decision-making of a business or organization. It involves the acquisition, management, and use of financial resources to achieve the goals and objectives of the business.
Business finance is concerned with the management of funds in a way that will ensure the survival and growth of the business. It involves the identification, analysis, and management of financial risks and opportunities. The goal is to make the best use of available resources and to maximize the return on investment.
Some key areas of business finance include:
- Financial forecasting and budgeting: projecting future financial performance and creating a plan for how to use funds in the future.
- Capital budgeting: evaluating and selecting long-term investments, such as equipment or property.
- Working capital management: managing short-term financial resources, such as cash and inventory, to ensure the day-to-day operations of the business.
- Financing: obtaining funds from external sources, such as loans or investors, to finance the business.
- Risk management: identifying and managing potential financial risks, such as currency fluctuations or credit risk.
Business finance is an essential aspect of any business, and it requires a deep understanding of financial principles, as well as the ability to analyze and interpret financial data. It's a broad field that encompasses many areas, and it's important for business owners, managers, and finance professionals to have a strong grasp of the fundamental concepts and principles of business finance.
Investments in assets are important because assets generate the cash flows that are needed to meet operating expenses and provide a return to owners of the business. Financing decisions involved generating funds internally or form external sources to the business. Such as by issuing debt or equity securities. Financing charges amount to non-operating cash flows. The required rate of return caters for the costs to both shareholders and debt holders for funds committed to the project. Therefore, using the required rate of return involves the financing charges being incorporated into the discount rate NOT the Net Cash Flows.
Fishers Separation Theorem states:
- Two time points: present and future
- No uncertainty, outcome of all decisions is known now
- No imperfections in the capital market
- All decision makers are rational
- Companies managers use resources according to shareholders
The theorem assumes that there is certainty and a frictionless capital market in which the interest rates for borrowers equals interest rate for lenders. Shows a company can make a dividend/investment decision that is in the best interest of all shareholders. Using ROR it is possible to show that the viability of project will depend on the ROR in respect to interest rate introduced through the capital market If the interest rate is lower than both projects, then the combination of both projects is best accepted and if no combination is possible (i.e. an upgrade and another project) then both projects are accepted. NPV calculates the projects REQUIRED RATE OF RETURN to convert future cash flows to their equivalent values today.
Capital rationing describes the situation where firms have limited resources and independent projects.