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KU Relationship Between Business Finance & Financial Management Notes

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Business Finance Notes-Kenyatta University

` Kenyatta University

Course : Bachelor of Commerce

Unit Tittle : Business Finance

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Business Finance Notes-Kenyatta University

RELATIONSHIP BETWEEN BUSINESS FINANCE AND FINANCIAL MANAGEMENT

DEFINITION:

Business finance is the process by which a financial manager/accountant provides finance for business use as

and when it is needed. This provision has to be undertaken on the basis of the needs of a company. On the

other hand, Financial Management is a branch of economies concerned with the generation and allocation of

scarce resources to the most efficient user within the economy (or the firm). The allocation of these

resources is done through a market pricing system. A firm requires resources in form of funds raised from

investors. The funds must be allocated within the organisation to projects that will yield the highest return.

1. Needs Consequent on the Operations of a Company (Basic Needs)

These have to be financed in so far as they arise out of the company’s operations e.g. salaries.

2. Shortages of Cash Brought About By Unforeseeable Circumstances E.G Non Payment By

Debtors

These needs have to be financed by short term finances e.g. overdrafts, but this may be against financial

prudence rather such needs should be financed by revolving finances in the circular flow. However, the

financial manager must manage his finances using such tools as:

• Cash budget – statement of expected receipts and payments over a projected period of time – a

forecast.

• Funds flow statement – (Actual).

Variance between actual funds flow with cash budget. The variance must be managed to keep the company

liquid. On the other hand a financial manager has to meet the company’s strategic/long term needs (long

term investment) are useful to the company because:

1. It influences the company size (assets)

2. It influences its growth (plough back)

3. Finances incidental needs.

4. It influences the company’s long-term survival – this is through continuous investment.

These investments will call for long term financing in form of owners finance (Ordinary Share Capital and

Revenue reserves). This is a base on which other finances are raised. The company will also use external

financing e.g. debts, loans, debentures, mortgages, lease finance etc. These finances have to be used in

acceptable/reasonable financial mix. This implies that the company’s gearing level is kept low i.e. the

relationship between owners and creditors finance. This should be below 67% otherwise the company may

be forced into receivership and subsequently liquidation. Even then, when using creditors finances a

company must consider:

1. That cost of finance is less than the Return which implies the rate should not be less than the bank

interest + inflation + risk.

2. Economic conditions prevailing – use debt under boom conditions.

3. Present gearing – if high this will lead to:

4. Low credit rating

5. Lowering of the company’s share prices especially to less than Par value – this leads to mass sale of

shares – creditors rush to draw their finances and therefore receivership.

6. Long term ventures have to call for independent feasibility studies before funds are committed i.e.

7. Assessment of the return – at least should be greater than minimum return + risk + inflation.

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Business Finance Notes-Kenyatta University ` Kenyatta University Course : Bachelor of Commerce Unit Tittle : Business Finance 1 Business Finance Notes-Kenyatta University RELATIONSHIP BETWEEN BUSINESS FINANCE AND FINANCIAL MANAGEMENT DEFINITION: Business finance is the process by which a financial manager/accountant provides finance for business use as and when it is needed. This provision has to be undertaken on the basis of the needs of a company. On the other hand, Financial Management is a branch of economies concerned with the generation and allocation of scarce resources to the most efficient user within the economy (or the firm). The allocation of these resources is done through a market pricing system. A firm requires resources in form of funds raised from investors. The funds must be allocated within the organisation to projects that will yield the highest return. 1. Needs Consequent on the Operations of a Company (Basic Needs) These have to be financed in so far as they arise out of the company’s operations e.g. salaries. 2. Shortages of Cash Brought About By Unforeseeable Circumstances E.G Non Payment By Debtors These needs have to be financed by short term finances e.g. overdrafts, but this may be against financial prudence rather such needs should be financed by revolving finances in the circular flow. However, the financial manager must manage his finances using such tools as: • • Cash budget – statement of expected receipts and payments over ...
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Tags: business finance management BUSINESS FINANCE Financial Management