Business and Finance
Transcript: Business and Finance Fundamental Concepts and Tools of Business Finance Basic Concepts Finance Definition Categories Public Finance deals with the revenue and expenditure patterns of the government and their various effects in the economy deals with an area of general finance which is not classified under public finance concerned with the fundamentals of managing one's own personal money affairs. Finance of Non- Profit Organization includes private undertakings such as charity, religion, and some private educational institutions. Business Finance it covers financial management of private profit-seeking concerns in the business of service, trade, manufacturing, mining, public utilities and financing. Goals of Business Finance realizing the highest possible peso or dollar. when a firm decides on obtaining a higher rate of return on its own investment Maximizing Profit Subject To a Cash Constraint maintaining too large a cash balance reduces the potential rate of return while running out of cash is disastrous. The ideal set-up is to maximize profit while at the same time maintaining the cash balance that will satisfy both requirements. the objective of the firm is to maximize the current value of the company to its stockholders Net Present Worth is equal to the value now of the firm including values arising in the future. computed on its present worth and is added to the other values of the firm with the present. this concept indicates that money increases in value as time passes. Calculation of the Present Worth What is the value today of Php100,000 to be received next year? Assume that the prevailing rate of interest is 10% p.a. Seeking an Optimum Position Along a Risk-Return Frontier a firm can set a goal of achieving the best possible combination of risk and return. Definition of Return on Investment or Net Worth the net income generated by the use of investments or the net-worth of a firm is referred to as return on investment. (Rate of return when expressed in percentage.) Definition of Risk Risk refers to the uncertainty as to loss. When used in finance, the terms applies to the potential incurrence of loss of money or its equivalent. Calculation of Expected Value using Risk and Return the optimum position of risk and return may be determined by calculating the expected value of alternative decisions. expected value of a return on investment = return times the percentage of probability that will happen (risk factor) Natures and Aims of Business Any lawful economic activity which is concerned with making goods available as well as the rendering of useful services to those who want them. (Miranda) All effort primarily concerned with providing for the interested public’s legitimate needs, at the required time and place, at an equitable price, and with reasonable returns to compensate the businessman for his efforts and risks. (Ignacio) Any lawful economic activity concerned with the production or distribution of goods or services for profit. Involves providing and selling s product or service with the aim of obtaining rewards for the private owners (Oxenfeldt) Roles of Business Business firms and the government are oriented towards the provision of goods and services to the society. Business is largely responsible for bringing into the market a wide array of products which was not made available in the past. Kinds of Business Commerce buying and selling of goods and services trading, merchandising and marketing Examples: supermarkets, dry goods store, peddlers, sari-sari store, importers Industry mainly concerned with production of: *consumer’s goods – goods which are intended for ultimate consumption *producer’s goods – intended for use of business and industry Classifications Genetics Industries agriculture, forestry and fish culture Extractive Industries extraction of goods from natural resources (mining, lumbering, hunting and fishing) Manufacturing Industries convert raw materials into finished products (manufacture of drugs, plastics, food, liquor, footwear, motor cars, tools, office supplies household appliances, etc) Construction Industries building infrastructures (airports, seaports, dams and highways); construction of dwelling houses Services sells services to buyers Recreation movie houses, television and radio stations, theaters for drama and stage presentation Personal restaurants, barber shops, transportation, hotels, tailoring shops Finance banks, insurance companies, investment houses, financing institutions, credit unions, savings and loan associations Objectives of Business primarily for profit however, short-term and long-term profits are sacrificed in order to attain non-economic goals like: prestige and popularity; family control; social consciousness professional managers maintain that a business firm should attain the following multiple objectives: the creation and distribution of a product or service the satisfaction of personal objectives protection and enhancement of the human
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