Finance Essay

23798 Words Dec 17th, 2011 96 Pages
Compiled by Allan Simiyu for BBM 312 Students only
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CHAPTER ONE
INTRODUCTION
1.1 Introduction
Whether a business concern is big or small, it needs finance to fulfill its business activities. Finance may be defined as the art and science of managing money. According to Oxford dictionary, the word ‗finance‘ connotes ‗management of money‘. Webster‘s Ninth New Collegiate Dictionary defines finance as ―the Science on study of the management of funds‘ and the management of funds as the system that includes the circulation of money, the granting of credit, the making of investments, and the provision of banking facilities. Therefore, Finance is defined as the procurement of funds and their effective utilization in business concerns. The
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Put more prosaically, every business has to look at its available investment opportunities and decide whether to make the investment or not. In making this decision, firms have to grapple with two basic issues.
 The first is the rate of return that they need to make on an investment, given its risk, for it to be a good investment.
 The second is how to measure returns on investments, especially when the cash flows on these investments are different from accounting earnings and vary over time. In other words, the manger has to consider size, timing and risk of future cash flows
1.3.2 Financing Decisions – Capital structure decisions
This function is mainly concerned with determination of optimum capital structure of the company keeping in mind cost, control and risk. Generally this is a Procurement of Funds function since investments in assets must be financed somehow. Financial management is also concerned with the management of short-term funds and with how funds can be raised over the long term. There are two ways in which any business can raise financing. It can use the owner‘s funds (equity) or it can borrow
Compiled by Allan Simiyu for BBM 312 Students only
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money (debt). Every business has to consider whether the mix of debt and equity that it uses to fund investments is in fact the right one. The financing decision examines whether the firm‘s

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