Functions of Business Finance

Managerial Functions: It includes two important decisions of a finance manager.

 Investment decision: Investment decision is taken by valuing different projects where expected
the return and risk are considered. Investment project or assets can be divided into two
categories:
 Short-term investment: In this case investment is made in current assets for one or less than
one year.
 Long-term investment: Capital budgeting is concerned for investing in term project where the
following things are considered: overall assets and cost, expected the future return, the risk of
expected return, cost of capital.
 Financing decision: The second function of the financial manager is to decide about the
allocation of dividend among its stakeholders. In this case, retained earnings are also
considered.

Routine or incidental functions: Some other functions are also accomplished by financial managers.
These are commonly known as routine works:
• Fund collection
• Reserve maintenance
• Information collection
• Preparing financial statements, etc.

Role of Financial Managers

1. Estimation of capital requirements: A finance manager has to make estimation with regards to
capital requirements of the company. This will depend upon expected costs and profits and
future programmes and policies of a concern. Estimations have to be made in an adequate
manner which increases earning capacity of enterprise.
2. Determination of capital composition: Once the estimation have been made, the capital
structure have to be decided. This involves short- term and long- term debt equity analysis. This
will depend upon the proportion of equity capital a company is possessing and additional funds
which have to be raised from outside parties.
3. Choice of sources of funds: For additional funds to be procured, a company has many choices
like-
a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.
4. Investment of funds: The finance manager has to decide to allocate funds into profitable
ventures so that there is safety on investment and regular returns is possible.
5. Disposal of surplus: The net profits decision have to be made by the finance manager. This can
be done in two ways:
a. Dividend declaration - It includes identifying the rate of dividends and other benefits like
bonus.
b. Retained profits - The volume has to be decided which will depend upon expansional,
innovational, diversification plans of the company.
6. Management of cash: Finance manager has to make decisions with regards to cash
management. Cash is required for many purposes like payment of wages and salaries, payment
 of electricity and water bills, payment to creditors, meeting current liabilities, maintainance of
enough stock, purchase of raw materials, etc.
7. Financial controls: The finance manager has not only to plan, procure and utilize the funds but
he also has to exercise control over finances. This can be done through many techniques like
ratio analysis, financial forecasting, cost and profit control, etc.

Business Organization
Sole Proprietorship
A sole proprietorship, is a type of business entity that is owned and run by one natural person and in
which there is no legal distinction between the owner and the business. The owner is in direct control of
all elements and is legally accountable for the finances of such business and this may include debts,
loans, loss, etc.
The owner receives all profits (subject to taxation specific to the business) and has unlimited
responsibility for all losses and debts. Every asset of the business is owned by the proprietor and all
debts of the business are the proprietor's. It is a "sole" proprietorship in contrast
with partnerships (which have at least two owners).
A sole proprietor may use a trade name or business name other than his, her, or its legal name. They
may have to legally trademark their business name if it differs from their own legal name, the process
varying depending upon country of residence.
Benefits of a Sole Proprietor Business
• Easier to set up and register
• Requires minimal amount of capital
• Lower cost in registering for government permits and licenses
• Minimal regulations and monitoring requirements
• You can register and run your business on your own
• You can enjoy the profits on your own

Disadvantages of a Sole Proprietor Business

• Risk and liability is shouldered by the owner (you) alone
• The loss is solely suffered by the owner (you)
• You manage and operate the business on your own which sometimes leads to exhaustion
• Shareholders, such as creditors or government agencies, can run after your own personal
assets since the business is you.

Where to Register a Sole Proprietor Business?

Here are the government agencies where you are required to register your Sole Proprietor business.

• Department of Trade and Industry

• Local Government Units where your business is located:
 Barangay
 Mayor’s Office
• Bureau of Internal Revenue
Partnerships
In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law
does not distinguish between the business and its owners. The Partners should have a legal agreement
that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future
partners will be admitted to the partnership, how partners can be bought out, or what steps will be
taken to dissolve the partnership when needed; Yes, its hard to think about a “break-up” when the
business is just getting started, but many partnerships split up at crisis times and unless there is a
defined process, there will be even greater problems. They also must decide up front how much time
and capital each will contribute, etc.

Advantages of a Partnership
• Partnerships are relatively easy to establish; however time should be invested in developing the
partnership agreement.
• With more than one owner, the ability to raise funds may be increased.
• The profits from the business flow directly through to the partners’ personal tax return.
• Prospective employees may be attracted to the business if given the incentive to become a
partner.
• The business usually will benefit from partners who have complementary skills.

Disadvantages of a Partnership
• Partners are jointly and individually liable for the actions of the other partners.
• Profits must be shared with others.
• Since decisions are shared, disagreements can occur.
• Some employee benefits are not deductible from business income on tax returns.
• The partnership may have a limited life; it may end upon the withdrawal or death of a partner.

Types of Partnerships that should be considered:

1. General Partnership
Partners divide responsibility for management and liability, as well as the shares of profit or loss
according to their internal agreement. Equal shares are assumed unless there is a written agreement
that states differently.

2. Limited Partnership and Partnership with limited liability

“Limited” means that most of the partners have limited liability (to the extent of their investment) as
well as limited input regarding management decision, which generally encourages investors for short
term projects, or for investing in capital assets. This form of ownership is not often used for operating
retail or service businesses. Forming a limited partnership is more complex and formal than that of a
general partnership.

3. Joint Venture
Acts like a general partnership, but is clearly for a limited period of time or a single project. If the
partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will
have to file as such, and distribute accumulated partnership assets upon dissolution of the entity.

Where to Register a Partnership?

Here are the government agencies where you are required to register your Partnership.
 • Securities and Exchange Commission
• Local Government Units where your business is located:
 Barangay
 Mayor’s Office
• Bureau of Internal Revenue

Corporations
A Corporation, chartered by the state in which it is headquartered, is considered by law to be a unique
entity, separate and apart from those who own it. A Corporation can be taxed; it can be sued; it can
enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders
elect a board of directors to oversee the major policies and decisions. The corporation has a life of its
own and does not dissolve when ownership changes.
• Minimumn of 15
• 50 years lifespan
What is a Corporation?
A corporation is a legal entity that is separate and distinct from its owner or incorporators. It has legal
rights and obligations similar to an individual. It can enter into contracts, loan, hire employees, pay
taxes, etc. It is formed by at least five (5) individual called incorporators.

The ownership of a corporation is divided into shares of stock. A corporation issues the stock to
individuals or other businesses, who then become owners or stockholders, of the corporation.

Advantages of a Corporation
• The risk and liability is limited only to the corporation. Owners are not personally liable.
• It is easy to increase capital through issuance of stocks to investors
• It can be pass on to different owners
• It can exist indefinitely
• It has the capacity to act independently similar to individual
• The management or decision making is shared by the board of directors, not sole individual.

Disadvantages of a Corporation
• More costly to set-up than a sole proprietor
• It is mandated by more government reportorial requirements and laws
• Higher capital requirement and operating cost
• Higher tax rates

Where to Register a Corporation?

Here are the government agencies where you are required to register a Corporation in the Philippines:

• Securities and Exchange Commission (By Laws, Certificate of Incorporation)

• Local Government Units where your business is located:
 Barangay
 Mayor’s Office
• Bureau of Internal Revenue
Dividends
A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits.
When a corporation earns a profit or surplus, it can re-invest it in the business (called retained earnings),
and pay a fraction of the profit as a dividend to shareholders. Distribution to shareholders can be in cash
(usually a deposit into a bank account) or, if the corporation has a dividend reinvestment plan, the
amount can be paid by the issue of further shares or share repurchase.

A dividend is allocated as a fixed amount per share, with shareholders receiving a dividend in proportion
to their shareholding. For the joint-stock company, paying dividends is not an expense; rather, it is the
division of after tax profits among shareholders. Retained earnings (profits that have not been
distributed as dividends) are shown in the shareholders' equity section on the company's balance sheet -
the same as its issued share capital. Public companies usually pay dividends on a fixed schedule, but may
declare a dividend at any time, sometimes called a special dividend to distinguish it from the fixed
schedule dividends. Cooperatives, on the other hand, allocate dividends according to members' activity,
so their dividends are often considered to be a pre-tax expense.

Dividends Payment
 Cash dividends are the most common form of payment and are paid out in currency, usually via
electronic funds transfer or a printed paper check. Such dividends are a form of investment
income and are usually taxable to the recipient in the year they are paid. This is the most
common method of sharing corporate profits with the shareholders of the company. For each
share owned, a declared amount of money is distributed. Thus, if a person owns 100 shares and
the cash dividend is 50 cents per share, the holder of the stock will be paid $50. Dividends paid
are not classified as an expense, but rather a deduction of retained earnings. Dividends paid
does not show up on an income statement but does appear on the balance sheet.

 Stock or scrip dividends are those paid out in the form of additional stock shares of the issuing
corporation, or another corporation (such as its subsidiary corporation). They are usually issued
in proportion to shares owned (for example, for every 100 shares of stock owned, a 5% stock
dividend will yield 5 extra shares).

 Stock dividend distributions are issues of new shares made to limited partners by a partnership
in the form of additional shares. Nothing is split, these shares increase the market capitalization
and total value of the company at the same time reducing the original cost basis per share.

 Stock dividends are not includable in the gross income of the shareholder for US income tax
purposes. Because the shares are issued for proceeds equal to the pre-existing market price of
the shares; there is no negative dilution in the amount recoverable.[5][6][7]

 Property dividends or dividends in specie (Latin for "in kind") are those paid out in the form of
assets from the issuing corporation or another corporation, such as a subsidiary corporation.
They are relatively rare and most frequently are securities of other companies owned by the
issuer, however they can take other forms, such as products and services.

 Interim dividends are dividend payments made before a company's Annual General Meeting
(AGM) and final financial statements. This declared dividend usually accompanies the company's
interim financial statements.
 Other dividends can be used in structured finance. Financial assets with a known market value
can be distributed as dividends; warrants are sometimes distributed in this way. For large
companies with subsidiaries, dividends can take the form of shares in a subsidiary company. A
common technique for "spinning off" a company from its parent is to distribute shares in the
new company to the old company's shareholders. The new shares can then be traded
independently.