BUSINESS FINANCE:

INTRODUCTION:
The functions of
Financial Manager
1:MANAGERIAL
FUNCTIONS
a) Investment of Long-term asset-mix
decisions
• These decisions (also referred to as capital
budgeting decisions) relates to the allocation
of funds among investment projects.
• They refer to the firm’s decision to commit
current funds to the purchase of fixed assets
in expectation of future cash inflows from
these projects. Investment proposals are
evaluated in terms of both risk and expected
return.
b) Financing decisions
• Financing decision refers to the decision
on the sources of funds to finance
investment projects. The finance
manager must decide the proportion of
equity and debt.
• The mix of debt and equity affects the
firm’s cost of financing as well as the
financial risk. This will further be
discussed under the risk return trade-off.
c) Division of earnings decision
• The finance manager must decide whether the
firm should distribute all profits to the
shareholders, retain them, or distribute a portion
and retain a portion.
• The earnings must also be distributed to other
providers of funds such as preference
shareholder, and debt providers of funds such as
preference shareholders and debt providers.
• The firm’s dividend policy may influence the
determination of the value of the firm and
therefore the finance manager must decide the
optimum dividend – payout ratio so as to
maximize the value of the firm.
d) Liquidity decision
• The firm’s liquidity refers to its ability to meet
its current obligations as and when they fall
due. It can also be referred to as current
assets management. Investment in current
assets affects the firm’s liquidity, profitability
and risk.
• The more current assets a firm has, the more
liquid it is. This implies that the firm has a
lower risk of becoming insolvent but since
current assets are non-earning assets the
profitability of the firm will be low. The
converse will hold true.
Other Routine
Functions:

a) Supervision of cash receipts and

payments
b) Safeguarding of cash balance
c) Custody and safeguarding of
important documents
d) Record keeping and reporting
THE
OBJECTIVES/GOALS
OF A BUSINESS
1. Profit maximization – This is a
traditional and a cardinal objective of a
business. This is so for the following
reasons:
• To earn acceptable returns to its
owners. (i.e. Must not be less than
bank rates + inflation + risk)
• So as to survive (through plough
backs)
• To meet its day to day obligations.
2. To maximize the net worth i.e. the
difference between total assets and total
liabilities. This is important because:
It influences company’s share prices.
It facilitates growth (plough backs).
It boosts the company’s credit rating.
This is what owners claim from the
company.
3. To maximize welfare of employees –
Happy employees will contribute to the
profitability. This includes:
Reasonable salaries
Transport facilities
Medical facilities for the employee and
his family
Recreation facilities (sporting facilities).
4. Interests of customers – the company
has to provide quality goods at fair prices
and have honest dealings with customers.
5. Welfare of the society – the company
has to maintain sound industrial relations
with the society:
• Avoid pollution
• Contribution to social causes e.g.
Harambee contributions, building clinics
etc.
THE RISK-RETURN
TRADE-OFF
• Most financial decisions involve alternative
courses of action. The alternatives have
different returns and risk. For example, should
we buy a replacement machine now or should
we wait until next year, should we set the debt-
to-assets ratio at 20%, 40% or any other ratio?
• The higher the risk on any decision, the higher
the required return to compensate for this risk.
The relationship between Return and Risk can
be expressed as follows:
• Required Rate of Return = Risk-free rate +
Risk premium.
TYPES OF BUSINESS
ORGANISATIONS

1. Sole proprietorships
2. Partnerships
3. Joint stock companies or
Public/Private limited companies.
SOLE
PROPRIETORSHIP
Characteristics
• Accounts do not have to be audited
• It caters for personal attention of customers
• Limited to such finances as:
– Personal saving
– Loans from relatives & friends
– Short-term loans from banks.
– Trade credit from suppliers.
• Less legal formalities to form.
• Highly flexible (and adaptable)
• Highly flexible decision-making process.
Other Advantages
• Sole trade usually skilled in the
business (good for competition)
• Profits motivates owners
• High supervision of employees
• Low bureaucracy (less time wasted)
Disadvantages
• Short economic life therefore does not
attract long-term finance, therefore,
limited expansion and growth.
• Unlimited liability
• Success depends on ability or
judgement of owner
PARTNERSHIPS

Definitions
• “The relationship, which exists between
persons carrying on a business in
common with a view of profit.”
Formation of a partnership
1. Orally
2. Actions of the person concerned
3. Agreement in writing.
4. By a deed i.e. an agreement under seal.
Types of Partners

1. General Partners – Unlimited liability

and active in participation in partnership
activities.
2. Limited partners – Limited liability and
does not participate in the management of
partnerships.
3. Sleeping partners – has no active role,
nevertheless, such a partner will have
contributed to the capital of the partnership
business and will thus share in the profits
although at a lower proportion in most
cases.
A partnership deed constitutes a legal
contract among the partners. The articles
of partnerships must contain eleven
clauses.
1. Nature of business.
2. Profit sharing ratio
3. Capital contribution
4. Rates of interest on both capital and
drawings
5. The provision for proper accounts and
their audit.
6. Powers of each partner.
7. Grounds of dissolution.
8. Determination of Goodwill
9. Determination of amount payable to
outgoing partners.
10. Expulsion procedures.
11. The arbitration clause.
JOINT STOCK COMPANIES
• Initiators contribute to the capital base of
such companies through the purchase of
shares of such companies. These
companies are governed by the
Companies Act (Cap. 486) of 1948.
• Such must be registered with the
Registrar of Companies after which it is
issued with a certificate of incorporation
which indicates the Birth of the company.
Advantages

 Limited liability.
 Perpetual existence (or going concern) which
allows the company to make strategic plans to
raise finance in Capital Markets more easily.
 The company can own assets and incur
liabilities on its own accord.
 Title to share is freely transferable which
makes these shares more of an investment.
 Exception – Private limited companies whose
transfer of shares needs the consent of its
members.
 Shares may be used as securities.
 Large sources of finance.
Disadvantages

• Loss of secrecy – poor competition

• Many formalities in forming the
company
• Heavy initial capital outlay.
• Difficult to reconstruct the capital
• Bureaucracies especially in decision
making processes.
• Inflexibility and thus low adaptability.
SOURCES OF FUNDS

• Equity capital
• Debt finance
• Bills of exchange
• Lease finance
• Overdraft finance
• Plastic money – Debenture finance
• Venture capital
•
TYPES OF FINANCING:

1.) Personal Financing.

2.)Equity Financing.

3.)Debt Financing.
1.) Personal Financing.

a)Personal Funds:
• Involves both financial resources
and sweat equity.

• Sweat equity represents the value

of the time and effort that a founder
puts into a firm.
b)Friends and Family:
• Often comes in the form of loans or
investments, but can also involve
outright gifts, foregone or delayed
compensation, or reduced or free rent.
c)Bootstrapping:
• Finding ways to avoid the need for
external financing through creativity,
ingenuity, thriftiness,
• cost-cutting,obtaining grants, or any
other means.
EXAMPLES OF
BOOTSTRAPPINGMETHODS:
• Buy used instead of new equipment
• Coordinate purchases with other
businesses
• Lease equipment instead of buying
• Obtain payments in advance from
customers
• Minimize personal expenses
• Avoid unnecessary expenses, such as
lavish office space or furniture

• Buy items cheaply, but prudently,

through discount outlets or online
auctions such as eBay,rather than at
full-price stores
• Share office space or employees with
other businesses
• Hire interns
• Legend has it that Steve Jobs and
partner Steve Wozniak sold a
Volkswagen van and a
• Hewlett-Packard programmable
calculator to raise $1,350, which was
the initial seed capital for Apple
Computer.
SOURCES OF EQUITY
FUNDING
• The primary disadvantage of equity
funding is that the firm’s owners relinquish
part of their ownership interest and may
lose some control. The primary
advantage is access to capital.
• In addition, because investors become
partial owners of the firms in which they
invest, they often try to help those firms
by offering their expertise and assistance.
• Unlike a loan, the money received from
an equity investor doesn’t have to be
paid back. The investor receives a
return on the investment through
dividend payments and by selling the
stock.
The three most common forms of equity
funding:
Business Angels:
• Business angels are individuals who
invest their personal capital directly in
start-ups.
• The term angel was first used in
conjunction with finance to describe
wealthy New Yorkers who invested in
Broadway plays.
• The prototypical business angel, who
invests in entrepreneurial start-ups, is
about 50 years old, has high income
and wealth, is well educated, has
succeeded as an entrepreneur,
Venture Capital
• Venture capital is money that is
invested by venture capital firms in
start-ups and small businesses with
exceptional growth potential.
• Venture capital firms are limited
partnerships of money managers who
raise money in “funds” to invest in start-
ups and growing firms.
• The funds, or pools of money, are
raised from high net worth individuals,
pension plans,university endowments,
foreign investors, and similar sources.
• The investors who invest in venture
capital funds are called limited
partners.
• The venture capitalists, who manage
the fund, are called general partners.
• Once a venture capitalist makes an
investment in a firm, subsequent
investments are made in rounds (or
• stages) and are referred to as follow-
on funding.
• An entrepreneur should ask the
following questions and scrutinize the
answers to them before accepting
funding from a venture capital firm:
• Do the venture capitalists have
experience in our industry?
• Do they take a highly active or passive
management role?
• Are the personalities on both sides of
the table compatible?
• Does the firm have deep enough
pockets or sufficient contacts within the
venture capital industry to provide
follow-on rounds of financing?
• Is the firm negotiating in good faith in
regard to the percentage of our firm
they want in exchange for their
investment?
• Along with traditional venture capital,
there is also corporate venture
capital.
• This type of capital is similar to
traditional venture capital except that
the money comes from corporations
that invest in start-ups related to their
areas of interest.
Other Sources of Debt
Financing
• Vendor credit (also known as trade
credit) is when a vendor extends credit
to a business in order to allow the
business to buy its products and/or
services up front but defer payment
until later.
• Peer-to-peer lending is a financial
transaction that occurs directly
between individuals or “peers.”
Prosper, which is the best known
peer-to-peer lending network, is a Web
site where individuals can buy loans
and request to borrow money.
• Crowdfunding is the modern-day version
of “passing the hat.” Crowdfunding sites
allow entrepreneurs to create a profile, list
their fund-raising goals, and provide an
explanation of how the funds will be used.
• Individuals can then pledge money, in
exchange for some type of amenity, like
being one of the first 100 people to try the
company’s product, instead of equity or a
promissory note.
Example: Kickstarter
• The following suggestions can help
entrepreneurs avoid creating
disastrous situations when raising
money using crowdfunding:
• Leasing
• A lease is a written agreement in which
the owner of a piece of property allows
• an individual or business to use the
property for a specified period of time
in
• exchange for payments.
Strategic Partners:
• Strategic partners are another source of
capital for new ventures.Indeed,strategic
partners often play a critical role in
helping young firms fund their operations
and round out their business models.
• Biotechnology companies, for example,
rely heavily on partners for financial
support, as related in the “Partnering for
Success”
• Biotech firms, which are typically fairly
small, often partner with larger drug
companies to conduct clinical trials and
bring products to market. Most of these
arrangements involve a licensing
agreement.
Sources of
entrepreneurial finance in
Kenya
1. Angel Networks
• Angel Networks are financiers who will
first have to believe in your business
idea as a viable one. They’ll then
provide funding, training and be part of
the day to day business activities to
ensure the startup grows. So far
Invested Capital remains the well-
known angel network for startups.
2. Crowd sourcing.
• This is where you get several lenders
at one place who will first have to be
convinced by the viability of your
startup business. The most
popular crowd-sourcing platforms
are Zidisha and Kiva.
• Others include Cheetah fund, Wakibi,
Kickstarter, Indiegogo, Appbackr,
Quirky AfricInvest, Agrivie Fund,
Invested Capital, Leapfrog, Eva Fund,
Fasini, Enabilis and Crowd funder.
3. Micro Leaders:
There are hundreds of micro-finance
institutions in Kenya both credit only and
deposit taking. Micro lenders have a good
history of uplifting start-ups compared to
commercial banks in Kenya. Visit any and
give them your startup idea. Some
examples include:U&I microfinance,
Faulu,Imarika,Century, Uwezo, Youth Fund,
• Women Enterprise fund, Zawadisha,
Sumac, Letshego kenya, Opportunity
kenya, ECLOF kenya, Milango
microfinance, Musoni MFI, Bimas MFI,
Plan international,Yehu microfinance,
Riverbank,Ufanisi-AFR, Rupia MFI,
Kopo kopo, Unaitas, Juhudi kilimo MFI,
Window MFI, Craft Silicon, Planet
Rating, Taifa MFI and Greenland
Fedha.
4. Youth Enterprise Development fund
• This is arguably the most renowned of
our government’s initiatives. Sadly this
is because it has been tainted by
scandals. That notwithstanding, it’s a
core part of realizing Vision 2030. The
Youth Fund was established in 2006
with the aim of availing opportunities to
Kenyan youths.
• The government eyes fostering
entrepreneurship as a tool in dealing
with youth unemployment. The fund is
open to those aged between 18-35
years old.
5. Uwezo Fund
• Mirroring the Youth Fund is Uwezo
Fund. Only that it has a much wider
scope. It is an empowerment program,
created in 2013, hoped to benefit
women, youth and persons with
disability. It offers capital and mentor-
ship to entrepreneurs with the primary
aims of achieving gender equality and
eradicating poverty.
• Its loans range from sh.50,000-500,000 at
a time.
6. Women Enterprise Fund
• This initiative is tied to the Ministry of
Gender. From the name it is evident who
it targets. Women Enterprise Fund not
only offers credit to women entrepreneurs
but also markets goods and services
produced by them. Keeping in line with
the social motivation of these government
funds; it aims to make women financially
stable.
7. ICDC
• The Industrial and Commercial Development
Corporation(ICDC) is a 60 year old soul.
Nevertheless, it still plays an important role in
our Vision 2030 quest. It avails funding for
Kenyan entrepreneurs through medium and
long term financing. The main task of ICDC is
to prop up industrial development in Kenya. A
key but poorly sold sector to the public. ICDC
offers venture capital, joint-ventures,
commercial loans and asset financing.
8. Kenya Industrial Estate:
Like ICDC, KIE is joined to the Ministry of
Industrialization at the hip. The Kenyan
Government is aware that
industrialization is the key to reaching
developed status. It is little wonder then
that KIE is driven to indigenize industry in
Kenya.
• It provides industrial sheds, subsidizes
credit and improves entrepreneurial
skills of small to medium size
enterprises. KIE offers Jua Kali sector
loans of between sh.100, 000-500,000
and to medium enterprises it offers up
to 14 million shillings.
9. Industrial Development Fund
• Industry is a capital heavy venture thus
excuse the government’s many Development
Finance Institutions. Industrial development
fund has been in existence for a long time just
like its sister institutes. Established in 1973, it
offers secured loans for medium and large
industrial enterprises. The loans come in
typical variety; be it project and asset financing
or even hire purchase. IDB will assist you
establish or expand your business so go for it.
10. Agriculture Finance Corporation
• It’s logical to have an agriculture
specific fund. After all, agriculture is still
the backbone of our lauded diversified
economy. AFC was initially set up to
enable transfer of land to Kenyan
farmers in post-independence Kenya.
Today it offers credit to the agricultural
entrepreneurs among us.
11. Venture Capitalists
These are financiers who will listen to
your start-up business idea and evaluate
its viability. If they are fully convinced by
your idea, they’ll provide the funding and
be part of the ownership (a percentage of
your business will belong to the venture
capitalist) but will never be involved in
the day to day activities of the business.
• Examples of venture capitalists in
Kenya include among others; Nairobi
Garage, Seed Capital Investment,
Savannah Fund, Westpac, Growth
hub, Grofin, Monsanto Fund and
Jacana.
12. Financial foundations
• Sometimes foundations can give
funding to startup businesses in form of
interest free loans, grants or prizes.
Some foundations have known dates
when they give out loans, grants or
hold competitions while others don’t
have. You must be on the look always
never to miss any announced dates set
for competitions. Ongoing now is the.
• Examples of other foundations include
;Safaricom foundation, Chandaria
foundation, Citi foundation, MasterCard
foundation, Coca-cola foundation, Aga
Khan foundation, Ford foundation, The
Tony Elumelu, Micro loan, Virgin unite
and African Leadership foundation.
 Thank you!

Any Questions?