Strongpreneur#Starting A Business
January 17, 2019 173
Strongpreneur#Starting A Business
January 17, 2019 173
For any businessman, one area of particular concern lies in the effective management of financial matters, the sources, and uses of funds.
Small businesses generally have a weak capital base since the majority of them are to draw money from the capital market as big companies do. Consequently, the only option is to borrow money and often times on unfavorable terms. Small businesses rely primarily on ‘own equity, bank financing, trade credit’ and lease financing to finance their business.
However, in recent years small-scale industries in Nigeria are being given increasing policy attention and financial incentives. But before going into sources of finances it is important that the potential investor has an idea of an estimated level of fund needed for his particular type of business. He needs to count how much money for his own (equity) he is prepared to put into the business before he thinks of borrowing and to seek for other financial assistance. This requires proper budgeting to help ensure that proper control and evaluative procedures are established in a business because it is a valuable tool for planning.
The budget can be prepared by small business to cover any period of time desired by the business owner, and the level of cost differs depending on the type of business.
The Definition and Functions of Finance
Finance which has evolved as a field of study and as one of the functional areas of management is concerned with the techniques of raising and allocation of funds with a view to maximizing the wealth of individuals, corporate bodies, communities, and nations.
The term funds which can also be substituted with finance refer to all forms of money or near monies and they include cash and non-cash assets with varying degrees of liquidity. The non-cash assets include debts, equity, and debt certificates.
Finance as a field of study is divided into public finance which deals with sources of government revenue and how it spends it, and private finance for individuals and corporations. Private finance involves raising of funds and their allocation within a firm in order to maximize shareholder’s wealth.
Finance Has Three Major Functions:
Definition and Scope of Investment
An investment can simply be defined as an allocation of existing economic activities to which funds are allocated.
Examples of these activities are:
Investment returns tend to have a positive correlation with investment risk. This means the higher the returns the higher the risks. The returns are more often than not, seen in terms of income or profit but there are other forms of return or reasons for making investments. Some investments are made for capital gain which implies capital appreciation. Some are for the security of capital while others are for social recognition and political or moral reasons.
The Relationship Between Finance and Investment
From the definition of finance and investment, it could be seen that the latter is part and parcel of the former. We have seen that investment decision is one of the major functions of finance, so we cannot separate investment from finance. That is why some major topics in financial management or theory of finance also feature in investment analysis. These topics include capital budgeting techniques, valuation of securities and portfolio management.
Identification of Investment Opportunities
An investment opportunity is characterized by the followings:
Investment opportunities can be identified from the following sources:
Certainty, Uncertainty, and Risk
Investment decisions are carried out under three environmental conditions these are the conditions of certainty, uncertainty, and risk.
The condition of certainty prevails where an investor has full knowledge of the ultimate outcome of an investment. He plans to make in the future this however a very rare conditions an investment in government treasury bills provides a good example of investment decisions made under this condition.
The condition of uncertainty exists when an investor is ignorant about the future outcome of an investment or the probability of its occurrence. Uncertainty is a subjective phenomenon because two or more individuals are unlikely to have identical views of the outcome or decisions taken under conditions of uncertainty.
The condition of risk exists between the two extremes, under it, an investor has incomplete knowledge as well as incomplete ignorance about the future outcome of an investment.
The risk is defined as “a situation where the parameters of the probability distribution of outcomes are known”. This suggests that under conditions of risk an investor knows the possible consequences of investment decisions, in other words, he knows the probability distribution of the future outcomes of investments.
Types of Risks
There are many factors which contribute to the variability of the possible returns of an investment. Some of the influences are external to the investor and are largely beyond his control; they are referred to as sources of systematic risk. Other influences are interns! And are to a large extent controllable, they are called the elements of unsystematic risk. It can, therefore, be said that investment risk is made up of two main parts the systematic and the unsystematic risk.
The systematic risk is the portion of the total variability of investment returns caused by factors that affect all investments. It is also called market risk. The factors that cause it to include economic and political factors.
The unsystematic risk is the portion of the total variability in investment returns caused by factors that are unique to the investment for the firm or industry.
The components of investment risk generally include the followings:
The riskiness of an investment proposal is the variability of its possible returns. The greater the magnitude of deviation from the expected value and the greater the magnitude of its occurrence the greater will be the risk of an investment. The more the values of the individual outcomes are clustered around the expected value the smaller the risk of investment.
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