TOPIC 5
Business Finance
Business finance draws from many
disciplines

Financial and investment relates closely to:
 Economics
 Accounting
 Law
 Quantitative
methods and
 Behavioral science
The role of Business Finance


The role is to raise funds from members of the
public and from other investors, and to invest those
funds.
Funds obtained from:
 Owner
of the business (the shareholders)
 Long term lenders
 Short term finance (provided by banks)
 Financial institutions
 Trade creditors
Businesses typically invest

Typically invest in
 Real
assets (lands, buildings, plants and trading stocks)
 Financial assets (making loans, buying shares, other
business)
Crucial importance to business

The decision of:

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This decision is crucial in determining the business will success or
failure. This is because:
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Types and quantity of finance to raise
Choice of investment to be made
Such decisions involve financial amounts
Once made, such decisions are not easy to reverse. So the business will
committed in the long term to the selected type of finance or investment.
Business Finance:
is the study of how these financing and investment decisions should
be made in theory, and how they are made in practice.
Types and Source of Finance
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Every business activity (whether new or currently
operated) requires a sufficient source of finance.
To ensure the company able to proceed with its
daily operation.
should be able to find suitable sources of finance
that will not burden the company.
Source and Type of Finance

In determine the source and type of finance,
questions need to be asked:
 How
much RM needed?
 When to use? And How long?
 From where RM can be obtained? Whether internally
or externally?
 For what RM needed?
 What ids the company capacity?
 Is the finance obtainable? Finance Cost?
Definition of types and Source of
Finance

Type of Finance:
Define as tools or instrument that is use by the company in
sustaining the capital expenditure or daily operation of the
company.
 It can be short term, medium term and long term.


Source of Finance
Define as financial institution (bank) or individual or
company (license financing company) that offer various
types of financing.
 It can be obtained from either in the company itself or
outside of the company

Why need finance?

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The need of finance shall depend on the establishment of the
company. Example: New company need more financing than the
established company.
New establish company need the finance to support the project
operation cost (buy machine and equipment; buy office and
renovation; pre-operation cost: registration fee, license, insurance,
deposit, electric cable etc)
Well established company need the finance to
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buy raw material; pay business overhead; marketing cost; pay existing
loan etc.
To grow the business operation (extension of factory; hi tech new
machine, emply more staffs etc.)
When there is expenditure, Finance is needed
Master Budget

Preparation of master budget
Do detail research on marketing
 Do sales forecast for certain period of time



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Master budget covers all investment aspects and
expenditure for company operation
Master budget = Profit plan
2 main category for master budget:

Operation Budget


include sales budget, production cost and all expenditure in
resulting to budgeted net income
Financial Budget

Include capital budget, cash budget and pro forma or financial
statement forecast
Typical Master Budget Components
(for production company)

Operation Budget
Sales budget
 Last stock budget
 Production budget

Material budget
 Labour budget
 Factory overhead budget
 Manufactured cost
budget

Sales expenditure
budget
 Management budget
 Budgeted net income


Financial Budget
Capital budget
 Cash budget
 Pro forma financial
statement
 Others

Types and Source of Finance
Short term finance
1.

< 1 year payback period
Medium term finance
2.

Between I year to 5 years payback period
Long term finance
3.

> 5 years payback period
Government special funding
4.

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‘Skim Jaminan Prinsipal Baru’ manage by Credit Gurantee Corporation
Export credit refinancing manage by banks that join this scheme
Loan for workshop, machine and plants by ‘Bahagian Ekonomi Desa’
Venture Capital (by instituition, company or individual)
5.

Investor becomes one of the managing directors in the company for certain
period of time
Source of Finance

Internal source of financing
Sources of finance that can be obtained within the company
 Also known as spontaneous financing
 Limited


External source of financing
Sources of finance that can be obtained outside of the
company (i.e.: merchant bank, finance institution, supplier,
government and investors)
 Financial cost from government agencies less expensive than
others.

Payback
Period
Short Term
Medium Term
Long term
Source of Finance
Internal
External
Salary accrual
Tax accrual
Reduction of work capital
Supplier credit
Liquidity Loan
Overdraft
Bankers Guarantee
Discount of Bills
Leasing of non receivable account
Credit Letter
Depreciation allocation
Sales of fixed assets
Leasing
Hire purchase
Term Loan
Profits
Capital Injection
Long term loan
Transfer Loan
Sell shares
Internal Short Term Finance
Accrual of Salary
Accrual of Taxes
Reduction of revolving capital
Accrual of Salary and Taxes

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Can be used for spontaneous financing
Usually salary is paid at end of the month and tax
is paid for the next following year
Its free financing BUT company has no absolute
authority to control this source of financing
Company must ensure that sufficient amount
allocated during the salary day or tax pay day
Otherwise, company may suffer
Reduction of revolving capital

Budget allocated for revolving capital can be use
for internal financing sources if:
 Extra
allocation
 Capital value can be reduced
 Example:
company no longer need a lot of staff because
the use of efficient machineries with less operation cost

Internal Medium Term Financing
Depreciation allocation
Selling of company assets
Depreciation allocation

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Non cash allocation – reduce the taxable amount of
company income
Does not involve any cash flow
Depreciation value is deducted from book value of all
fixed assets except for land asset.
Example: Company fixed asset = RM50,000 and
depreciation of asset value is at 20% /year.
Therefore, depreciation = RM50,000 x 20%
= RM 10,000/year
This RM10,000 stated in the company account can be
an important internal financing sources.
Selling company assets

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Sell off extra assets and unproductive assets
The money can finance more important purpose
Recommended to sell off assets that not contribute
to company profits
Internal Long Term Financing
Profits
Capital Injection
Profits

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Company’s profit can be used as internal main
source of financing
Not use for paying dividend to shareholder or not
withdraw by the owner
Profits that are not taken will be reinvested in the
company
Capital Injection


Capital injection by the owner of company
Can be done when company faced difficulty in
obtaining loan or high interest loan
External Short Term Financing
Sources
Supplier credit
Liquidity Loan
Overdraft
Bankers Guarantee
Discount of Bills
Leasing of non receivable account
Credit Letter
Credit from Supplier
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Frequent use of short term finance
Usually, supplier give 30, 45 or 60 days credit period
to the trustable client
New establish company may have difficult to get this
privilege
If the company get credit facility for 30 days, this
means company do not have to pay until the 30th day
Using this benefit, company able to do sales
Example: company gets credit RM100/day, so in 1
month company gets RM100x30=RM3000 (finance
from supplier)
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Usually, supplier will give discount if the client can
payback within the specified period.
Example: discount 2/10, nett 30.
If company buys material of RM50,000 and gets
credit 2%. If he can payback the credit within
10days. He can saves RM1000.
The discount valid for 10 days only.
Liquidity Loan

Line of credit

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Company can withdraw up to maximum limit
Example: line credit of RM50,000 for a year. Every withdrawal,
company is required to signatories promissory note.
Interest is imposed from the day of the withdrawal until payment
is made or the dateline of the agreement
Interest will be imposed based on the total amount and the
payback period.
Revolving credit

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Penalty is imposed to unusable balance.
Example: Company gets RM50,000 credit facility at 10% rate
peryea. If company use only RM40,000,normal interest is
imposed on the total but the balance will gets penalty.
Usually 0.25% penalty.
Overdraft
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Given by banks to current account users
Enable the users to withdraw more than the balance
in his/her account.
Interest and payback period will be determined by
banks
Frequent use for short term financing to supports the
required company temporary cash.
Bank Guarantee
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Given to selected client
Company must have certain amount of cash in the
account (usually fixed deposit)
Low interest
Guarantee period depends on the agreement
between banks and the client.
Finance via non receivable account

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Discount of bills
Leasing of non receivable account
Factoring
Discount of Bills
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Offer credit sales
The bills is certify by the buyers
Using the bills, company can discount the bills at any
merchant banks or license finance company
Company should get agreement from the respective
parties to use this facility
Leasing the non receivable account

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Lease the non receivable account to financial
institution for immediate loan.
Company can gets loan of 60% to 70% of the
value of non receivable account.
However, if the invoice is not settle by the company’s
client, bank has the authority to get the payment
from the company.
Factoring

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Facility and agreement offered by bank or
factoring company
Involve commission, interest rate and reserve value
Most expensive method of financing
Letter of Credit

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Usually for import and export business
Importers apply letter of credit from the bankers as
a guarantee payment to exporters
Trust Receipts

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Usually used together with letter of credit
Enable the importers to gain temporary rights on the
imported products
With this rights, the company can sell the product and
order his client to make payment directly to the bank
Bank will receive all payments on behalf of the
importers and debited the company’s account for
payment to the exporter’s bank
This facility gives ample time to the importers to sell the
products and import them without having to make full
payment
enable the company to import more stock
Banker’s Acceptance

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To accommodate the import and export financial
requirements
Can be used for selling or buying products
The client is require to state the purpose of the
business and proposed methods of repayment in th
edocument
The bank will certify the document if the bank
agrees with the terms
Low discount rate
Issued by merchant banks only
External Medium Term Financial
sources
Hire and Purchase
Leasing
Term Loan
Hire Purchase
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Under the Hire purchase act 1967
Financing equipments, electrical equipments,
machineries, motor vehicle etc.
Buyers is require to pay down payment of 30% 40% of the purchase products
Buyers need to signatories an agreement of hire
purchase
High interest
Leasing
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No need to prepare high capital to buy fixed asset
during initial stage of business
Agreement between buyer and owner of the asset.
Involve leasing duration, interest of repayment term
Usually, leasing period is between 3 to 5 years
2 categories:

Operating lease


The asset is used for certain operation period but not for the
entire leasing period.
Financial lease

The asset can be used as long as the leasing period. Client cannot
terminate leasing earlier than the agreed period.
Term Loan

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Medium and long term loan depend on the agreed
repayment term between 3 to 10 years or more
Opportunities to the loaners to schedule the suitable
payback payment according to the affordability of
the company’s financial.
Usually used in financing the payment of purchasing
fixed assets ( machine, buildings, plants, extension
of factory, renovation etc)
2 types of term loan in Malaysia
 Leasing
Loan (Mortgage, Debentures)
 Non Leasing Loan (require selected guarantor)
External Long Term Finance Sources
Long term debt
Convertible debt
Long Term Debts
Similar to term loan but different in size and loan period.
Types
1.
Equipment loans
2.
Syndicated loans
3.
Business acquisition loans
4.
Asset-based loan
5.
Expansion loan

Sources :
1.
Commercial bank
2.
Special financing government agencies
3.
Private finance institution
4.
Merchant bank
Convertible debts

Offered by big companies to convert the loan with
company shares
Selling shares

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Sell company shares to others
Suitable methods if the interest loan is high during
the time
No need to pay dividend to the sahreholders
Therefore profits can be reinvested in the company
Government Special Finance
Ministry/Agency
Fund/Finance Scheme
Kementerian
Pembangunan
Usahawan
Skim Pembiayaan Francais
Skim Banyuan Pembangunan Francias
Tabung Ekonomi Kumpulan Usahaniaga(TEKUN)
Skim Modal Asas
Pembiayaan secara Islam
Skim Galakan Usahawan
Tabung Pembangunan Asean-Jepun(AJDF)
Tabung Usahawan Siswazah (TUS)
Perlaburan Ekuiti Perbadanan Nasional Berhad
Kementerian
Perdagangan
Antarabangsa&
Industri (MITI)
Dana Pengkomersilan R&D
Dana Perolehan Teknologi (TAF)
Skim Penyusunan Semula Industri (IAF)
Skim Pinjaman Mudah untuk Modenisasi dan Automasi IKS
Skim Pinjaman Mudah untuk Meningkatkan Kualiti
Tabung Bantuan Teknikal Industri(ITAF)
Pakej Kewangan untuk IKS (PAKSI)
Skim Geran IT
Ministry/Agency
Fund/Finance Scheme
Kementerian Kewangan
Tabung Perfileman
Tabung Penerbitan
Dana IKS
Bank Negara Malaysia
Tabung Usahawan Baru (TUB)
Tabung Perkapalan
Tabung Industri Bumiputra(TIB)
Tabung untuk Makanan
Tabung Industri Kecil and Sederhana
Pembiayaan Semula Kredit Eksport
Agensi-agensi Lain
Perbadanan Usahawan Nasional Berhad
Amanah Ikhtiar Malaysia
Skim Pembiayaan Ikhtiar Nelayan
Skim Pembiayaan Ikhtiar Ibu Tunggal
Tabung Kumpulan Wang Amanah
Pembangunan Ekonomi Belia
Skim Geran Penyelidikan & Pembangunan
Koridor Raya Multimedia
References
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
www.malaysia.gov.my
Mohamed Dahlan Ibrahim, 2002. “Pengurusan
Kewangan Perniagaan Kecil dan Sederhana”,
Prentice Hall