1.0	INTRODUCTION

In this unit, you would identify the key role of finance as it is embedded in the functions of the Finance Manager. The central role of the finance manager will be explained to emphasis its utility as a pivot of management functions.

2.0	OBJECTIVES

At the end of this unit, you should be able to:

identify the key roles of finance in an enterprise

state the duties of a Finance Manager

Explain the interdependent relationship of finance with other sections of a business organisation.

3.0	MAIN CONTENT

3.1	Central Role of Finance Manager

As could be deduced from Unit 1 of this Module, the finance manager’s duties include:

Budgeting

Raising funds

Selecting and evaluating projects

Planning the marketing and pricing strategies.

The finance manager is always supposed to be a specialist/professional, with knowledge of many areas of finance. The breadth of finance


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function is vast that in many business organisations, it includes human resources from several departments of management.

3.2	Crucial Role Played by Finance Staff

As has been spelt out in Unit 1 of this Module, Finance is concerned with the flow of fund, which is the life blood of the business. The crucial role played by finance staff is recognised as vital and they are rewarded accordingly.

Clearly, skill is an extremely valued asset in managing an enterprise. It entails the techniques through which an organisation obtains finance for the business and the usage of the finance to assure the business as a going concern and successful. The use of the finance to establish the enterprise successfully, maintain, sustain and enable it grow into a colossus requires financial dexterity which the finance manager and the staff are at the centre.

SELF ASSESSMENT EXERCISE 1

State the key roles of a finance manager.

3.3	Corporate Organisation

The finance function to staff and departments will be dependent upon the size and magnitude of the business organisation. The larger the organisation, the greater is the degree/level of specialization of tasks and duties required.

The smaller business consolidates many duties in fewer sections and units. Generally however, the head of finance – Director of Finance, Chief Finance Officer, as it may apply, is the treasurer or any other designation like the controller of finance or general manager finance etc.

As expressed in the highlighted functions of an enterprise, the treasurer supervises or participates in the functions of finance. The treasurer oversees or manages the enterprise’s liquid assets, liabilities, payroll and cashier activities, credits and collections, forecasting, capital budgeting and investment and financing. (All these will be discussed later in other units and other financial management courses in the programme as appropriate).

The Treasurer is an active participant in long -range financial planning. Practically, the task of finance is specifically assigned to finance staff, but non-finance staff frequently partakes in the decision-making process.
 




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For example:

i)	Cost recording and control are accounting and finance function, whereas the determination of standard costs and the responsibility for correcting any variation(s) from realizable standards is with operations department.

ii)	In the same state, sales department in collaboration with marketing consultant (hired by the enterprise) estimate the level of sales for various pricing/costing policies. This data is then utilized in financial planning to estimate profit levels for each price structure.


The framework and responsibility for pricing/costing policy are jointly determined by the marketing/sales department and financial planning staff.

Planning funds for operations and capital budgeting is also a joint decision-making process conducted by the production, sales and finance personnel.

iii)	The need for a new machine might be determined by the production department which makes its request to the head of division/department etc, (who is a part of financial management team).

If the expenditure is not greater than the estimated value example N20,000 the decision as to whether to acquire the machine would be made at this point. If the outlay is above that amount, the requisition would be submitted for approval to business organisation with head of finance recommendation and supporting information as onus of proof.

This will then follow the laid-down policy of the enterprise – to approve or disapprove the proposal; based upon data relating to projected production/sales and the available funds to finance the investment.

SELF ASSESSMENT EXERCISE 2

Give one example of how finance inter-depends on other sections/units for implementation of a business.

3.4	Finance Functions in an Enterprise

The functions of finance manager are condensed into the following:

1)	Financing and investment;



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2)	Accounting and control;

3)	Forecasting and long-run planning;

4)	Pricing, and
5)	Others.

They are discussed below.

1.	Financing and Investments: Supervising the firm’s cash and other liquid holdings, raising additional funds when required and investing funds in projects for adequate returns to keep the enterprise going as a concern.

2.	Accounting and Control: Maintaining financial records, controlling financial activities; identifying deviations from planned and efficient performance and managing payroll, tax matters, inventories, fixed assets and computer operations.

3.	Forecasting and Long-Run Planning: Forecasting costs, technological changes, capital market conditions, funds needed for investment purposes, returns on proposed investment projects and demand for the organisation’s product etc.

4.	Pricing: Determining the impact of pricing/costing policies on profitability.

5.	Other Functions: Credit and collection, insurance and incentive planning (pension, etc.)

4.0	CONCLUSION

In this unit, we have attempted to establish the financial manager as a key person in the business organisation, frequently rising to the top in an enterprise as his role is central, dynamic and important.

5.0	SUMMARY

In summary, this unit is made up of the central role of the finance manager in a business organisation, the crucial role of finance staff, and the interdependence of finance unit/department with others in a corporate organisation and the highlights of finance function in an enterprise.


6.0	TUTOR-MARKED ASSIGNMENT

1.	What are the central roles of finance manager in a business organisation?

2.	Discuss briefly the duties of a treasurer in an enterprise.
 



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7.0	REFERENCES/FURTHER READING

Jones, G. L. (1976). Financial Measurement for Managers London Edward Arnold (Publishers) Ltd

Pandey, I. M. (2005) Financial Management (9th edition) India, New Delhi: VIKAS Publishing House PVT Ltd

Schall, L. G. & Haley, C.W. (2002) Introduction to Financial Management. New Delhi: TATA McGraw-Hill Publishing Co Ltd.


Oyekanmi, Abiodun (2003). Basic Concepts and Applications in Business Finance Lagos Nookia Ventures Ltd















































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MODULE 2

Unit 1	Finance Goals and Objectives in a Firm

Unit 2	The Role of Financial Managers

Unit 3	Introduction to Financial Analysis

Unit 4	Profit Planning and Pricing

Unit 5	Introduction to Working Capital Management








UNIT 1	FINANCE GOALS AND OBJECTIVES OF A FIRM

CONTENTS

1.0	Introduction

2.0	Objectives

3.0	Main Content

3.1	Profit Maximization

3.2	Wealth Maximization

3.3	Financial Goal, Firms Mission and Objectives

4.0	Conclusion

5.0	Summary

6.0	Tutor-Marked Assignment

7.0	References/Further Reading

1.0	INTRODUCTION


In this unit, we will be shown the financial goal of a firm which is shareholders’ wealth maximization as reflected in the market value of business equity - owners’ contributions/shares.

2.0	OBJECTIVES

At the end of this unit, you should be able to:

identify financial goal of a business firm

discuss profit maximization

Explain wealth maximization.
 






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3.0	MAIN CONTENT

3.1	Profit Maximization

In the market economy of a country, prices of goods and services are determined by the forces of demand and supply. Firms produce goods and services desired by the community in which they serve as efficiently as possible.

It is worthy of note that a business organisation’s financing and investment decisions remain continuous in response to the business activities and circumstances around them.

Price mechanism (system) is a vital organ of a market economy, showing the goods and services required in the community. When the goods and services are in high demand, their prices will rise. This will

give rise to higher profit margin. Other Firm with similar or complementary goods and services will intensify competition in order to have a share of the market. The equilibrium price will eventually be reached where demand and supply match.

Business firms are frequently profit oriented with maximization of profit as the proper objective.

What is Profit?

It may be expressed as the amount a business can spend in a period and be as “well off” at the end of the period than as at the beginning. In this statement, there are limitations and complications like:

What determines the “well off” of a business (the size and magnitude of activities)?

Is it maximising total profit or rate of profit? Other problems are risk associated with a project

Profit maximization neglects differences in the degree of risk associated with different income streams.

Risk is the expected variability of the income flow.

This is why Pandey (2005) summarised profit maximization limitations as follows:

It is vague

It ignores the timing of returns

It ignores risk.



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Profit maximization objective is not always clear. It may not specify period – short, medium or long term profit – profit before or after tax; total or relative profit; total operating profit or accruing profit.

SELF ASSESSMENT EXERCISE 1

What is profit maximization limitation?

3.2	Wealth Maximization

This is one of the financial goals of a business enterprise. Yes! You should recall in our previous study that Firm’s management controls the firm, but the shareholders/entrepreneur are the owners of the business Firm. It is then incumbent on the owners to specify the business concern’s primary objective to maximize the utility of the entrepreneurs/owners.


Apart from profit making and maximization, the investors (the contributors to the capital base) wealth should be maximized through the manner of profit sharing.

The finance manager should use it as a basis for making decisions concerning:

Survival

Growth of the business and the owners’ delight too.

The financial thrust should correspond with business owners / entrepreneurs primary goal. It is pertinent, at this point, to note that the best primary financial goal to meet the above stated criteria is to maximise the business organisation’s value to the existing owners/entrepreneurs.


Market value assessment of the appropriate prices of a business is considered thus:

Current and expected income

Uncertainty and timing of income streams

Dividend policy

Other factors the market considers relevant

The market price hereby reflects the markets’ view of management’s activity record of business investment, financing and dividend decisions. Invariably, the market’s view is largely based upon information provided by management in the business’s annual and other reports.
 



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A brief consideration of whether the goal of maximizing the business’s value to existing shareholders meets the three criteria earlier specified.

1.	Consider if the objective is operational: Finance Officer can evaluate alternative courses of action and choose which will increase the business value to the owners by the largest amount.

2.	This objective overcomes the problems inherent in the profit maximization objective in that the market price of a business’s contribution/shares is an unambiguous concept and its determination takes account of the time value of money and risk.

3.	Finally, it is reasonable to assume that the objective is reasonable and consistent with owners/entrepreneurs’ interests.

To sum it up then, we should note that the goal of the firm and that of managers and employees are to maximize the wealth of the owners for who the business is being managed, which in turn, is measured by the value of contribution by owner(s). Therefore, when the finance manager is considering each financial decision, alternative or realistic action, in the light of impact on the firm’s contribution, value/ price, he should accept only those actions that are expected to increase contributor’s price.


SELF ASSESSMENT EXERCISE 2

In your own words, highlight the limitations of profit maximization.

3.3	Financial Goal and firm’s Mission/Objectives

Pandey (2005) stated that the basis of the theory of financial management is the same as that of maximisation of owners’ welfare (classical theory of the firm). Every corporate business Firm states categorically their vision, mission and values in broad terms and is also concerned about technology, leadership, productivity, market standing, image, profitability, financial resources, employee satisfaction etc.

Objectives and decision criteria should be distinct.

Goals or objectives are missions or basic purposes of a business’s existence. They direct the firm’s actions.

The strategies are designed on these basic objectives.

Defines its markets, products and technology.

Policies are laid down in areas of production, purchase, marketing, technology, finance etc.

SELF ASSESSMENT EXERCISE 3


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Picture yourself as an entrepreneur.

On this basis, develop a typical mission and objectives of your business.

4.0	CONCLUSION

We have attempted a simplified approach to understanding financial goal of a business firm which we have seen as not being simply profit maximization but considering the well being of the investors too. The two have to be balance by the finance officer in-charge to impact positively on the society.

5.0	SUMMARY

This unit is summarized thus:

The identification of financial goals of a firm seen through profit maximization and wealth maximization.

The blend of the two effectively and efficiently by the financial manager gives the society a good turnaround of the business performance.

Each firm produces a mission and objectives to synchronize with the financial goals to produce goal befitting the entrepreneurs own.


6.0	TUTOR-MARKED ASSIGNMENT

1.	Identify main financial goal of a business concern.

2.	Explain financial goal based on firm mission and objectives fulfilment.

7.0	REFERENCES/FURTHER READING

Pandey, I.M. (2005). Financial Management New Delhi: India: VIKAS Publishing House PVT Ltd. (9th ed).

University of Southern Queens Land, Business Finance I Study Book.
 













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UNIT 2	THE ROLE FINANCIAL MANAGERS

CONTENTS

1.0	Introduction

2.0	Objectives

3.0	Main Content

3.1	Financial Manager

3.2	Fund Raising

3.3	Funds Allocation

3.4	Profit Planning

3.5	Capital Markets

4.0	Conclusion
5.0	Summary

6.0	Tutor-Marked Assignment

7.0	References/Further Reading

1.0	INTRODUCTION

In this unit, you will be able to know who a Finance Manager is and identify his role in the financial management ‘mix’ of a firm.

Among other things, he coordinates the flow in the working cycle and makes the correct ‘dose’ of investment to be at the proper place in order to avoid “too much or too little of fund”.

2.0	OBJECTIVES

At the end of this unit, you should be able to:

explain who a Financial Manager is

identify the role of Financial Manager

plan profit of a Business firm

Describe Capital Market.

3.0	MAIN CONTENT

3.1	Financial Manager

This is the person responsible for performing finance functions. In a modern firm, finance manager’s position is significant. He is recognised


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as a member of the top management team. He maintains records, prepares progressive financial report through auditing, financial/managerial accounting and assists in raising funds when required.


As an adviser, the finance manager now shapes the fortunes of the firm and he is involved in the most vital decision of allocation of capital.

Finance Manager must be broad in knowledge and far-sighted in outlook, to ensure that the funds of the business outfit are utilized in an efficient and effective way.

Finance decisions influence the size, profitability, growth, risk and survival of the firm; and these in turn, affect the overall value of the firm. Hence, a finance manager must have clear understanding and professional grasp of the nature and scope of the finance functions.

SELF ASSESSMENT EXERCISE 1

Describe a financial manager

3.2	Funds Raising

The scope of financial management includes fund raising in the modern approach to financing. This was not the case in the past because raising funds was always done during major events in the life of the firm like:

Promotion

Re-organization

Expansion

Diversification.

As a cardinal duty, the finance manager sees that a firm is well funded to be able to meet its obligation. This had already been discussed previous unit of this course.

3.3	Funds Allocation

The modern approach to finance is an analytical way of looking at the financial problems of the business. Financial management is therefore considered as a vital and an integral part of overall management.

In a modern firm, the basic function of finance department is to decide about the expenditure decisions and to determine the demand for capital to meet these expenditures. That means, the finance manager is duty bound to allocate funds in an efficient and effective manner.
 


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The finance manager should be able to find answers to the following questions:

How large should the firm be?

How fast should it grow?

What form of assets should it hold?

How should the funds be raised?

3.4	Profit Planning

Profit-planning function is one of the acquired roles of the Finance Manager. Profit planning is the operating decisions in the areas of pricing, costing of the volume of output and the firm’s product lines selection.


It is, therefore, a pre-requisite for optimising investment and financing decisions. The cost structure of the business organization (the mix of fixed and variable costs) has a significant influence on a firm’s profitability.


Fixed costs remain constant while variable costs change in direct proportion to changes in volume of goods. The fixed costs enhance profit fluctuation at a higher degree than the fluctuations in sales. The change in profits due to the change in sales is an operating leverage.

Profit planning is an aid to anticipating the relationships between volume, costs and profits. It is from here that an action plan emanates.

SELF ASSESSMENT EXERCISE 2

Discuss the different roles of a finance manager.

3.5	Capital Markets

Capital market is the meeting point for investors (lenders) and firms (borrowers), hence, the understanding of the operations of the capital markets and the way in which the capital markets value securities.

In Nigeria, it is known as the Nigeria Stock Exchange (NSE). The Exchange is the market that serves as an intermediary between fund-raisers and supplier of capital. The Nigerian Securities and Exchange Commission (SEC) is the regulator and monitor of activities in the Nigerian Capital Market in order to protect both the largely unaware investing public and issuers of securities.

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COURSE DESCRIPTION AS IN THE OPP

The	modules	and	units	are	self	explanatory	as	they	summarize

INTRODUCTION TO FINANCE - 100 level students of Bachelors’ degree of Banking and Finance. You will need to work in groups with other students in this course and program in order to discuss, compare notes and thoughts and to exchange and share ideas.

6.0 ASSESSMENTS

There are two aspects to the assessment of the course: first are the tutor-marked assignments (TMA); and the end of course examination. Within each unit are self assessment exercises which are aimed at helping you check your assimilation as you proceed. Try to attempt each of the exercises before finding out the expected answer from lecture.

8.0	TUTOR-MARKED ASSIGNMENT (TMA)

This is your continuous assessment and accounts for 30% of your total score. You are expected to answer at least four TMA’s, three of which must be answered and submitted before you sit for the end of course examination. Your Facilitator will give you the TMA’s and you must submit to your Centre your responses.





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BFN209	MODULE 1


9.0	FINAL EXAMINATION AND GRADING

With this examination written successfully, you have completed your course in Basic Research and one believes you would apply your knowledge (new or up-graded) in your project. The ‘end of course examinations’ would earn you 70% which would be added to your TMA score (30%). The time for this examination would be communicated to you.

Table 1:	Course Marking Scheme	
	ASSESSMENT		MARKS
Assignment (TMAs) 1 – 4		Four (4) assignments, best
			three (3) marks of the four
			account at 10% each = = 10 x
			3=30%
End of course examination		70% of overall course marks
Total			100% of course marks

10.0	HOW TO GET THE MOST FROM THIS COURSE

In distance learning, the study units are specially developed and designed to replace the conventional lectures. Hence, you can work through these materials at your own pace, and at a time and place that suits you best.

Visualize it as reading the lecture.

Each of the study units follows a common format. The first item is an introduction to the subject matter of the unit, and how a particular unit is integrated with the other units and the course as a whole. Next is a set of learning objectives. These objectives let you know what you should be able to do by the time you have completed the unit. You should use these objectives to guide your study. When you have finished the unit, you must go back and check whether you have achieved the objectives. If you make a habit of doing this, you will significantly improve your chances of passing the course.

The main body of the unit guides you through the required reading from other sources.

This will usually be either from your set books or from a Reading Section. Activities are interspersed throughout the units, and answers are given at the end of the units.

Practice these self-assessment exercises to help you to achieve the objectives of the units and prepare you for the assignments and the examinations. Keep tap with your facilitator for assistance.


In summary,
(1)	Try to read this course guide.

(2)	Organize a study schedule.

(3)	Do everything you can to stick to the schedule.
 



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BFN209	INTRODUCTION TO FINANCE


(4)	Assemble the study materials.

(5)	Work through the unit. The content of the unit itself has been arranged to provide a sequence for you to follow. As you work through this unit, you will be instructed to read sections from your set books or other articles.

(6)	Review the objectives for each study unit confirms that you have achieved them. If you feel unsure about any of the objectives, review the study material or consult.

(7)	When you are sure of having achieved a unit’s objectives, you can then start on the next unit.

(8)	After completing the last unit, review the course and prepare yourself for the final examination. Check that you have achieved the unit objectives and the course objectives.

To gain the maximum benefit from course tutorials, prepare a question list before attempting them.

11.0	SUMMARY

This course BFN209 is designed to introduce you to Finance to give you some knowledge which would help you to understand the role of finance in business enterprise Endeavour to go through this course successfully and you would be in a good position to pass your examination at the end of the semester

We wish you success in this interesting course. GOOD LUCK.






























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BFN209	MODULE 1





MODULE 1

Unit 1	Nature of Finance

Unit 2	Scope of Finance

Unit 3	Function of Finance

Unit 4	Risk of Finance

Unit 5	Key Role of Finance


UNIT 1	NATURE AND SCOPE OF FINANCE

CONTENTS

1.0	Introduction
2.0	Objectives

3.0	Main Content

3.1	Nature of Finance

3.1.1 Finance Defined

3.2	Evolution of Finance

3.3	Field of Finance

3.4	Role of Finance

3.5	Common Denominator of Finance

3.6	Interrelationship and Transaction

3.7	Funds Flow

4.0	Conclusion

5.0	Summary

6.0	Tutor-Marked Assignment

7.0	References/Further Reading

1.0	INTRODUCTION

Finance plays a very important role in any business activities, whether public or private sector. Its management is the pillar upon which all economic activities stand. No business can survive or be sustained without finance.

In this first unit of this course, we will you will be introduce the nature of finance in a buy & sell enterprise, define finance; explain the role and field of finance.

2.0	OBJECTIVES

At the end of this unit, you should be able to:

discuss the nature of finance

define finance
 


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BFN209	INTRODUCTION TO FINANCE


Identify the role finance.

3.0	MAIN CONTENT

3.1	Nature of Finance

Finance may be defined as the provision of money at the time it is required. Every person responsible for finance, whether it is for a corporate organization or private household, money is confronted with prospects of inflow receipts on the one hand, and outflow payments on the other. The inflows are expected to be arranged in such a way that fund (money) is always available to make necessary payments as they arise.


3.1.1 Finance Defined

Oyekanmi (2003) defined finance “as money affairs or money matters”. All forms of money or near money e.g. debt, cash equity certificates would be implied. In certain usage, however, not only are liquid funds subsumed in the term finance, but all forms of assets, which are capable of being expressed in monetary terms.

On the other hand, Anao (1993) defined finance as money affairs or money matters. All forms of money or near-money such as debt, cash equity, certificates of deposits would be implied. In certain usage, however, not only are liquid funds subsumed in the term finance, but all forms of assets, which are capable of being expressed in money terms.

According to Hornby (2001), finance is the money need or needed to support an activity, project, programme etc. and or the management of money.

3.2	Brief Evolution of Finance

Finance evolved from economics as its branch in the early part of the 20th century; but later became a separate discipline. It graduated in response to the complexity of business from sole proprietorship to corporate organisation. Finance was initially concerned mainly with the keeping of records of receipts and payments; dealings simply on bonds, debentures, banks.

Nowadays, it has extended the ‘coast’ to various aspect or aspects of company survival, introduction of new technologies in operation, the application of computers and its closeness to economy.

SELF ASSESSMENT EXERCISE 1


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BFN209	MODULE 1


Define of Finance.

3.3	Field of Finance

The field of finance originally covered mainly:

Instruments of finance (e.g. bonds, debentures etc.)

Institutions / intermediaries (e.g. banks, finance coys etc.)

Capital markets (e.g. exchange etc.)

The finance is related to economics as every individual, organizations and government operate within the economy. So understanding economic setting is paramount to you.

You need the knowledge and alertness of each level of economic activity and the related consequences. It is associated with accounting as both are interested in cash flows and accounting and financial data necessary for taking basic decisions.

3.4	Role of Finance

Without money (finance), an enterprise cannot function; hence, understanding the role of finance and its ability to measure the progress of a business is essential for effective management.

Finance can be likened to a lubricant. Too little of it (finance) can make a business grind to a halt; while too much of it may lead the business having to grapple with all types of projects not minding their usefulness.


3.5	Common Denominator of Finance

Money is the common denominator for the full range of activities performed in the business.

Yes, there are other factors which are common to business like man-hours, which are all the same length but don’t have the same value in term of quantity of work done or skill and expertise displayed.

Money also presents its problems, particularly when inflation sets in, resulting in changes in the purchasing power of a unit of currency.

This notwithstanding, for the moment, this fact has not affected its role as a common denominator, so long as it remains the medium in which business is conducted.
 






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3.6	Inter-relationship and Transaction

Money is the medium of exchange in business; the other two elements are production/operation and marketing. All these three must be held in balance to enable optimum utilization of the resources of the enterprise.

The interrelationship between the various elements is graphical represented below:

Figure 1:	Business Cycle


	INVESTMENT
Provides return to	Provides
	MONEY/CASH
Pay	Pays for
CUSTOMER	Fixed Assets
	materials running
	
	costs
Sold to	Produce




GOODS/SERVICES

SOURCE: Jones, G.L. (1976) Financial Measurement for Managers


According to Jones (1976), the initial investment of cash (money) in figure 1 above, is shown to provide the means whereby the entrepreneur or promoter of the business enterprise can purchase those assets which enable the business to have premises, equipment, transport and other items required before the activities of the organization can take-off.





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The investment must also be sufficient to allow management to pay the running expenses of the business, such as wages, rent etc. and purchase the first quantities of goods or other basic commodities which are required before any income can be earned.


It is essential to realize that in most cases, money is paid out for these items before the receipt of cash can be expected.

Having acquired the assets and the materials needed to commence business, and paid the running costs for the first period of activity, goods and services become available to the potential customers, who in turn, purchase them and thus provide the cash to pay for further commodities and running costs.

Because the cash received from sales should be greater than the cash paid out for materials and running expenses, a reservoir of cash is built up from which funds can be drawn to pay the providers of the initial capital a return on their money in the form of interest or dividends.

SELF ASSESSMENT EXERCISE 2

Describe the role of Finance in an enterprise.

3.7	Funds Flow

The working cycle described in figure 1 above demonstrates the way funds flow through business. There are a number of linked transactions.

Note: First, that every time funds flow in a business, there is a source of funds and a use of funds. That is, each transaction has two aspects:

1.	The generation or supply of funds

2.	The utilization of these funds.

4.0	CONCLUSION

The nature as well as the vital role played by finance in any business enterprise has been discussed and illustrated in this unit.

5.0	SUMMARY

In this unit, we have discussed the nature of evolution, field and role of Finance. Also, we have introduced finance as a common denominator in
 

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BFN209	INTRODUCTION TO FINANCE


This is why finance function affects the size, growth, profitability and risk of the firm, and ultimately, the value of the business/enterprise.

SELF ASSESSMENT EXERCISE 5

Liquidity of a business is affected by	.


3.5	Financial Procedures

Financial procedures involve a lot of measures to achieve effective execution of finance function. Some important routine finance functions are:

Supervision of cash receipts and payments and cash balances safeguarding.

Custody and safeguarding of securities, insurance policies and other valuable papers.

Taking care of the mechanical details of new outside financing.

Record keeping and reporting.

In recent years, the scope of finance function as stated in Unit 1 of this Module indicates that it has widened. This will be discussed more in the next unit.

4.0	CONCLUSION

The various finance functions have been identified and discussed showing they are applied at each stage of cash to investment as they affect production of goods and services and the marketing of these product.


5.0	SUMMARY
 

In this unit, we have identified enterprise are identified based on liquidity decisions. The effective function was also established.
 

the  finance  function  of  a  business investment,  financing,  dividend  and procedure  for  the  execution  finance
 

6.0	TUTOR-MARKED ASSIGNMENT

1.	State some financial procedures for effective execution of finance function.

2.	Explain in short note: investment decision and liquidity decision of a business concern.


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7.0	REFERENCES/FURTHER READING

Pandey, I.M. (2005). Financial Management (9th edition). New Delhi India VIKAS Publishing House PVT Ltd.

Jones, G.L. (1976). Financial Measurement for Managers London Edward Arnold (Publishers) Ltd
 


























































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UNIT 4	RISKS OF FINANCE

CONTENTS

1.0	Introduction

2.0	Objectives

3.0	Main Content

3.1	Investor’s Dilemma

3.2	Physical Risks and Finance

3.3	Technical Risks and Finance

3.4	Economic Risks and Finance

3.5	Political Risks and Finance

3.6	Avoidance of Risk

3.7	Distribution of Risks

4.0	Conclusion

5.0	Summary

6.0	Tutor-Marked Assignment

7.0	References/Further Reading

1.0	INTRODUCTION

To function properly in business, you should consider the risk taken; especially in the sourcing and usage of fund.

In this unit, you would be led to the investor’s dilemma, especially in the developing economy like Nigeria, where risk taking is much dreaded and one has to “look before one leaps” in financial venture.

2.0	OBJECTIVES

At the end of this unit, you should be able to:

discuss the risks of finance

state category of risks in finance

Identify how to avoid finance risks.

3.0	MAIN CONTENT

3.1	Investor’s Dilemma

If the investor believes that there is some chance, however small, that in the long run he may earn a small return (profit), he would extra effort than he could obtain on a riskless investment. He will not invest unless he can expect a higher return if the investment does succeed. Though in




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the course of event, he will not necessarily expect this higher return to become available at once.

This allowance for risk, in greater or less degree, is made whenever the yield of the investment is anywhere dependent on the satisfactory result of the undertaking of work for which the full fruits are reaped only after a delay.

It is pertinent to note that there can never be a certainty that the fruits, when reaped would be commensurate with the cost of resources (labour, capital etc) expended in the production/marketing.

Hence, there is always some chance that part or all of the resources employed may prove to have been wasted.

The risk that threatens the complete or partial loss of the postponed fruits of effort can be classified under four main headings:

Physical risks

Technical risks

Economic risks

Political risks

3.2	Physical Risks and Finance

These are risks that some accident may destroy or spoil some physical goods created by the work financed.

For example:

A stock of food may go bad or be eaten up by insects or animals

A house (premises) may be destroyed by fire

A ship may be wrecked or sunk.

Dangers from fire, flood, storm, theft etc. have always threatened and still threaten the benefit of the fruits of business enterprise.

3.3	Technical Risks and Finance

These are those risks that arise from the fact that the producer’s skill or that of the subordinates may not be up to the expected level for the plan, hence it may fall short of achieving the intention. If at all it is achieved, it may fall below the standard; i.e. the end -product, at disposal may consume, in its construction, more resources than permitted in making the plans.
 



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For example, a farm entrepreneur in a new environment may try to grow crops unsuited to the soil or climate. A new technical process, successful in the laboratory or in small-scale plant, may encounter unforeseen difficulties when tried in large-scale production. Wherever experience of the exact process is lacking, whether because the process itself is only newly developed or because of the lack of experience of the people using it, a high degree of technical risk is always present. This is one of the reasons why the early stage of enterprise venturing into new areas of producing goods/services, using newly processes are nearly always less satisfactory than anticipated.

Experience (know-how) gained by the organization of its particular technical process which often constitutes its most valuable possession. Thus, unforeseen technical risk in finance renders the whole months of intensive work completely wasteful; except for the obtaining of valuable experience.

3.4	Economic Risks and Finance

This category of risks is usually the greatest and closely related to finance. They remain; even though the physical object created suffer no unexpected damage. It is found possible to construct these physical objects with the resources assumed to be available. There are four main kinds of this risk:


The risk of an inadequate supply of the resources needed to make the product planned so that it costs more to make than had been expected or even cannot be made at all; and

The risk of fall in demand for the product once it has been made.

The risk of a failure of the demand for a product is increased when that product is itself highly durable, for them to the other risk.


The risk that potential purchasers may be prevented from buying by a shortage of finance.

3.5	Political Risk and Finance

These are risks of losses as the result of unforeseen intervention by governments. These risks may particularly affect the enterprise operating in or exporting to, a foreign country, where government laws discriminate. This may have untold frustration in the quest for achievement of the expected return on capital investment. Example includes Rent Act, which can affect the status of workers who are


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tenants if it is not favourable; corporate tax can affect the profit margin of an enterprise and this may in turn have effect on the finances of the organization.

SELF ASSESSMENT EXERCISE 1

List the different types of risk associated with the finance of an enterprise.


3.6	Avoidance of Risk

There are three ways of avoiding or reducing risk. These are as follows:

Appropriate measures involving additional expenditure;

Turn into regular costs by pooling them with large numbers of similar risks; and

Combing them with other risks operating in the opposite direction.


Almost every kind of risk can be reduced, to some extent, by increasing expenditure on precautions as follows:

A building can be made more resistant to fire if more fund is expended on it to add value to it.

The risk of financial failure of a new method of production can be reduced at the cost of increased expenditure of time and money; if a thorough testing in a small-scale plant is made before being introduced into large-scale production (project).

The risk of production being held up for lack of an important component can be removed and the cost of an immediate loss of output avoided; if adequate reserve stocks are built up.

Even the risk of miscalculating consumers’ demand can be reduced by expenditure on market research, advertisement and sales promotion.

The great difficulty is usually to determine how large an increase in costs is justified in order to achieve an uncertain degree of reduction in an uncertain risk.
 









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SELF ASSESSMENT EXERCISE 2

Name ways of avoiding risk in a business concern.

3.7	Distribution of Risks

After eliminating all the risks which can be reduced by taking precautions, pooled by insurance or offset by hedging (the term used for reducing risk by using derivatives – debt capacity enhancement, increased focus on operations and isolating managerial performance which we tried to explain earlier).

There remain a very large number of risks that must be borne by whoever provides the finance for a productive operation. It is with these various methods of sharing such risks among various classes of providers of capital that this unit is mainly concerned with.

The simplest form of finance is where the whole of finance required by a particular enterprise is provided by an Entrepreneur (a single person). In this business, the person pays all expenses, takes all receipts and makes the whole of any profit or loss which results from the activities of the business. When the business requires more assets than he can afford to provide personally (expansion) then, there arises the problem of how to distribute the risk inherent in the business. Hence, different contributors to the finance of the business will be required to share the risk as shareholders.

The number of possible ways in which the risks and profits can be shared between the different people who jointly contribute to the finance of a business is also infinite. The following ways are frequently adopted.


1.	A full share of all risk and profits.

2.	A prior claim on any profits the enterprise can earn up to a certain limited amount, with or without some share in the remainder.

3.	A loan of money on payment of a fixed amount of interest which must be paid whether the concern is earning a profit or not.

4.	The renting of land or other durable good is return for fixed money (rent), payable whether or not the enterprise is able to earn a profit (leasing).






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Partnership and Limited Liability Company are two main institutional forms under which people join together on equal terms to provide the finance needed for an enterprise, sharing fully in both risks and profits.

SELF ASSESSMENT EXERCISE 3

Name two structures of sharing finance risks.

4.0	CONCLUSION

The categories of risk of finance in a business organization were identified and discussed. The manners or ways on how to minimize risks among investors were suggested as well as the means of distributing the risk.


5.0	SUMMARY

In this unit, attempts have been made to discuss risk of finance and business, types of risk (physical, technical, economic, political), the avoidance and distribution of risk.

6.0	TUTOR-MARKED ASSIGNMENT

1.	Discuss the finance dilemma of an entrepreneur.

2.	Explain how finance risks affect technical risk.

7.0	REFERENCES/FURTHER READING

Kolb,	R.W	&	Rodriguez,	R.S	(1994) Essential	Financial

Management Florida USA: Kolb Publishing Company Inc.

Paish, F.W. (1975) ‘Business Finance’ Pitman Publishing New York

USA

Pandey, I.M. (2005). Financial Management (9th edition). New Delhi India.

September 30, 2025 7:59 PM

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Sources of finance can be divided into internal and ?
Question 1Answer

external


Apart from money the the other two elements are operation and
Question 2Answer

personnel


which of the following is not a central role of finance manager?
Question 3Answer

planning of manpower needs



Preference shareholders receive dividend at a ?
Question 4Answer

fixed rate


The risks that some accident may destroy or spoil some physical goods created by the work financed is described as ?
Question 5Answer

physical risk


What is described as the provision of money at the time it is required?
Question 6Answer

finance


Which of the following is NOT part of the original field of finance?
Question 7Answer

Marketing strategies


Finance can be likened to a ?
Question 8Answer

lubricant


What is considered the common denominator for the full range of activities performed in business?
Question 9Answer

Money


which of the following is not a risk of finance?
Question 10Answer

cash risks

September 4, 2025 1:36 PM

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