Finance and Banking · Classes 9-10 · Chapter 1 · 1.3
Business Finance, Banks and Financial Institutions.
A corner grocery needs money to run, and so does a huge company. But is the grocer's own pocket the same as a thousand strangers' savings? No. This note is about how each kind of business gets its fund, and how a bank earns.
1. What business finance means
An organization formed to earn profit by taking the risk of profit and loss is a business organization. The process of collecting fund for business purposes and investing it is business finance. Of all the kinds of finance it is the most important, and it is the main subject of this lesson.
Business organizations are of three types: sole proprietorship, partnership and joint stock business. Two jobs are common to the finance of all three: fund collection and fund management. Own capital and loan are the sources of the fund.
The most familiar businesses in Bangladesh are small enterprises of sole proprietorship and partnership: small and cottage industries, hotels and restaurants, grocery shops, saloons and boutique shops.
2. Sole proprietorship and partnership: who carries the risk
In a sole proprietorship the owner enjoys the profit alone. When there is a loss, the owner's personal property is used to repair it. In a partnership the risk is distributed among all the partners, so each must be ready to use personal property to bear a loss.
The same loss, one owner or several partners. Add owners and see how much of the loss lands on whose house.
From one owner to partners
The amount is imaginary, and the shares are taken as equal only to show the idea.
The sources of fund for both are the owner's own capital, profit, a loan from relatives, and an interest-bearing loan from a bank or a village money lender. Their main aim is to earn profit by investing their own fund.
3. The joint stock company: capital cut into pieces
The financial process of a joint stock company is different from that of a sole proprietorship or a partnership. Government approval is needed to form one. Before approving, the government examines the minimum capital, the identity of the directors, the business objectives and various documents.
Once approved, the company divides the big capital it wants into small equal portions. These portions are shares, and selling them in the share market brings in the fund. The book's example: for a capital of 10 crore taka (100 million), 1 lac shares of 1000 taka each can be sold, since 1,00,000 × 1000 = 10,00,00,000 taka = 10 crore taka. Change the numbers and check it yourself.
From capital to shares
The number is a model. 10 crore and 1000 taka are the book's example; the other numbers are imaginary.
Each share costs little, 1000 taka in the book's example. So even a small investor in a remote part of the country can buy shares.
Shareholders are the owners of the company. When the company is profitable they usually get a regular dividend. They can sell their shares in the share market, such as the Dhaka Stock Exchange, and turn them into cash.
Besides shares, a joint stock business can raise fund by selling bonds and debentures, which are loans from the public. But debenture holders are not owners; they are lenders. So the company pays them interest at a fixed rate, regularly. Shareholders get dividend, debenture holders get interest.
Change how the company's year went. Watch side by side what reaches the shareholder and the debenture holder.
A good year, a bad year
The number of coins is imaginary, only to show what moves and what does not.
Now sort the statements into owner and lender.
Owner or lender
4. Banks and financial institutions
Government and private banks, such as Sonali, Janata, Rupali, Prime and Shahjalal Islami Bank, are profit-oriented business organizations. Still, their financial process is a little different from an ordinary business. A country's economic activity usually revolves around banks and financial institutions.
Run a bank yourself. Set the rate you pay depositors and the rate you charge the entrepreneur.
The gap between two rates
The rates and the size of the fund are imaginary, not figures from the book.
A bank collects small sums from the public and builds deposits of different terms. It pays the depositors interest at a fixed rate. Then it lends from that same fund to entrepreneurs. Go through the steps one by one.
How a bank earns
People leave small sums with the bank. That is the bank's fund.
The bank pays its depositors interest, at the lower rate.
From the same fund the bank lends to an entrepreneur and charges interest, at the higher rate.
Rate received on loans − rate paid on deposits = the bank's profit.
As a formula: bank's profit = rate of interest received on loans − rate of interest paid on deposits. The rate on loans is greater than the rate on deposits, so the gap is the profit.
Besides commercial banks, some financial institutions play an important part in the country's economy: Investment Corporation of Bangladesh (ICB), Bangladesh House Building Finance Corporation and Bangladesh Agricultural Bank.
5. Check yourself
Three questions in the exam's style. Start with the first.
Question 1
What is the main goal of a business organization?
In the second, keep the difference between shares and loans in mind.
Question 2
Approval of the government must be taken for which type of organization?
Take the last one's arithmetic slowly.
Question 3
Mr. Sultana started a book business at Andarkella in Chattogram with the money saved by his father. He sells various types of story books, poetry books, children's books, paper and pens and other valuables in addition to textbooks. Currently, due to the popularity of the business, he is expanding the size of the shop and borrowed some money from Probani Bank for 7 years and pays the interest from internal funds. What type of financing is Mr. Sultana involved in?
The whole note on seven cards.
Seven cards
Source: Finance and Banking, Classes 9-10 (NCTB), Chapter 1 “Finance and Business Finance”, section 1.3.