Business Finance: Meaning, Nature, and Significance
What is Business Finance?
Finance is the lifeblood of any business. The mere inception of a business idea is not enough, it can only be brought to fruition given there are enough funds to enable all such functions. The basic function of every organization is to either manufacture goods or offer services. This function can only be met when there is enough money to bear all such expenses. Similarly, all the goals of expansion and growth are only possible when there are enough funds with the firm. The financial requirements of a business can be categorized as follows:
- Fixed Capital: Such funds are used for investments to be made in long-term projects and assets the benefits from which would be reaped by the firm over a long period of time. Such capital is used to purchase land and building, fixtures and other such long-term assets.
- Working Capital: Such funds are used in the day-to-day operations of a firm. Such operations include holding current assets and settlement of current liabilities.
It is noteworthy that only the estimation of funds does not suffice, but the decisions pertaining to raising, utilizing and controlling such funds also have to be made. Thus, Business Finance refers to the money required for carrying out business activities. It involves all activities right from the estimation of funds to their acquisition, utilization and disposal.
According to B.O. Wheeler, “Business finance is that activates which is concerned with the acquisition and conservation of capital funds in meeting the financial need and overall objective of business enterprise.”
According to Guthumann and Dougall, “The activity concerned with planning, developing, managing, administering and increasing of the capital used for business purposes is known as finance.”
Nature of Business Finance
The nature of Business Finance are as follows:
- Necessary for all Business: Finance is the lifeline of all businesses. It is needed at every step right from promotion, and incorporation to production, selling, marketing, etc. All kinds and sizes of firms require the use of funds to carry out all kinds of operations.
- Depends on Nature and Size of Business: Different kinds of businesses have different levels of requirements of funds for their operations. The volume of funds required depends on the size of the firm. Smaller firms have less requirements of funds as compared to larger firms.
- Includes all types of Funds: Both Owners’ Funds and Borrowed Funds are included in business finance.
- Required on a Continuous Basis: Business Finance is required on a continuous basis during the life of a business enterprise.
- Wider Term: Business Finance is a wider term as it involves estimation, procurement, utilisation and investment of funds.
- Fluctuating Nature: Business finance keeps on fluctuating when there is a change in factors like inflation rate, change in demand, change in supply, fashion, technology, etc.
- Determines size of Business: The scale of business is determined by the availability of finance. The more is the availability of funds, the larger is the size and scale of the business.
Significance of Business Finance
The significance of Business Finance are:
- Establishing the Business
All kinds of expenses pertaining to the establishment of a business are only possible when the firm has enough funds. These expenses include promotion expenses, directors’ fees, incorporation expenses, floating charges, prospectus issuance, commencement expenses, office construction, acquiring assets, etc.
- Running the Business
Also known by the name working capital, these funds ensure that the day-to-day operations of a firm are running smoothly. This includes payment of interest on loans, short-term loans, trade payables, salaries etc. Liquidity is an important facet of every organization.
- Expansion of Business
This could be done either by expanding the magnitude of the current activities or by diversifying the range of products and/or services offered by the organization. Sufficient funds are needed to achieve either of these goals.
- Availing New Opportunities
A stable financial position gives a firm a competitive edge over its contemporaries, with the former being able to tap a given market prospect and turn it into a successful and profitable venture.
- Increasing Goodwill
A good financial position enables businesses to offer better services to their customer’s immersive sales experience, good after-sales services, etc., which in turn raises brand awareness and also widens the firm’s customer base, ultimately increasing goodwill.
- Facing Contingencies
Large corporations with turnovers exceeding millions of dollars are able to “plough back” a major chunk of their profits into the business in the form of provisions and reserves in order to meet any uncertainties/contingencies in the future. Small firms can also achieve this, with a little bit of careful financial planning.
- Purchasing Tangible and Intangible Assets:
Business Finance is required to purchase tangible assets like machinery, land, building, etc., and intangible assets like trademarks, patents, etc.