Nature and Significance of Business Finance
Business is concerned with the production and distribution of goods and services for the satisfaction of the needs of society. For carrying out various activities, business requires money. Finance, therefore, is called the lifeblood of any business. The requirements of funds by business to carry out its various activities are called business finance. It is the art and science of managing your company’s money.
A business cannot function unless adequate funds are made available to it. The initial capital contributed by the entrepreneur is not always sufficient to take care of all the financial requirements of the business. A business person, therefore, has to look for different other sources from where the need for funds can be met. The role of finance in business is also to make sure there are enough funds to operate and that you’re spending and investing wisely. A clear assessment of the financial needs and the identification of various sources of finance, therefore, is a significant aspect of running a business organization.
The importance of business finance lies in its capacity to keep a business operating smoothly without running out of cash while also securing funds for longer-term investments. The need for funds arises from the stage when an entrepreneur makes a decision to start a business. Some funds are needed immediately say for the purchase of plant and machinery, furniture, and other fixed assets.
- Financial planning and control
A business firm must manage and make their financial analysis and planning. To make these planning and management, the financial manager should have knowledge about the financial situation of the firm. The financial budget serves as the basis of control over financial plans.
- Financial Statement Analysis
One of the scopes of business finance is to analyze financial statements. This statement consists of the financial aspect related to the promotion of new business, administrative difficulties in the way of expansion, necessary adjustments for the rehabilitation of the firm in difficulties.
- Working capital Budget
The financial decision making that relates to current assets or short-term assets is known as working capital management. This aspect implies that the individual current assets such as cash, receivables, and inventory should be very efficiently managed.
- Initial Investment / Capital:
It really is popularly said that money is needed for earning profits. To begin the activities of the continuing business, capital investment is foremost required and every company knew the significance of business finance.
- Debt Ratios:
The importance of business finance is more significant than money in your hand. Many businesses have some level of debt, mostly in the startup stages. Excessively debt contrasted with revenues/profits and assets can leave you into much bigger problems than making your loan repayments.
Similarly, some funds are required for day-to-day operations, say to purchase raw materials, pay salaries to employees, etc. We require business finance to meet unexpected emergency finance requirements that may arise suddenly. Finance may be required time to time upgrade the technological updates available and their adoption in the business. Also when the business expands, it needs funds.