Meaning of Business Finance

Business Finance means the funds and credit employed in the business.
Finance is the foundation of a business. Finance requirements are to
purchase assets, goods, raw materials and for the other flow
of economic activities. Let us understand in-depth the Meaning of
Business Finance.

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Meaning of Business Finance

According to B.O. Wheeler Meaning of Business Finance includes
those business activities that are concerned with the acquisition and
conservation of capital funds in meeting the financial needs and overall
objectives of a business enterprise.”

Business is identified with the generation and circulation of products

and services for fulfilling of needs of society. For successfully doing
any operation, business requires money which is known as business
finance. Therefore, funds are known as the lifeblood of any business. A
business would not function unless there is adequate money accessible
for use.
The capital contributed by the businessman to establish the business
isn’t adequate to meet the financial needs of the business. Consequently,
the businessman needs to search for an option to generate funds. A
research of the financial needs and options to fulfill those needs must be
done with a specific end goal to arrive at effective financial
management to maintain the business.

The fundamental necessities of business would be to buy a plant or

apparatus, or it could be to buy raw materials, development of a
business that prompts more enrollments, paying wages and so on.
The money related necessities of a business can be classified as follows:

 Fixed Capital Requirement: In order to begin a business, money is

required to buy fixed assets like land, building, plant and machinery.
This is called the Fixed Capital Requirement.
 Working Capital Requirement: A business needs funds for its day
to day activities. This is known as Working Capital Requirements.
Working capital is required for the purchase of raw materials, paid
salaries, wages, rent, and taxes.
 Diversification: A company needs more funds to diversify its
activities to become a multi-product company e.g. ITC.
 Technology upgrading: Finances are needed to adopt the latest
technology for example use of particular software and the latest
computers in business.
 What is Capital Structure?

Browse more Topics under Financial Management

 Financial Management and Objectives of Financial Management

 Financial Planning
 Financing Decision
 Capital Structure

Importance of Business Finances

We now know the meaning of Business Finance, let us learn its
importance. Business finance is an essential requirement for the
establishment of any business. Money is actually the most important
tool to bridge the gap between production and sales. Let us take a look
at some of the important functions of business finances.

 We require business finances to meet certain contingencies and any

unexpected problems that may arise
 Necessary for the promotion of sales
 A requirement to avail any business opportunities that may present
themselves
What is Financial Planning?

Solved Question for You

Q: Only large companies require business finance. True or False?

Ans: This statement is False. All companies whether big or small

require finance for manufacturing, trading, running costs, etc.
Business finance
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WRITTEN BY
J. Fred Weston See All Contributors
Emeritus Professor of Managerial Economics and Finance, University of California, Los
Angeles. Author of The Scope and Methodology of Finance and others.
See Article History

Business finance, the raising and managing of funds by business

organizations. Planning, analysis, and control operations are
responsibilities of the financial manager, who is usually close to the
top of the organizational structure of a firm. In very large firms, major
financial decisions are often made by a finance committee. In small
firms, the owner-manager usually conducts the financial operations.
Much of the day-to-day work of business finance is conducted by
lower-level staff; their work includes handling cash receipts and
disbursements, borrowing from commercial banks on a regular and
continuing basis, and formulating cash budgets.

Financial decisions affect both the profitability and the risk of a firm’s

operations. An increase in cash holdings, for instance, reduces risk;
but, because cash is not an earning asset, converting other types of
assets to cash reduces the firm’s profitability. Similarly, the use of
additional debt can raise the profitability of a firm (because it is
expanding its business with borrowed money), but more debt means
more risk. Striking a balance—between risk and profitability—that will
maintain the long-term value of a firm’s securities is the task of
finance.

Short-term financial operations

Financial planning and control

Short-term financial operations are closely involved with the financial
planning and control activities of a firm. These include financial ratio
analysis, profit planning, financial forecasting, and budgeting.
Financial ratio analysis
A firm’s balance sheet contains many items that, taken by themselves,
have no clear meaning. Financial ratio analysis is a way of appraising
their relative importance. The ratio of current assets to current
liabilities, for example, gives the analyst an idea of the extent to which
the firm can meet its current obligations. This is known as a liquidity
ratio. Financial leverage ratios (such as the debt–asset ratio and debt
as a percentage of total capitalization) are used to make judgments
about the advantages to be gained from raising funds by the issuance
of bonds (debt) rather than stock. Activity ratios, relating to the
turnover of such asset categories as inventories, accounts receivable,
and fixed assets, show how intensively a firm is employing its assets. A
firm’s primary operating objective is to earn a good return on its
invested capital, and various profit ratios (profits as a percentage of
sales, of assets, or of net worth) show how successfully it is meeting
this objective.

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Ratio analysis is used to compare a firm’s performance with that of

other firms in the same industry or with the performance of industry
in general. It is also used to study trends in the firm’s performance
over time and thus to anticipate problems before they develop.

Profit planning
Ratio analysis applies to a firm’s current operating posture. But a firm
must also plan for future growth. This requires decisions as to the
expansion of existing operations and, in manufacturing, to the
development of new product lines. A firm must choose between
productive processes requiring various degrees of mechanization
or automation—that is, various amounts of fixed capital in the form of
machinery and equipment. This will increase fixed costs (costs that are
relatively constant and do not decrease when the firm is operating at
levels below full capacity). The higher the proportion of fixed costs to
total costs, the higher must be the level of operation before profits
begin, and the more sensitive profits will be to changes in the level of
operation.

Financial forecasting
The financial manager must also make overall forecasts of future
capital requirements to ensure that funds will be available to finance
new investment programs. The first step in making such a forecast is
to obtain an estimate of sales during each year of the planning period.
This estimate is worked out jointly by the marketing, production, and
finance departments: the marketing manager estimates demand; the
production manager estimates capacity; and the financial manager
estimates availability of funds to finance new accounts receivable,
inventories, and fixed assets.

For the predicted level of sales, the financial manager estimates the
funds that will be available from the company’s operations and
compares this amount with what will be needed to pay for the new
fixed assets (machinery, equipment, etc.). If the growth rate exceeds
10 percent a year, asset requirements are likely to exceed internal
sources of funds, so plans must be made to finance them by issuing
securities. If, on the other hand, growth is slow, more funds will be
generated than are required to support the estimated growth in sales.
In this case, the financial manager will consider a number
of alternatives, including increasing dividends to stockholders, retiring
debt, using excess funds to acquire other firms, or, perhaps, increasing
expenditures on research and development.

Business finance
KEY PEOPLE
 George Soros
  Sir James Michael Goldsmith
 Thomas Fortune Ryan
 Sir Francis Baring, 1st Baronet
 Thorstein Veblen
RELATED TOPICS
 finance

Budgeting
Once a firm’s general goals for the planning period have been
established, the next step is to set up a detailed plan of operation—the
budget. A complete budget system encompasses all aspects of the
firm’s operations over the planning period. It may even allow for
changes in plans as required by factors outside the firm’s control.

Budgeting is a part of the total planning activity of the firm, so it must

begin with a statement of the firm’s long-range plan. This plan
includes a long-range sales forecast, which requires a determination of
the number and types of products to be manufactured in the
years encompassed by the long-range plan. Short-term budgets are
formulated within the framework of the long-range plan. Normally,
there is a budget for every individual product and for every significant
activity of the firm.

Establishing budgetary controls requires a realistic understanding of

the firm’s activities. For example, a small firm purchases more parts
and uses more labour and less machinery; a larger firm will buy raw
materials and use machinery to manufacture end items. In
consequence, the smaller firm should budget higher parts and labour
cost ratios, while the larger firm should budget higher overhead cost
ratios and larger investments in fixed assets. If standards are
unrealistically high, frustrations and resentment will develop. If
standards are unduly lax, costs will be out of control, profits will
suffer, and employee morale will drop.

The cash budget
One of the principal methods of forecasting the financial needs of a
business is the cash budget, which predicts the combined effects of
planned operations on the firm’s cash flow. A positive net cash flow
means that the firm will have surplus funds to invest. But if the cash
budget indicates that an increase in the volume of operations will lead
to a negative cash flow, additional financing will be required. The cash
budget thus indicates the amount of funds that will be needed or
available month by month or even week by week.

A firm may have excess cash for a number of reasons. There are likely
to be seasonal or cyclic fluctuations in business. Resources may be
deliberately accumulated as a protection against a number
of contingencies. Since it is wasteful to allow large amounts of cash to
remain idle, the financial manager will try to find short-term
investments for sums that will be needed later. Short-term
government or business securities can be selected and balanced in
such a way that the financial manager obtains the maturities and risks
appropriate to a firm’s financial situation.

Accounts receivable
Accounts receivable are the credit a firm gives its customers. The
volume and terms of such credit vary among businesses and among
nations; for manufacturing firms in the United States, for example, the
ratio of receivables to sales ranges between 8 and 12 percent,
representing an average collection period of approximately one
month. The basis of a firm’s credit policy is the practice in its industry;
generally, a firm must meet the terms offered by competitors. Much
depends, of course, on the individual customer’s credit standing.

To evaluate a customer as a credit risk, the credit manager considers

what may be called the five Cs of credit: character, capacity,
capital, collateral, and conditions. Information on these items is
obtained from the firm’s previous experience with the customer,
supplemented by information from various credit associations and
credit-reporting agencies. (See credit bureau.) In reviewing a credit
program, the financial manager should regard losses from bad debts
as part of the cost of doing business. Accounts receivable represent an
investment in the expansion of sales. The return on this investment
can be calculated as in any capital budgeting problem.

Inventories
Every company must carry stocks of goods and materials in inventory.
The size of the investment in inventory depends on various factors,
including the level of sales, the nature of the production processes, and
the speed with which goods perish or become obsolete.

Checking inventory of wine casks in the cellars of a northern California winery.

Comstock
The problems involved in managing inventories are basically the same
as those in managing other assets, including cash. A basic stock must
be on hand at all times. Because the unexpected may occur, it is also
wise to have safety stocks; these represent the little extra needed to
avoid the costs of not having enough. Additional amounts—
anticipation stocks—may be required for meeting future growth needs.
Finally, some inventory accumulation results from the economies of
purchasing in large quantities; it is always cheaper to buy more than is
immediately needed, whether of raw materials, money, or plant and
equipment.

There is a standard procedure for determining the most economical

amounts to order, one that relates purchasing requirements to costs
and carrying charges (i.e., the cost of maintaining an inventory). While
carrying charges rise as average inventory holdings increase, certain
other costs (ordering costs and stock-out costs) fall as average
inventory holdings rise. These two sets of costs constitute the total
cost of ordering and carrying inventories, and it is fairly easy to
calculate an optimal order size that will minimize total inventory costs.
The advent of computerized inventory tracking fostered a practice
known as just-in-time inventory management and thereby reduced the
likelihood of excess or inadequate inventory stocks.

SIMILAR TOPICS
 Campaign finance
 Corporate finance
 Bank
 Accounting
 Trust company
 Bond
 Stock
 Finance company
 Savings and loan association
 Credit union

Short-term financing
The main sources of short-term financing are (1) trade credit, (2)
commercial bank loans, (3) commercial paper, a specific type
of promissory note, and (4) secured loans.

Trade credit
A firm customarily buys its supplies and materials on credit from
other firms, recording the debt as an account payable. This trade
credit, as it is commonly called, is the largest single category of short-
term credit. Credit terms are usually expressed with a discount for
prompt payment. Thus, the seller may state that if payment is made
within 10 days of the invoice date, a 2 percent cash discount will be
allowed. If the cash discount is not taken, payment is due 30 days after
the date of invoice. The cost of not taking cash discounts is the price of
the credit.

Commercial bank loans

Commercial bank lending appears on the balance sheet as notes
payable and is second in importance to trade credit as a source of
short-term financing. Banks occupy a pivotal position in the short-
term and intermediate-term money markets. As a firm’s financing
needs grow, banks are called upon to provide additional funds. A
single loan obtained from a bank by a business firm is not different in
principle from a loan obtained by an individual. The firm signs a
conventional promissory note. Repayment is made in a lump sum at
maturity or in installments throughout the life of the loan. A line of
credit, as distinguished from a single loan, is a formal or informal
understanding between the bank and the borrower as to the maximum
loan balance the bank will allow at any one time.

Commercial paper
Commercial paper, a third source of short-term credit, consists of
well-established firms’ promissory notes sold primarily to other
businesses, insurance companies, pension funds, and banks.
Commercial paper is issued for periods varying from two to six
months. The rates on prime commercial paper vary, but they are
generally slightly below the rates paid on prime business loans.

A basic limitation of the commercial-paper market is that its resources

are limited to the excess liquidity that corporations, the main suppliers
of funds, may have at any particular time. Another disadvantage is the
impersonality of the dealings; a bank is much more likely to help a
good customer weather a storm than is a commercial-paper dealer.

Secured loans
Most short-term business loans are unsecured, which means that an
established company’s credit rating qualifies it for a loan. It is
ordinarily better to borrow on an unsecured basis, but frequently a
borrower’s credit rating is not strong enough to justify an unsecured
loan. The most common types of collateral used for short-term credit
are accounts receivable and inventories.

Financing through accounts receivable can be done either by pledging

the receivables or by selling them outright, a process
called factoring in the United States. When a receivable is pledged, the
borrower retains the risk that the person or firm that owes the
receivable will not pay; this risk is typically passed on to the lender
when factoring is involved.

When loans are secured by inventory, the lender takes title to them.
He may or may not take physical possession of them. Under a field
warehousing arrangement, the inventory is under the physical control
of a warehouse company, which releases the inventory only on order
from the lending institution. Canned goods, lumber, steel, coal, and
other standardized products are the types of goods usually covered in
field warehouse arrangements.

Intermediate-term financing
Whereas short-term loans are repaid in a period of weeks or months,
intermediate-term loans are scheduled for repayment in 1 to 15 years.
Obligations due in 15 or more years are thought of as long-term debt.
The major forms of intermediate-term financing include (1) term
loans, (2) conditional sales contracts, and (3) lease financing.

Term loans
A term loan is a business credit with a maturity of more than 1 year
but less than 15 years. Usually the term loan is retired by systematic
repayments (amortization payments) over its life. It may be secured by
a chattel mortgage on equipment, but larger, stronger companies are
able to borrow on an unsecured basis. Commercial banks and life
insurance companies are the principal suppliers of term loans. The
interest cost of term loans varies with the size of the loan and the
strength of the borrower.

Term loans involve more risk to the lender than do short-term loans.
The lending institution’s funds are tied up for a long period, and
during this time the borrower’s situation can change markedly. To
protect themselves, lenders often include in the loan agreement
stipulations that the borrowing company maintain its current liquidity
ratio at a specified level, limit its acquisitions of fixed assets, keep its
debt ratio below a stated amount, and in general follow policies that
are acceptable to the lending institution.

Conditional sales contracts

Conditional sales contracts represent a common method of obtaining
equipment by agreeing to pay for it in installments over a period of up
to five years. The seller of the equipment continues to hold title to the
equipment until payment has been completed.

Lease financing
It is not necessary to purchase assets in order to use them. Railroad
and airline companies in the United States, for instance, have acquired
much of their equipment by leasing it. Whether leasing is
advantageous depends—aside from tax advantages—on the firm’s
access to funds. Leasing provides an alternative method of financing.
A lease contract, however, being a fixed obligation, is similar to debt
and uses some of the firm’s debt-carrying ability. It is generally
advantageous for a firm to own its land and buildings, because their
value is likely to increase, but the same possibility of appreciation does
not apply to equipment.

The statement is frequently made that leasing involves higher interest

rates than other forms of financing, but this need not always be true.
Much depends on the firm’s standing as a credit risk. Moreover, it is
difficult to separate the cash costs of leasing from the other services
that may be embodied in a leasing contract. If the leasing company can
perform nonfinancial services (such as maintenance of the equipment)
at a lower cost than the lessee or someone else could perform them,
the effective cost of leasing may be lower than other financing
methods.

Although leasing involves fixed charges, it enables a firm to present

lower debt-to-asset ratios in its financial statements. Many lenders, in
examining financial statements, give less weight to a lease obligation
than to a loan obligation.

Long-term financial operations
Bonds
Long-term capital may be raised either through borrowing or by the
issuance of stock. Long-term borrowing is done by selling bonds,
which are promissory notes that obligate the firm to pay interest at
specific times. Secured bondholders have prior claim on the firm’s
assets. If the company goes out of business, the bondholders are
entitled to be paid the face value of their holdings plus interest.
Stockholders, on the other hand, have no more than a residual claim
on the company; they are entitled to a share of the profits, if there are
any, but it is the prerogative of the board of directors to decide
whether a dividend will be paid and how large it will be.
 READ MORE ON THIS TOPIC

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Long-term financing involves the choice between debt (bonds)

and equity (stocks). Each firm chooses its own capital structure,
seeking the combination of debt and equity that will minimize the
costs of raising capital. As conditions in the capital market vary (for
instance, changes in interest rates, the availability of funds, and the
relative costs of alternative methods of financing), the firm’s desired
capital structure will change correspondingly.

The larger the proportion of debt in the capital structure (leverage),

the higher will be the returns to equity. This is because bondholders do
not share in the profits. The difficulty with this, of course, is that a
high proportion of debt increases a firm’s fixed costs and increases the
degree of fluctuation in the returns to equity for any given degree of
fluctuation in the level of sales. If used successfully, leverage increases
the returns to owners, but it decreases the returns to owners when it is
used unsuccessfully. Indeed, if leverage is unsuccessful, the result may
be the bankruptcy of the firm.

Long-term debt
There are various forms of long-term debt. A mortgage bond is one
secured by a lien on fixed assets such as plant and equipment.
A debenture is a bond not secured by specific assets but accepted by
investors because the firm has a high credit standing or obligates itself
to follow policies that ensure a high rate of earnings. A still more
junior lien is the subordinated debenture, which is secondary (in
terms of ability to reclaim capital in the event of a
business liquidation) to all other debentures and specifically to short-
term bank loans.

Periods of relatively stable sales and earnings encourage the use of

long-term debt. Other conditions that favour the use of long-term debt
include large profit margins (they make additional leverage
advantageous to the stockholders), an expected increase in profits or
price levels, a low debt ratio, a price–earnings ratio that is low in
relation to interest rates, and bond indentures that do not impose
heavy restrictions on management.

Stock
Equity financing is done with common and preferred stock. While
both forms of stock represent shares of ownership in a company,
preferred stock usually has priority over common stock with respect to
earnings and claims on assets in the event of liquidation. Preferred
stock is usually cumulative—that is, the omission of dividends in one
or more years creates an accumulated claim that must be paid to
holders of preferred shares. The dividends on preferred stock are
usually fixed at a specific percentage of face value. A company issuing
preferred stock gains the advantages of limited dividends and no
maturity—that is, the advantages of selling bonds but without the
restrictions of bonds. Companies sell preferred stock when they seek
more leverage but wish to avoid the fixed charges of debt. The
advantages of preferred stock will be reinforced if a company’s debt
ratio is already high and if common stock financing is relatively
expensive.

If a bond or preferred stock issue was sold when interest rates were
higher than at present, it may be profitable to call the old issue and
refund it with a new, lower-cost issue. This depends on how the
immediate costs and premiums that must be paid compare with the
annual savings that can be obtained.

Earnings and dividend policies

The size and frequency of dividend payments are critical issues in
company policy. Dividend policy affects the financial structure, the
flow of funds, corporate liquidity, stock prices, and the morale of
stockholders. Some stockholders prefer receiving maximum current
returns on their investment, while others prefer reinvestment of
earnings so that the company’s capital will increase. If earnings are
paid out as dividends, however, they cannot be used for company
expansion (which thereby diminishes the company’s long-term
prospects). Many companies have opted to pay no regular dividend to
shareholders, choosing instead to pursue strategies that increase the
value of the stock.

Companies tend to reinvest their earnings more when there are

chances for profitable expansion. Thus, at times when profits are high,
the amounts reinvested are greater and dividends are smaller. For
similar reasons, reinvestment is likely to decrease when profits
decline, and dividends are likely to increase.

Companies having relatively stable earnings over a period of years

tend to pay high dividends. Well-established large firms are likely to
pay higher-than-average dividends because they have better access to
capital markets and are not as likely to depend on internal financing. A
firm with a strong cash or liquidity position is also likely to pay higher
dividends. A firm with heavy indebtedness, however, has implicitly
committed itself to paying relatively low dividends; earnings must be
retained to service the debt. There can be advantages to this approach.
If, for example, the directors of a company are concerned with
maintaining control of it, they may retain earnings so that they
can finance expansion without having to issue stock to outside
investors. Some companies favour a stable dividend policy rather than
allowing dividends to fluctuate with earnings; the dividend rate will
then be lower when profits are high and higher when profits are
temporarily in decline. Companies whose stock is closely held by a few
high-income stockholders are likely to pay lower dividends in order to
lower the stockholders’ individual income taxes.

In Europe, until recently, company financing tended to rely heavily on

internal sources. This was because many companies were owned by
families and also because a highly developed capital market was
lacking. In the less-developed countries today, firms rely heavily on
internal financing, but they also tend to make more use of short-term
bank loans, microcredit, and other forms of short-term financing than
is typical in other countries.

Convertible bonds and stock
warrants
Companies sometimes issue bonds or preferred stock that give holders
the option of converting them into common stock or of purchasing
stock at favourable prices. Convertible bonds carry the option of
conversion into common stock at a specified price during a particular
period. Stock purchase warrants are given with bonds or preferred
stock as an inducement to the investor, because they permit the
purchase of the company’s common stock at a stated price at any time.
Such option privileges make it easier for small companies to sell bonds
or preferred stock. They help large companies to float new issues on
more favourable terms than they could otherwise obtain. When
bondholders exercise conversion rights, the company’s debt ratio is
reduced because bonds are replaced by stock. The exercise of stock
warrants, on the other hand, brings additional funds into the company
but leaves the existing debt or preferred stock on the books. Option
privileges also permit a company to sell new stock at more favourable
prices than those prevailing at the time of issue, since the prices stated
on the options are higher. Stock purchase warrants are most popular,
therefore, at times when stock prices are expected to have an upward
trend. (See also stock option.)

Growth and decline

Mergers
Companies often grow by combining with other companies. One
company may purchase all or part of another; two companies may
merge by exchanging shares; or a wholly new company may be formed
through consolidation of the old companies. From the financial
manager’s viewpoint, this kind of expansion is like any other
investment decision; the acquisition should be made if it increases the
acquiring firm’s net present value as reflected in the price of its stock.

The most important term that must be negotiated in a combination is

the price the acquiring firm will pay for the assets it takes over.
Present earnings, expected future earnings, and the effects of the
merger on the rate of earnings growth of the surviving firm are
perhaps the most important determinants of the price that will be
paid. Current market prices are the second most important
determinant of prices in mergers; depending on whether asset values
are indicative of the earning power of the acquired firm, book values
may exert an important influence on the terms of the merger. Other,
nonmeasurable, factors are sometimes the overriding determinant in
bringing companies together; synergistic effects (wherein the net
result is greater than the combined value of the individual
components) may be attractive enough to warrant paying a price that
is higher than earnings and asset values would indicate.
The basic requirements for a successful merger are that it fit into a
soundly conceived long-range plan and that the performance of the
resulting firm be superior to those attainable by the previous
companies independently. In the heady environment of a rising stock
market, mergers have often been motivated by superficial financial
aims. Companies with stock selling at a high price relative to earnings
have found it advantageous to merge with companies having a lower
price–earnings ratio; this enables them to increase their earnings per
share and thus appeal to investors who purchase stock on the basis of
earnings.

Some mergers, particularly those of conglomerates, which bring

together firms in unrelated fields, owe their success to economies of
management that developed throughout the 20th century. New
strategies emphasized the importance of general managerial functions
(planning, control, organization, and information management) and
other top-level managerial tasks (research, finance, legal services, and
technology). These changes reduced the costs of managing
large, diversified firms and prompted an increase in mergers and
acquisitions among corporations around the world.
When a merger occurs, one firm disappears. Alternatively, one firm
may buy all (or a majority) of the voting stock of another and then run
that company as an operating subsidiary. The acquiring firm is then
called a holding company. There are several advantages in the holding
company: it can control the acquired firm with a smaller investment
than would be required in a merger; each firm remains a separate legal
entity, and the obligations of one are separate from those of the other;
and, finally, stockholder approval is not necessary—as it is in the case
of a merger. There are also disadvantages to holding companies,
including the possibility of multiple taxation and the danger that the
high rate of leverage will amplify the earnings fluctuations (be they
losses or gains) of the operating companies.

Reorganization
When a firm cannot operate profitably, the owners may seek to
reorganize it. The first question to be answered is whether the firm
might not be better off by ceasing to do business. If the decision is
made that the firm is to survive, it must be put through the process of
reorganization. Legal procedures are always costly, especially in the
case of business failure; both the debtor and the creditors are
frequently better off settling matters on an informal basis rather than
through the courts. The informal procedures used in reorganization
are (1) extension, which postpones the settlement of outstanding debt,
and (2) composition, which reduces the amount owed.

If voluntary settlement through extension or composition is not

possible, the matter must be taken to court. If the court decides on
reorganization rather than liquidation, it appoints a trustee to control
the firm and to prepare a formal plan of reorganization. The plan must
meet standards of fairness and feasibility; the concept of fairness
involves the appropriate distribution of proceeds to each claimant,
while the test of feasibility relates to the ability of the new enterprise to
carry the fixed charges resulting from the reorganization plan.

J. Fred Weston
Learn More in these related Britannica articles:


history of Europe: Growth of banking and finance

Perhaps the most spectacular changes in the 16th-century economy were in the
fields of international banking and finance. To be sure, medieval bankers such as the
Florentine Bardi and Peruzzi in the 14th century and the Medici in the 15th had
operated on an…

accounting

…will be devoted primarily to business accounting.…


 commercial transaction: Loan of money

…could exist without the credit financing of industrial investments, of commercial

transactions, or of private acquisitions. A lender gives money to the borrower, who is
obliged to repay it and to pay interest as well. Interest is thus the price for the
utilization of the lender’s money. The payment of…

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 Features, Characteristics and Concept of
Business Finance
Leave a Comment / Business Planning, Business
Terms, Definition, Entrepreneurs, Finance, Financial Terms /
By Editorial Team
5
(16)
Contents [hide]
o 0.1 Concept of Business Finance:

o 0.2 Characteristics of Business Finance / Features of

Business Finance:

o 0.3 How to Manage your Business and Personal

Financial Resources:

o 0.4 Precaution Measures – Manage Small Business

Finances:

o 0.5 Advantage and Benefits of Personal Finance:

 1 Business Finance Basics for Beginners Guide

Concept of Business Finance:

The concept of Business financing is just like what it appears: the
activity of funding the many aspects of a continuing business, whether
the funding be for beginning a business, running it, or expanding it.
Aside from the size or form of business, you can find fundamental
questions financing that is involving must certainly be addressed.
Most organizations buy number of products, for example: buildings,
equipment, or workplace furniture and equipment, that are meant to
be useful for a time that is very long. Such things are called
investments that are long-term. Any business making investments that
are long-term carefully think about what those investments will be, just
how much they will cost, and how much they will hold their value over
time. Just as important is the relevant concern of where you’ll get the
amount of money needed to pay for them.

In the meaning of Business Finance it indicates that each time a

business is simply starting, it typically borrows money from banks or
other non-banking financial institutions, or it brings in additional
individuals or investors to fairly share ownership in the business in
order to procure the first money it needs to protect the costs to build a
business that is brand new. Capital is the expression given to the
money or other things of worth that are needed to create products or
solutions. Money can take the proper execution of human resources,
goods and products by way of financial trade. Examples of capital are
factories, workplace, skilled labors, tools, machinery, money, etc.
When businesses are up and running and handling the everyday
operations being monetary it may likewise turn to banks and investors
for financing, however it typically relies on its customers for producing
the money needed seriously to finance business. If the company is
profitable plus the company saves a number of the cash it generates
from commercial activity, it may use that money to make investments
being new will further expand its business. There are numerous
practices that are very different usage to obtain the financing they
need to fund large projects and to boost their profitability.
Characteristics of Business Finance /
Features of Business Finance:
Business finance have some features that helps us to differentiate
with other branches related to finance; for example, business finance
generally tend to value both the time and money spent by a company,
what you mean when an investor expects a profitable return, it is
exposed to run very high risks. Anyway we must say that most
investors are usually used to face this kind of risk, but still, of course,
will always seek ways to reduce the risk you run.

Moreover, business finance are characterized by offering long-term

investments to be carried out simple and similar, because the bottom
line here is that all investments in company project arises with
sufficient finance. Opportunity costs are also part of the characteristic
factors relating to business finance, and in this case we must say that
this is the highest performance that finance will not be able to win in
the event that funds are invested in particular project. The opportunity
costs are usually associated with the losses that an investor is willing
to take when an option that is best to use the corresponding money is
not chosen.

Business finance often provide some dilemmas for investors, for

example, one of the most common is the one between liquidity and
the need to invest, and this rethinking because every company prefers
own money, but despite that, they often choose to sacrifice this
liquidity in order to generate more utilities. Another of the dilemmas
posed by business finance is one that is centred between risk and
profit. As we said earlier in this article, the investor whenever you
execute an investment is taking a risk of loss that can be either very
large or very small depending on the type of investment and the
economic impact, whether positive or negative than the same present.
How to Manage your Business and
Personal Financial Resources:
When you are starting a business, it is important to manage business
finance and personal finance. Money must be kept separate so that it
is easier to track that personal funds are not used in
business expenses.
1. Take Separate Accounts: 
Business finance and personal finance to maintain the home and the
family must be managed discretely. This confusion arises when
making payments of taxes and other legal responsibilities, helps to
account for the money that belongs to the business are avoided, and
helps you keep track of how and where the money is spent. Carrying
separate accounts also shields personal appeals against debts and
business expenses, if it fails to succeed.

2. Ways of keeping Accounts Separate: 

It is good to have a separate bank account for the business. It is
easier to control business costs if managed from a single account, and
a clear idea about the income. Keep the money in a safe place. Ask
other business owners to do the same. Open an account with banks
having great savings plans. Adopt a good accounting system that
permits control of your expenses. Talk to owners of prosperous
businesses and ask about the accounting systems that provide them
with good results.
3. Pay a Salary and consider it as a Business Expense: 
Decide in advance how much you want to invest personal savings in
the business. Set a static limit that will help you determine whether or
not it is worth investing money in that business.

4. Do not misuse of Business Funds: 

As a business proprietor, you might be interested to consider all gains
it as personal income, but even if you know who manages the money,
you should not treat it as your own, and that doing so could results in
other risks. For example, if you start borrowing as collateral to the
business then you cannot afford it; the company would be at risk, as
well as investments of other people will be also at risk. Here are the
precautions you should undertake when utilizing business funds. This
will help you as a guide in how to manage small business finances.

Precaution Measures – Manage Small

Business Finances:
If you need to borrow money for business, use the money only for the
cost of this. Make clear that if the business throws more money than
expected over a period of time, that money must be saved or
reinvested. You and the other employees have fixed salaries and that
should not change until there is a new financial business analysis.
Advantage and Benefits of Personal
Finance:
To open a business, then it offers some advantages offered to have
personal resources in order. You know in advance how to spend with
attention and maintain a detailed audit of revenue and expenditure. It
is likely to ensure a strong credit history and a good reputation
because it has managed money dutifully, which can help you
get support for business. If you ever need a loan, and have a record
of your finances; present your finances in order before a bank will help
you increase your chances to be eligible for a loan. It will be easier to
set aside money from their savings to support family while starting the
business or generate savings from business finance.
What is definition of business finance and
explain its types?
Finance ManagementAccountingAcademic Content

Finance represents the money management and the process of acquiring the funds. Finance is a
board term that describes the activities related to banking, leverage or debt, credit, capital
markets, money and investments.
Business finance tells about the funds and credit employed in the business. It also helps to
manage the funds/money to make your business more profitable by considering financial
statements (profit and loss accounts, balance sheets and cash flow statements).

Types of Business finances

The types of business finances are explained below −

 Short term finance

Financing the business for a short period of time (less than 1 year) is short term finance. It is also
called working capital financing. Trade credit, working capital loans, invoice discounting,
factoring, and business line of credit comes under short term finance.
Advantages of short term finance are less interest, disbursed quickly and less documentation.
Main disadvantages of short term finance are the money which we get is smaller, it has fixed
period of loan, interest rates keep on increasing, effects business and its liquidity.

 Medium term finance

This will be considered for two reasons, one when long term capital is not available and
secondly, when deferred revenue expenditure write off period is three to five years.
Financing for a period for medium term is between three to five years. Preferred shares, Bonds,
lease finances, etc. comes under medium term finances.
Medium term loans are more conservative than long term investments, but involves more risk
than short term. It often looks for balance between risk and return.

 Long term finance −

It is provided for a period of more than ten years. Long term finance is also called fixed capital
finance. Equity capital, preference capital, Debentures, term loans, retained earnings comes
under long term finance.
The main purpose of getting these kinds of finances is to carry out the business on an
expansionary scale from which, greater economic benefits are expected to arise in future.
Business Finance - Know its Meaning, Importance,
Types & Sources
Feb 25, 2021Business Loan

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Finance is the heart and soul of any enterprise. It plays a vital role right from the
establishment of a business to play an important role in driving its growth. Today, business
finance has come a long way from traditional methods of financing. Let us understand more
about this topic:

What is Business Finance?

Business finance refers to funds availed by business owners to meet their needs that may
include commencing a business, obtaining top-up funds to finance business operations,
obtaining finance to purchase capital assets for the business, or to deal with a sudden cash
 crunch faced by the business. Prominent loan providers have your back and provide finance
to cater to the needs of your business.

What is the Importance of Obtaining Business Finance?

The importance of finance cannot be sufficiently stressed. A couple of advantages of
obtaining finance can be described as follows:

 Business finance can help entrepreneurs purchase land, capital assets and other
assets without much difficulty and can focus solely on commencing the operations of the
business.
 With access to finance, purchasing land and machinery, upgrading to the latest
software and technology is easier, allowing you to walk towards ensuring the highest
standards of quality in your industry.
 Access to finance can help you deal with contingencies better without disrupting the
operations of the company.

What are the Types of Business Finance?

The major types of business finance are outlined below. You can evaluate each type and
assess the suitability for your business:

 Equity Finance
In this type of finance, the investors are the owners of the company to the extent of their
investment. Equity finance could consist of finance brought into the business by shareholders
or owners. Typically, an investor contributes a large sum of money towards the business in
exchange for share in the business. When the business starts generating profits, investors
earn the benefits depending on the number of shares they own.
 Debt Finance
Debt finance is what its name suggests. It is money that is borrowed from a lender and has to
be repaid at a predetermined rate of interest over time.
Must Read: 10 Types of Business Loans in India

What are the Sources of Business Finance for an Entrepreneur?

Obtaining finance can be intimidating for entrepreneurs. It is a decision that should be taken
with caution because it is bound to leave a deep impact on the finances of your business. In
such a situation, exploring various sources of financing is extremely worthwhile. Finance
can be classified based on various parameters and it is completely up to the entrepreneur to
choose the right mix of finance for his business.
The various sources of funds can be classified into two main categories:

External Funding

 Through Debt:
Entrepreneurs can rely on borrowings in the form of loans from lending institutions to cater to
 the unique requirements of their business. Loan providers offer quick approval of loans of up
to Rs. 50 lakh to ensure that you can make the best use of the opportunities that come your
way. However, the catch is that business loans are usually only given to existing businesses
who have achieved a certain level in terms of annual turnover and profits, and have a stable
income for at least a period of 2 years. Depending on the lender’s policy and the type of loan,
other eligibility criteria may also apply.
 Through Equity:
Entrepreneurs can pitch their business idea / project to investors to request for funding. If their
pitch is accepted, then investors give them the capital they need in exchange for a share in
the business. The investors may also then appoint a management team to oversee the use of
funds and business operations. This type of funding is especially suitable for startups or small
businesses which are looking towards expansion.

Internal Funding
Internal funds are generated by the owners of the enterprise in form of preference shares,
equity shares etc. It helps owners retain their control over the company in form of shares
and therefore drive the major decisions relating to the company. It also helps them avoid
taking on debt. However, this type of funding is possible only if the owner / promoter has
sufficient funds to avoid approaching lenders or investors.

What are the Documents Required to Apply for Business Finance?

Loan providers insist on a few basic documents to evaluate your eligibility for a business
loan. The business loan documents required include a copy of your KYC documents, a copy
of your address proof, latest bank statements, proof of income and documents to prove the
existence of your business. If the loan amount you seek is higher, you may also have to
pledge collateral such as property or financial assets, and documents pertaining to these
will also be required. Log into the website of your loan provider or get in touch with a
customer care representative to obtain a complete list of the documents required to process
your application.
Introduction to Business Finance
Business Finance is the life blood of business. Business Finance is not only a
requirement but also a sustaining need for the business. Business Finance being
the most crucial factor of every business requires special attention on its
procurement source, on its management, on its investment, in big business
houses a team is forced in this conduct known as the Finance Committee.

In this section we will know about the meaning, nature and significance of
business, also we will discuss the financial sources and its importance.  

Business Finance Meaning

The raising and management of funds by the business organizations is called
business finance. Planning the financial need, analyzing the requirement,
controlling the operations are the responsibilities of the financial manager, this
person is closely related to the top-level management team. 

In large firms, major financial decisions are taken by this financial committee,
they are responsible for the annual budget and so forth. 

While, in small companies, the owner-manager conducts the financial operations

all by themselves. The business finance which requires day-to-day attention is
conducted by the lower level staff. They work in the sections of handling the
cash, receipts, disbursements, borrowings from the commercial banks and this is
done on a regular and continuous basis and they also form cash budgets. 

Nature of Business Finance

The nature of the business finance is enumerated in the points mentioned below
–
1. Business Finance consists of different kinds of funds – short, medium and
long term as and when required by the business.
2. Any type of business needs this business finance, it is utmost for the
organization.
3. The volume required differs from business to business, small business
requires less business finance in contrast to the large business firms. 
 4. In different times of the business season, requirements differ. In peak
seasons business demands for huge business finance.
5. The amount of business finance determines the scale of operations
conducted by the company. 

Significance of Business Finance

To highlight the significance of business finance, we point the following as
mentioned:
1. A firm with a good amount of business finance will require less time and
hassles to start the business venture.
2. With the business finance in hand, the owners can buy the raw materials
as needed for production. 
3. The business firm can easily pay his dues and other payments with the
help of business finance. 
4. Uncertain risk and Contingencies can be tackled with business finance in
hand.
5. Good financial capacity of the business will attract talented workforce, also
highly efficient technology can also be availed with strong financial
background.  
  
Scope of Business Finance 
Business finance helps in studying, analyzing and allocating the business funds
and other covers done by the business is done as mentioned:
1. Analysis and Research of Financial Statement

2. Financial Planning and Controlling

3. Capital Structure Management

4. Raising Capital

5. Investing Capital

6. Managing the finance risk. 

Need and Importance of Sources of Business Finance  

The main resources of Business Finance are revenues from business operations,
investor’s own finances, venture capital, loans from financial institutions.
Businesses need finances to meet their day-to-day finances which can be
covered by these sources. 

The importance of the sources of business finance are:

1. Meeting Goals.

2. Short term activities

3. Long term activities

4. Achieving financial goals.

All such activities are governed and administered by the financial department in
each organization. Businesses need this finance to sustain their growth.
Companies pool money from the public in return of shares of the company, this
also a type of procurement of business finance.

So, we see there are many such fundamentals in the procurement of the
business fund thus the finance team should carefully execute their analyses.

FAQ (Frequently Asked Questions)

1. What is the Function of the Finance Committee?

Ans. The function of the finance committee is to specially analyze the need of business finance, how
it should be acquired, where it should be invested, the aggregate risk involved and also the
ascertainment of the return is conducted by the team. This team consists of experts who have wide
experience in the money market, they well know how finance is to be channeled in the business.

2. How Do Large Companies Acquire Business Finance?

Ans. Large companies are generally run by the wealthy owners; hence, they have investors' owner's
funds, they also acquire huge funds from the public who invest in the company, this is known as the
share capital. The large business corporations usually attract high net worthy investors to invest in
their business.

3. What is Venture Capital?

Ans. Venture capital is a special type of funding provided by the venture capitalists to the start-ups
who have high growth potential. They are basically private equity types of funds that are being
provided by investment banks and other financial institutions. 

4. What is the Post Popular Source of Funds?

Ans. The popular source of funds varies from business to business needs. Funds from the public
pool, the owner's own fund is known to be the most popular. Also, loans from financial institutions,
and banks are also regarded to be safe. 
Meaning, Nature and Significance of Business
Finance  
Every business needs finance to function. But from where do we obtain
finance? What is the meaning, nature, and significance of Business
Finance? Let’s find out more in the following section.

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Introduction
Money required for carrying out business activities is called business
finance. Almost all business activities require some finance. Finance is
needed to establish a business, to run it to modernize it to expand or
diversify it. It is required for buying a variety of assets, which may be
tangible like machinery, furniture, factories, buildings, offices or
intangible such as trademarks, patents, technical expertise etc.

Also, finance is central to run a day to day operations of business like

buying materials, paying bills, salaries, collecting cash from customers
etc needed at every stage in the life of a business entity. Availability of
adequate finance is very crucial for survival and growth of a business.

The Scope of Business Finance

Scope means the research or study that is covered by a subject. The
scope of Business Finance is hence the broad concept. Business finance
studies, analyses and examines wide aspects related to the acquisition of
funds for business and allocates those funds. There are various fields
covered by business finance and some of them are:

1. Financial planning and control

A business firm must manage and make their financial analysis

and planning. To make these planning’s and management, the financial
manager should have the knowledge about the financial situation of the
firm. On this basis of information, he/she regulates the plans and
managing strategies for a future financial situation of the firm within a
different economic scenario.

The financial budget serves as the basis of control over financial plans.
The firms on the basis of budget find out the deviation between the plan
and the performance and try to correct them.  Hence, business finance
consists of financial planning and control.

2. Financial Statement Analysis

One of the scopes of business finance is to analyze the financial

statements. It also analyses the financial situations and problems that
arise in the promotion of the business firm. 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.

3. Working capital Budget

The financial decision making that relates to current assets or short-term

assets is known as working capital management. Short-term survival is
a requirement for long-term success and this is the important factor in a
business. Therefore, the current assets should be efficiently managed so
that the business won’t suffer any inadequate or unnecessary funds
locked up in the future. This aspect implies that the individual current
assets such as cash, receivables, and inventory should be very
efficiently managed.

Nature And Significance Of Business Finance

Business is related to production and distribution of goods and services
for the fulfillment and requirements of society. For effectively carrying
out various activities, business requires finance which is called business
finance. Hence, business finance is called the lifeblood of any business
a business would get stranded unless there are sufficient funds available
for utilization. The capital invested by the entrepreneur to set up a
business is not sufficient to meet the financial requirements of a
business.
Solved Example
Q1. The IDBI extends financial assistance to _________.

a. small industries
b. medium industries
c. transporters
d. all of the above
Sol. The correct answer is the option ”d”. IDBI stands for Industrial
Development Bank of India. IDBI is an apex financial institution in the
arena of development banking. It provides financial assistance in the
form of long-term loans, debentures, etc to industries which helps an
all-round development of small industries, large industries, medium
industries, industries providing transportation service.
 Scope of Business Finance



Scope means the sphere of research or study that is covered by the subject. The scope
of Business Finance is hence the broad scope denoted by this subject. Business
Finance studies, analyses and examines wide aspects related to the acquisition of
funds for business and allocates those funds. There are various fields covered by
business finance and some of them are:

1. Financial Planning and Control: Any business firm must manage and make their financial analysis
and planning. To make these plannings and management, the financial manager must have
knowledge about the present financial situation of the firm. On the basis of these information,
he/she regulates the plans and managing strategies for future financial situation of the firm with in
different economic scenario. Financial budget also relies in these financial plans. Financial budget
serves as the basis of control over financial plans. The firms on the basis of budget, finds out the
deviation between the plan and the performance and tries to correct them. Hence, business
finance consists of financial planning and control.
 
2. Financial Statement Analysis: Another scope of business finance is to analyses the financial
statements. However, it also analyses the financial situations and problems that arises in the
promotion of the business firm. This statements consists 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.
 
3. Working Capital Management: The financial decision making that relates to current assets or
short-term assets is known as working capital management. Short-term survival is a prerequisite
of long term success and this is the important factor in business. Therefore the current assets
should be efficiently managed so that the business won't suffer any inadequate or unnecessary
funds locked up in future. this aspect implies that the individual current assets such as cash,
receivable and inventory should be very efficiently managed. Hence, the efficiency in the
management of working capital ensures the balance between liquidity and profitability.
 
4. Capital Building: Financial decision making related to long-term assets is known as capital
budgeting or long-term investment decision.

/>  

5. Capital Building: Financial decision making related to long-term assets is known as capital

budgeting or long-term investment decision. This scope s related tot eh selection of an
investment proposal out of the many related alternatives available to the firm. However, the
acceptance of the proposal depends on the returns associated with that particular proposal.Here,
the capital budgeting technique measures the worth of the investment proposal. This technique
studies the method of appraising investment proposals. It also analysis the risk and uncertainty,
as the returns from the investment proposal extends into the future. All the returns are evaluated
in relation to the risk.
 
6. Management of Financing: Managing financing is yet another important area of business finance.
The management of finance is concerned with the mix of assets or structure of the assets of the
firm. As the firm should always pay special attention to it's assets. The firm should properly mix
the ratio of debt and equity capital while main investment. As capital structure is the ratio of debt
and equity capital. Now, the capital structure consisting of the proper ratio of debt and equity is
known as optimum capital structure. Hence, the financial manager should make decision
regarding optimum capital structure and the ratio of fund to be raised to maximize the returns for
 the shareholders.
 
7. Dividend Management: Business finance also analyses the policies regarding the dividend,
depreciation and reserve. every dividend decisions are made on the basis of financing decision of
the firm. The firm should decide, how much of profit should be distributed among shareholders as
dividend and how much should be retained as earnings. This decision depends on the priority of
the shareholders and the investment opportunities available  to the firm. Here, the financial
manager should develop a sound dividend policy.

These were some aspects and scopes of Business Finance. Though Business Finance
covers a wider scope than this above are limited and important scopes of the field.
Some of other scopes covered by business finance are study of regulation and control,
study of financial assistance and Income management.

 
The Importance of Finance in Business
By Christian Nordqvist Published May 1, 2020 at 21:31 PM GMT

 Share

M
ost businesses are ultimately all about money, and how well it is managed determines
how successful the business is. Therefore, any businessperson needs to recognize the
importance of finance in business. I believe it is fair to say that without investment, a
business can barely exist.

Economics is the part of any business that needs the most attention with regards to how
much to spend and on what, creating budgets, analyzing investment system, and many
other things that determine the smooth running of a business. In this article, we are
going to look at the importance of finance in business.

What is Business Finance?

Business finance is the process of managing organization money. The purpose of

business finance is also to ensure that a business has adequate operating funds and
that it is spending and investing its money carefully, wisely, and effectively. The
importance of finance in business is in the ability to ensure that a business operates
without any financial hiccups like running short of cash, and at the same time making
sure, that funds are secure and well invested for long-term gains.

Moreover, even though finance is dependent on accounting, Finance is more active

while accounting is more descriptive; therefore, you can use accounting data to
manifest perceptible results.

Ima
ge created by Market Business News.

Why is business finance important?

We all know that all businesses run on money, and business finance is there to help you
make smart and wise financial decisions concerning long-term funding strategies as
well as cash flow. By learning more about business finance, using the money you have
in your business, and how to get even more capital when you need it, the profitability of
your organization will improve, and you will increase the potential to leverage more
opportunities.

Some of the reasons why finance is important in business are as follows;

Creating Profit for the business

 Image created by
Market Business News.

As people often say, “you need money to make money,” and they are absolutely right,
that is why business finance needs to be given the most attention. It is imperative for the
profits coming into a business to keep increasing to ensure that the business continues
to run successfully.

Therefore, the starting capital investment needs to be managed diligently, taking note of

the narrow division between debt and equity financing. As the finance team does the
profit planning, they should take it as they are determining the profit of individual
services and products of the business and, at the same time, eliminating the losers
while endorsing the winners.

Exploring new products and markets

All businesses are constantly in pursuit of new products and markets, and this, of
course, financial muscle. Therefore, without an effective financial structure in place,
exploring new spaces and getting into different markets with fresh solutions or products
may be rather difficult.

Creating more assets for the business

Ultimately, all company owners’ long term goal is to improve production by attaining
more assets for the business. The business finance department assists the company in
making sure that they have a viable savings plan independent of short-term finances in
order to meet this goal.
An organization requires a very skilled financial management team to adequately invest
in items such as equipment, land, and machinery that will enhance the production scale.

Making sure operational expenses are met

In most companies, the Finance side of things involves operational costs like raw
material, interest payments, remunerative packages for employees, inventory, and so
on; and meeting these expenses is what usually keeps the organization going. A good
financial plan will make sure that there is stability in the management of the profits
coming in relative to the operational expenses to be met on a regular basis.

Managing inevitable risks

Entrepreneurs, as well as established business owners, know very well that running a
business is all about taking risks. However, not all risks will result in success, failure will
come, and challenges are unavoidable. Therefore, having financial management skills
will be very beneficial in developing a contingency plan before that time comes.

Managing the cash flow of a business

No matter the size of a business, the larger the amount of cash flowing in and out of
business the better. However, not having a good financial system can cause a lot of
problems, including some legal issues.

Any business requires a solid financial team to deal with the company’s cash flow,
with financial records as evidence of the different transactions. This is important so that
the company can cover all its business expenses, and thus avoid any future problems.

Final Thoughts

Finance in business is a top priority for any successful business person or entrepreneur.
As you have seen in the points mentioned above, Finance places a huge role in running
a business successfully. Financial planning enhances the value of the company and
serves as a backbone for any organization. Ensuring that your financial team is strong
and efficient will benefit your business in the end. I hope this article has helped you.

Good Luck!
 The Importance of Business Finance
 Small Business

 Money & Debt

 Financing a Business

ByEric FeigenbaumUpdated February 05, 2019


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 What Are the Risks With Financing a Small Business With Credit Cards?
 Effect of Liabilities and Share Equity on a Company
 How to Prevent Business Failure
 How to Open a New Business Without Falling Into Debt
 About Bank Loans for Starting a Business

It takes money to make money, so the proverbial saying goes. Businesses have to
consider their finances for so many purposes, ranging from survival in bad times to
bolstering the next success in good ones. How you finance your business can affect
your ability to employ staff, purchase goods, acquire licenses, expand and develop.
While finances are not necessarily as important as vision and a great product, they are
crucial to making the good stuff happen.

Starting Capital and Financing

Every new venture needs seed money. Entrepreneurs only have dreams and ideas
until they have some capital to put their ideas in motion. Whether it's a product or
service, you will need a way to create and deliver it – as well as enough money and
time to lay the groundwork of selling and establishing important relationships. Most
business owners face the critical choice between debt and equity financing.

A small business loan leaves you free to own and have absolute control over your
company while it also leaves you lasting financial obligations. Equity gives you cash,
but you have to share the success. The critical decision in your financing will
determine how your business will work from that point onward.

Importance of Debt Ratios

Finances are about more than money in your hand. While most businesses have
some amount of debt – especially in the beginning stages – too much debt compared
with revenues and assets can leave your with more problems than making your loan
payments. Vendors and suppliers often run credit checks and may limit what you can
buy on credit or keep tight payment terms. Debt ratios can affect your ability to attract
investors including venture capital firms and to acquire or lease commercial space.

Weathering Business Cycles

No matter how well your business is doing, you have to prepare for rainy days and
even storms. Business and economic cycles bring dark clouds you can't predict. That's
why smart businesses create financial plans for downturns. Cash savings, good credit,
smart investments, and favorable supply and real estate arrangements can help a
business stay afloat or even maintain momentum when the business climate is
unfavorable.

Opportunity and Growth

Success can bring a business to a difficult crossroads. Sometimes to take on more
business and attain greater success, a company needs significant financial investment
to acquire new new capital, staff or inventory. When business managers hit this
juncture, they have to wade through their financial options, which may involve
infusions of equity capitals – perhaps from venture capitalists. Every situation is
different, but smart managers consider the cost of success and their options for
obtaining growth financing.

Ensuring Payroll Accounts are Strong

Nothing spells imminent death like a company being unable to make payroll. Even the
most dedicated staff won't stick around long once the paychecks stop. The larger an
organization gets, the larger the labor costs.

Above all, companies have to ensure they have enough cash on hand to make payroll
for at least two payroll cycles ahead – if not more. Financial planning to ensure your
payroll accounts are in strong shape are essential to the integrity and longevity of your
company.
Business Finance - Know its Meaning, Importance,
Types & Sources
Feb 25, 2021Business Loan

BEGIN YOUR APPLICATION JOURNEY TODAY!

Finance is the heart and soul of any enterprise. It plays a vital role right from the
establishment of a business to play an important role in driving its growth. Today, business
finance has come a long way from traditional methods of financing. Let us understand more
about this topic:

What is Business Finance?

Business finance refers to funds availed by business owners to meet their needs that may
include commencing a business, obtaining top-up funds to finance business operations,
obtaining finance to purchase capital assets for the business, or to deal with a sudden cash
 crunch faced by the business. Prominent loan providers have your back and provide finance
to cater to the needs of your business.

What is the Importance of Obtaining Business Finance?

The importance of finance cannot be sufficiently stressed. A couple of advantages of
obtaining finance can be described as follows:

 Business finance can help entrepreneurs purchase land, capital assets and other
assets without much difficulty and can focus solely on commencing the operations of the
business.
 With access to finance, purchasing land and machinery, upgrading to the latest
software and technology is easier, allowing you to walk towards ensuring the highest
standards of quality in your industry.
 Access to finance can help you deal with contingencies better without disrupting the
operations of the company.

What are the Types of Business Finance?

The major types of business finance are outlined below. You can evaluate each type and
assess the suitability for your business:

 Equity Finance
In this type of finance, the investors are the owners of the company to the extent of their
investment. Equity finance could consist of finance brought into the business by
shareholders or owners. Typically, an investor contributes a large sum of money towards
the business in exchange for share in the business. When the business starts generating
profits, investors earn the benefits depending on the number of shares they own.
 Debt Finance
Debt finance is what its name suggests. It is money that is borrowed from a lender and has
to be repaid at a predetermined rate of interest over time.
Must Read: 10 Types of Business Loans in India

What are the Sources of Business Finance for an Entrepreneur?

Obtaining finance can be intimidating for entrepreneurs. It is a decision that should be taken
with caution because it is bound to leave a deep impact on the finances of your business. In
such a situation, exploring various sources of financing is extremely worthwhile. Finance
can be classified based on various parameters and it is completely up to the entrepreneur to
choose the right mix of finance for his business.
The various sources of funds can be classified into two main categories:

External Funding

 Through Debt:
Entrepreneurs can rely on borrowings in the form of loans from lending institutions to cater
 to the unique requirements of their business. Loan providers offer quick approval of loans of
up to Rs. 50 lakh to ensure that you can make the best use of the opportunities that come
your way. However, the catch is that business loans are usually only given to existing
businesses who have achieved a certain level in terms of annual turnover and profits, and
have a stable income for at least a period of 2 years. Depending on the lender’s policy and
the type of loan, other eligibility criteria may also apply.
 Through Equity:
Entrepreneurs can pitch their business idea / project to investors to request for funding. If
their pitch is accepted, then investors give them the capital they need in exchange for a
share in the business. The investors may also then appoint a management team to oversee
the use of funds and business operations. This type of funding is especially suitable for
startups or small businesses which are looking towards expansion.

Internal Funding
Internal funds are generated by the owners of the enterprise in form of preference shares,
equity shares etc. It helps owners retain their control over the company in form of shares
and therefore drive the major decisions relating to the company. It also helps them avoid
taking on debt. However, this type of funding is possible only if the owner / promoter has
sufficient funds to avoid approaching lenders or investors.

What are the Documents Required to Apply for Business Finance?

Loan providers insist on a few basic documents to evaluate your eligibility for a business
loan. The business loan documents required include a copy of your KYC documents, a copy
of your address proof, latest bank statements, proof of income and documents to prove the
existence of your business. If the loan amount you seek is higher, you may also have to
pledge collateral such as property or financial assets, and documents pertaining to these
will also be required. Log into the website of your loan provider or get in touch with a
customer care representative to obtain a complete list of the documents required to process
your application.
Must Read: How to Apply for a Business Loan (Step by Step Guide)

Confused about how much money you are eligible to borrow for your business? A business
loan EMI calculator can help you calculate the approximate amount you can borrow while
ensuring that EMIs payable do not eat into the operating expenses of the business. If you
do decide to opt for a business loan, make sure that you repay the instalments on time to
make sure that you continue to maintain an excellent credit score in the long run.