Business Finance
Meaning of Business Finance
Business finance is the cornerstone of every organization. It refers to the corpus of funds and credit employed in a business. Business finance is required for purchasing assets, goods, raw materials and for performing all other economic activities. Precisely, it is required for running all the business operations.
To understand what business finance is, we must know that business finance includes activities concerning the acquisition and conservation of capital funds for meeting an organization’s financial needs and objectives. The importance of business finance is evident from the fact that business finance is required to undertake every business operation successfully.
A business may require additional funds for anything ranging from buying plant or apparatus, raw materials or further development. Different types of business finance are:
- Fixed Capital
- Working Capital
- Diversification
- Technology upgrading
Importance of Business Finance
Here are some reasons why business finance is important for all organizations:
Maximization of wealth: Business finance ensures that a shareholder’s wealth is maximized. It is also important to understand that wealth maximization is different from profit maximization. Wealth maximization is holistic and ensures the growth of an organization.
Ensure constant availability of money: For any business to survive, it should be in optimum financial condition. This includes the availability of funds at the time they are needed. Unless there are enough funds, the business may not be able to function properly.
Attaining optimum capital structure: This requires a perfect combination of shares and debentures. This way the organization will be able to maintain a perfect balance and not give away too much equity.
Effective utilization of funds: This is another reason for the high importance of business finance and its efficient utilization. A business should be able to cut down unnecessary costs and not invest funds in assets that are not required. An exhaustive course in financial management, diploma in banking and finance or any other course related to finance can give your career in financial management a head start. Or, if you are already in the field, it can give your career the necessary boost.
Financial Management in Businesses: Now that you know all about what business finance is and its importance, it’ll be easier for you to understand financial management.
Financial management can be defined as the activities involving planning, raising, controlling, and administering money that is used in the business. Financial management involves procuring funds for buying fixed assets, raw materials, and working capital. Now that we know what financial management is, it is also important to understand that proper financial management helps businesses supply better products and services to customers besides offering other benefits.
Sources of Business Finance
Retained Earnings: In most cases, a firm does not pay out all of its profits as dividends to its shareholders. A part of the net earnings may be kept in the company for future use. This is referred to as "retained profits." It is a source of internal finance, self-financing, or 'profit plowing.' The amount of profit available for reinvestment in a company is determined by a variety of factors, including net profits, dividend policy, and the company's age.
Trade Credit: A trade credit account is a line of credit given by one business to another for the purchase of products and services. Trade credit allows you to buy supplies without having to pay right away. Such credit shows up in the buyer of goods' records as sundry creditors' or 'accounts due.'
Public Deposit: Public deposits are deposits raised directly from the general public by organizations. Public deposit interest rates are often greater than those provided on bank deposits. Anyone interested in making a monetary contribution to an organization might do so by completing a designated form. In exchange, the organization gives a deposit receipt as proof of payment. While depositors receive a greater interest rate than banks, the cost of deposits to the firm is lower than the cost of bank borrowings.
Commercial paper: In the early 1990s, commercial paper became a popular form of short-term financing in our country. Commercial paper is an unsecured promissory note that a company issues to generate capital for a limited period of time, usually 90 to 364 days. It is distributed to other businesses, insurance companies, pension funds, and banks by a single company. The sum raised via CP is usually rather substantial. Because the loan is completely unsecured, only companies with a solid credit rating may issue a CP. The Reserve Bank of India is responsible for its regulation.
Conclusion: Businesses require funding for day-to-day operations, growth and expansion. They have access to both internal and external sources of finance to suit their needs. Internal sources like owners' equity and revenue tend to be the most economical option, while external financing enables high growth.
Retained Earnings: In most cases, a firm does not pay out all of its profits as dividends to its shareholders. A part of the net earnings may be kept in the company for future use. This is referred to as "retained profits." It is a source of internal finance, self-financing, or 'profit plowing.' The amount of profit available for reinvestment in a company is determined by a variety of factors, including net profits, dividend policy, and the company's age.
Trade Credit: A trade credit account is a line of credit given by one business to another for the purchase of products and services. Trade credit allows you to buy supplies without having to pay right away. Such credit shows up in the buyer of goods' records as sundry creditors' or 'accounts due.'
Public Deposit: Public deposits are deposits raised directly from the general public by organizations. Public deposit interest rates are often greater than those provided on bank deposits. Anyone interested in making a monetary contribution to an organization might do so by completing a designated form. In exchange, the organization gives a deposit receipt as proof of payment. While depositors receive a greater interest rate than banks, the cost of deposits to the firm is lower than the cost of bank borrowings.
Commercial paper: In the early 1990s, commercial paper became a popular form of short-term financing in our country. Commercial paper is an unsecured promissory note that a company issues to generate capital for a limited period of time, usually 90 to 364 days. It is distributed to other businesses, insurance companies, pension funds, and banks by a single company. The sum raised via CP is usually rather substantial. Because the loan is completely unsecured, only companies with a solid credit rating may issue a CP. The Reserve Bank of India is responsible for its regulation.
Comments