What is Business Finance? Importance, Types

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What is Business Finance?

Business finance refers to the discipline that deals with the management of money and financial resources within a business or organization. It involves making decisions related to acquiring, allocating, and utilizing funds to achieve the company’s financial goals and objectives. The capital invested by an individual to start a business is always insufficient to meet the company’s financial needs. As a result, businesses look for a way to produce revenue. A thorough examination of financial needs and possibilities for meeting those needs is conducted with the express purpose of keeping the business running.

The basic needs of a business include purchasing a plant or apparatus, as well as purchasing raw materials, expanding a firm to attract new customers, paying workers, and so on. Ideally, all businesses need finances for daily operations, and this is what makes the concept of finance important for organisations.

A business’s financial requirements can be classified as follows:

  • Fixed capital requirement: Money is needed to purchase fixed assets such as land, buildings, plants, and machinery to start a business. This is called the fixed capital requirement.

  • Working capital requirement: A business requires funds to carry out day-to-day operations like acquisition of raw materials, payment of salaries, wages, rent, and taxes. Working capital is required to perform all these operations.

  • Diversification: More capital is required for a business to diversify its activities and become a multi-product firm, such as ITC.

  • Technology upgrading: Finances are needed to adopt the latest technology, for example, use of particular software and the latest computers in business.

Importance of Business Finance

Finance is a need for the establishment of every business. The most crucial weapon for bridging the gap between production and sales is money. A firm requires funds to:

  • Cover specific risks and any unforeseen issues that may develop
  • Promote sales
  • Take advantage of any commercial possibilities that may arise

Types of Business Finance

There are three types of finance options available for a firm that are long-term, medium-term, and short-term finance. Long-term finance is generally needed for the purchase of fixed assets. On the other hand, medium-term finance may be required to modernise machinery and improve other facilities. Short-term finance is generally required for meeting expenses incurred on day-to-day operations.

Table differentiates between three types of finance:

Basis of DifferenceLong-Term SourceMedium-Term SourceShort-Term Source
Time periodRequired for a long period generally exceeding a period of more than five yearsRequired for a period generally exceeding one year but not more than five yearsRequired for a period of less than a year
Operating Cycle DurationIt does not vary with the length of operating cycleIt does not vary with the length of operating cycleIt varies with the length of operating cycle
PurposeRequired for purchasing fixed assets and financing projects having a long gestation periodRequired for modernisation and renovation of machineryRequired for meeting day-today expenses
Sources of FinanceIncludes shares, debentures and term loansIncludes leasing and medium-term loansIncludes trade credit, bank credit and discounting of bills
Distinction between Long-Term, Medium-Term, and Short-Term Finance

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