Business Finance - Meaning and Importance

Every business requires some amount of money to start and run the business. Whether it is a small business or large, manufacturing or trading or transportation business, money is an essential requirement for every activity. Money required for any activity is known as finance. So the term 'business finance' refers to the money required for business purposes and the ways by which it is raised.

Thus, it involves procurement and utilisation of funds so that business firms will be able to carry out their operations effectively and efficiently. A business unit cannot move a single step without sufficient amount of finance.

Why Business Need Funds

Every business needs funds mainly for the following purposes:

  1. To purchase fixed assets: Every type of business needs some fixed assets like land and building, furniture, machinery, etc. A large amount of money is required for purchase of these assets.

  2. To meet day-to-day expenses: After establishment of a business, funds are needed to carry out day-to-day operations e.g., purchase of raw materials, payment of rent and taxes, telephone and electricity bills, wages and salaries, etc.

  3. To fund business growth: Growth of business may include expansion of existing line of business as well as adding new lines. To finance such growth, one needs more funds.

  4. To bridge the time gap between production and sales: The amount spent on production is realised only when sales are made. Normally, there is a time gap between production and sales and also between sales and realisation of cash. Hence, during this interval, expenses continue to be incurred, for which funds are required.

  5. To meet contingencies: Funds are always required to meet the ups and downs of business and for some unforeseen problems. Suppose, a manufacturer anticipates shortage of raw materials after a period, then he would like to stock the raw materials in large quantity. But he will be able to do so only if sufficient money is available with him.

  6. To avail of business opportunities: Funds are also required to avail of business opportunities. Suppose a company wants to submit a tender for which some amount of money is required to be deposited along with the application. In case of non-availability of funds it would not be possible for the company to submit the tender.

Importance of Business Finance

Finance is the most important requirement of every business and it is considered as lifeline of the business. Inadequate finance poses many problems and may bring an end to the life of the business. The importance of finance has considerably increased in modern days due to following reasons in addition to the usual need:

  1. Need for Large Scale Operation: Now-a-days business activities are generally undertaken on a large scale. The products of any country are now freely and easily available in other countries. The entire world has become a big market. So to survive in the business world the businessman has to expand the horizon of his activities and function on large scale. This expansion of business always demands more funds.

  2. Use of Modern Technology: Use of latest technology in the process of production as well as distribution has become imperative for every business now-a-days. To meet the competition, production process now demands use of modern machinery, equipments and tools. Hence, there is a greater need for finance to meet the challenge of the world’s markets successfully.

  3. Promotion of sales: In this era of competition lot of money is to be spent on activities for promoting sales. This involves advertisement, personal selling, use of sales promotional schemes, providing after sales service and free home delivery, etc. which need huge amount of funds.