Courses for Kids
Free study material
Offline Centres
Store Icon

Meaning, Nature and Significance of Business Finance

Last updated date: 24th Apr 2024
Total views: 370.8k
Views today: 9.70k
hightlight icon
highlight icon
highlight icon
share icon
copy icon

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. 

Business finance refers to the funds needed to start a business, operate it, and expand it in the future. Funds are needed to acquire tangible assets like furniture, machinery, buildings, offices, and factories, as well as intangible assets such as patents, technical experience, and trademarks, among other things.

Aside from the assets listed above, the day-to-day operational operations of a corporation also require cash. Purchasing raw goods, paying employees, bills, and collecting money from clients are all examples of this activity. To sustain and expand a business, you must have a significant quantity of money.

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 available with a 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.

Sources of Business Finance

  1. 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.

  2. 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.'

  3. 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.

  4. 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.

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

FAQs on Meaning, Nature and Significance of Business Finance

What is the Function of the Finance Committee?

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.

How Do Large Companies Acquire Business Finance?

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. 

A company can raise money by selling ownership holdings in the form of stock to investors who become shareholders. This is referred to as equity financing. The advantage of this strategy is that, unlike bondholders, investors do not have to pay interest, therefore this form of capital may be raised even if the first is not profitable. Companies have the ability to borrow money. This can be done privately through bank loans or publicly through a debt issue. Corporate bonds are debt issuance that allow a large number of investors to become lenders (or creditors) to the corporation. Retained earnings is the net income that remains after costs and commitments have been met. Companies exist to make a profit by selling a product or service for a higher price than it costs to manufacture. This is a corporation's most fundamental source of finances and, preferably, the principal means of bringing money into the company.

What is Venture Capital?

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.

In other words, Venture capital is a sort of private equity and a type of funding provided by investors to startups and small enterprises with the potential for long-term growth. Well-heeled investors, investment banks, and other financial institutions are the most common sources of venture capital. It does not always have to be in the form of money; it can also be in the form of technical or managerial expertise. Small businesses with outstanding development potential, or businesses that have expanded swiftly and are set to expand, are frequently given venture capital.

What is the Post Popular Source of Funds?

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. 

Apart from loans from financial institutions there are many other sources of business finance. Retained earnings are also a type of business finance. Retained Earnings are the cumulative portion of a company's profits that aren't distributed as dividends to shareholders and are instead set aside for reinvestment. These funds are often allocated for working capital and fixed asset acquisitions (capital expenditures) or for debt repayment. Loans from banks are also a safe option.

What are the financial needs of  a business?

A company's financial requirements can be divided into the following categories:

(a) Fixed capital requirements: Funds are necessary to acquire fixed assets such as land and buildings, plant and machinery, and furnishings and fixtures in order to establish a business. This is referred to as the company's fixed capital requirements. The capital necessary for fixed assets are invested for a long time in the firm.

(b) Working Capital Requirements: An organization's financial needs do not cease with the acquisition of fixed assets. A firm, no matter how little or huge, needs finances to run its day-to-day operations. This is referred to as an organization's working capital, and it is utilised to hold current assets.