Meaning, Nature and Significance of Business Finance

Business is about producing and distributing goods and services to satisfy society's needs — and every one of those activities needs money. Because money keeps the enterprise alive, finance is often called the "lifeblood" of business.

Meaning of business finance: The money a business requires to carry out its various activities is called business finance. No business can function without an adequate supply of funds.

Why extra funds are needed: The capital the entrepreneur contributes at the start is rarely enough to meet every requirement. So the owner has to look to other sources as well. A clear assessment of how much finance is needed, and identifying the right sources for it, is therefore a vital part of running any organisation.

When the need arises: The need for funds begins the moment a person decides to start a business, and it recurs continuously thereafter — some funds are needed immediately (for plant, machinery, furniture and other fixed assets), some for everyday running (raw materials, wages, salaries), and more still when the business expands.

The financial needs of a business fall into two broad categories:

• (a) Fixed capital requirements: Funds needed to buy fixed assets such as land and building, plant and machinery, and furniture and fixtures. This money stays invested in the business for a long period. How much fixed capital a firm needs varies with the nature and size of the business — a trading concern typically needs far less fixed capital than a manufacturing concern, and a large enterprise needs more than a small one.

• (b) Working capital requirements: Buying fixed assets is not the end of the story. However small or large the firm, it needs funds for day-to-day operations — this is its working capital. It is used to hold current assets (stock of materials, bills receivable) and to meet current expenses (salaries, wages, taxes, rent). The amount required differs from firm to firm: a business that sells on credit or has a slow sales turnover needs more working capital than one that sells for cash or turns over stock quickly. …