Meaning, Need and Importance of Business Finance

Every business, whether a small tea stall or a large manufacturing company, needs money to start, run and grow its operations. This money required to carry on business activities is called business finance. It is not a one-time requirement — a firm needs funds at the promotion stage to acquire land, buildings, machinery and other fixed assets, and it needs funds continuously thereafter to buy raw materials, pay wages, meet day-to-day expenses and hold stock. The first kind of requirement is called fixed capital and the second is called working capital, and together they make up the total financial requirement of a business.

Business finance is often compared to blood in a living body. Just as blood carries oxygen and nutrients to every organ and keeps the body functioning, finance flows through every department of a business — production, marketing, personnel and administration — and keeps operations running smoothly. Without adequate and timely finance, even a business with an excellent product or a large market can fail, because it may be unable to pay its suppliers, meet its wage bill, or invest in the equipment needed to keep producing.

The need for finance arises at every stage of a business's life. At the promotion and formation stage, a business needs funds to conduct feasibility studies, register the enterprise and acquire the fixed assets required to begin production. During normal day-to-day operations, funds are required for working capital — buying raw materials, holding inventory, extending credit to customers and paying employees and expenses before revenue from sales is collected. When the business wants to expand — adding a new product line, entering a new market or increasing production capacity — it once again needs large amounts of finance, often far more than what internal profits can supply.

The importance of business finance for the smooth functioning of an enterprise can be summed up as follows. It enables the firm to acquire the fixed assets essential for production, such as land, buildings, plant and machinery. It ensures that day-to-day operations continue without interruption by financing the purchase of raw materials and payment of short-term liabilities. It allows the firm to modernise, expand and diversify to meet growing demand and remain competitive. It builds the goodwill and creditworthiness of the firm, since a business that pays its suppliers and lenders on time earns trust in the market. Finally, it protects the business against unforeseen contingencies, such as a sudden fall in sales or an unexpected repair, by allowing it to maintain some cushion of funds. Because the amount, timing and cost of finance needed differs from one situation to another, a business owner must understand the different sources from which funds can be raised, which is exactly what the rest of this chapter examines. This basic idea of arranging funds for a firm's needs is broadly the same idea that CBSE/NCERT Business Studies covers as 'business finance', even though the Tamil Nadu Class 11 Commerce textbook develops it in its own way.