Importance of Business Finance

Finance touches every stage of a business's life, which is why the AP Intermediate first-year Commerce course places it right after the chapters on forms of business organisation. Its importance can be understood under the following heads.

First, finance is needed to start a business. Before a single sale is made, an entrepreneur must spend money on land, a shop or factory shed, machinery, furniture, licences and an initial stock of goods.

Second, finance keeps day-to-day operations running smoothly. Wages, rent, electricity bills, transport charges and purchase of raw material all require a steady flow of cash; even a profitable firm can fail if it runs short of ready cash to meet these routine payments.

Third, finance enables growth and expansion. A firm that wants to open a new branch, add a product line, or replace old machinery with modern technology needs additional capital beyond what its regular operations generate.

Fourth, adequate finance improves the credit standing of a firm. A business that pays its suppliers and lenders on time, because it has planned its finances well, finds it easier to get raw material on credit and loans on favourable terms in the future.

Fifth, finance is needed to meet emergencies and face competition — a sudden fall in sales, a fire, or a rival's aggressive pricing can all be tackled better by a firm that keeps some financial cushion or can raise funds quickly. …