• Home
  • Finance
    • Financial Management
    • Strategic Management
    • Investment Analysis and Portfolio Management
    • Project Management
    • Islamic Banking & Finance
    • Auditing
  • Marketing
    • Principle of Marketing
    • Marketing Management
    • International Marketing
    • Advertising & Promotion
    • Commercial Challenges
  • HRM
    • Human Resource Management
    • Principles of Management
    • Training & Development
    • Employee Performance Management
  • Others
    • Introduction to Business
    • Business Communication
    • Banking & Finance
    • Entrepreneurship
    • Economics
  • Personal Skills
  • Tips & Tricks
  • About Us
    • Contact US

Business Study Notes

B.Com, M.Com. BBA & MBA Exam Study Online

  • Home
  • Finance
    • Financial Management
    • Strategic Management
    • Investment Analysis and Portfolio Management
    • Project Management
    • Islamic Banking & Finance
    • Auditing
  • Marketing
    • Principle of Marketing
    • Marketing Management
    • International Marketing
    • Advertising & Promotion
    • Commercial Challenges
  • HRM
    • Human Resource Management
    • Principles of Management
    • Training & Development
    • Employee Performance Management
  • Others
    • Introduction to Business
    • Business Communication
    • Banking & Finance
    • Entrepreneurship
    • Economics
  • Personal Skills
  • Tips & Tricks
  • About Us
    • Contact US
Home » What Is Business Finance? Financial Needs of Business Explained

What Is Business Finance? Financial Needs of Business Explained

By Richard Daniels Reading Time: 3 mins
Updated September 14, 2020

The term Business Finance refers to the amount of money invested in a business. Finance is essential for every business and it is needed to purchase assets, raw materials, to keep the business and to handle all the financial activities related to the business.

What is Business Finance

In simple words, Business Finance can be defined as “The facility to avail money whenever it is needed in a business”.

Financial Needs Of A Business

To start a business the primary requirement is to have some capital (money for investment). Capital is very essential for not only to start a business but to run it in a flow. When the company grows and expands more finance is required at each step.

The requirement of capital for a business is categorized into two main classes:

  • Fixed capital
  • Working capital

Fixed Capital

Every business requires an adequate amount of money i.e. the capital to get started. Fixed capital refers to the permanent assets which may include land, building, machinery or equipment, etc. and which is necessary to conduct the operation of a business.

Normally, fixed assets can neither be easily withdrawn from a business on a short notice nor change their form. However, they can be discarded when required. Thus, fixed capitals are the reserves required to purchase assets that are to be used over and over again for a long time in business.

The investment in intangible assets like goodwill, rights, copyrights and the long-term receivables is also a part of fixed assets. The amount of fixed capital may vary and depends upon the size and nature of the industry.

The requirement of fixed capital increases with the size of industry such as; railways, oil refineries, hydro and thermal power projects, etc. require more fixed capital. Therefore, we can say that fixed capital includes fixed and intangible assets.

Importance of Fixed Capital

Fixed capital is very important in order to make a business start its operation. Fixed capital is involved from the very first step towards establishing a business i.e. perceiving the idea of business, purchase of land, construction on the land, purchasing equipment etc.

All of them are not possible without having an ample amount of fixed capital. Moreover, in order to expand the business and equipment, fixed capital is required. Therefore, it is very important to have a sufficient amount of fixed capital for an enterprise.

Working Capital

Working capital is the difference between the current assets (accounts receivable) and current liabilities (account payable) of the company. All the current assets and current liabilities are checked through the balance sheet.

The current assets refer to the assets which can be changed into cash in a short period of time in the business such as cash in hand, bank balances, bills receivables, short term investments and records of shares.

On the other hand, current liabilities as its name shows are the amount to be paid within a short period of time in an accounting year. It includes short term loans, bill payable, payable taxes and payable dividends, etc. Working capital is also referred to as circulating capital which acts as blood and nerve of a business.

The main purpose of working capital is to purchase raw material, payments of wages, seasonal demands of business, to purchase more goods to sell, to come across the advertising expenses, and to provide credit facilities to the customers, etc.

Example

  1. Current assets – Current liabilities= Working Capital

$7 Million – 5 Million = 2 Million

The difference between the current assets and current liabilities is positive. The difference in the positive figures indicates that the industry has a construction working capital.

  1. Current assets – Current liabilities= Working Capital

$5 Million – $6 Million = – $1 Million

In case the difference is negative, it indicates that the business has a negative or a scarce working capital.

Importance of Working Capital

The importance of Working Capital is explained below:

  • Solvency of Business

It provides privileged circumstances to the business and helps the entrepreneur to continue the production without any interruption.

  • Good Will

It allows the business person to pay workers’ wages and other utility bills in time. It also helps the business to maintain its goodwill.

  • Loans on favorable terms

The high affluence and more goodwill of a business can help it get loans from the bank easily.

  • Cash Discounts

A sufficient amount of working capital helps a business to acquire cash discounts on their purchases. It also reduces the cost.

  • Enables to face crisis

A business with an ample amount of working capital can face financial crises and can sustain for a longer time.

  • Regular payment of dividend

An adequate working capital allows an enterprise to make more profit and pay dividends to the investors in time to maintain the goodwill of the business.

If you have any queries, please do ask in the comments section. We will be happy to hear from you!

Author at Business Study Notes
Richard DanielsAuthor at Business Study Notes

Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
Love my efforts? Don't forget to share this blog.

Related Posts:

  • Working Capital Management
    Working Capital Management
  • Financial Statements | Types, Purpose and Analysis
    Financial Statements | Types, Purpose and Analysis
  • Warehousing Definition, Advantages, Functions, Roles and…
    Warehousing Definition, Advantages, Functions, Roles and Types in Detail
  • Indirect Investment | The Investment Companies |…
    Indirect Investment | The Investment Companies | International Investment
  • Communication Strategies Definition | Types of Communication…
    Communication Strategies Definition | Types of Communication Strategies

Filed Under: Introduction to Business, Others Tagged With: business and finance, business finance definition, how can i get finance to start a business, need of finance in business

Related Posts

System-Views-of-Management-image

System Views of Management

System Views System views of management associates with the Management division of the organization and it assumes that all of the organizations are … [Read More...]

Leadership Theories

Situational Leadership Theories

Situational Leadership Theories Situational model of leadership is a factor that emphasizes the behavior of the leaders regarding different situations. … [Read More...]

Behavioral Leadership Model

Behavioral Leadership Model

Leadership  Leadership is the most critical and complex responsibility across any organization. It is because the leadership requires to be realistic, … [Read More...]

career development process in hrm

Career Development Process

Career Development Process Today's career development process has become a threat for students, especially a question that may stun many students who have … [Read More...]

Strategic leadership

Strategic Leadership Model

Strategic Leadership Model The strategic leadership model is basically the study of the leadership style. It describes the ways of modernizing an … [Read More...]

Types of Managerial Decision Making

Types of Managerial Decision Making

Managerial Decision Making Decision Making is an art of selection of one feasible alternative decision from many. Therefore types of managerial decision … [Read More...]

Quantitative-management-approach

Quantitative Management Approach

Quantitative Management Approach The quantitative management approach is used to enhance decision making power by using quantitative tools. As well as … [Read More...]

Effective-business-messages-image

Effective Business Messages

Effective Business Messages The process through which business messages are effectively prepared that have the potential to create desired results from … [Read More...]

Search the Site

ADVERTISEMENT

Business Study Notes

Business Study Notes is all about business studies or business education. Visit us to find here free business notes of all the subjects of B.com, M.com, BBA & MBA online.

Disclaimer

All the images and videos present on the Business Study Notes are not owned by us, if you found anything under copyrights, please Contact Us, we will remove it ASAP.

Categories

© Copyright 2023 Business Study Notes. All rights reserved. Privacy Policy, Sitemap.  
DMCA
PROTECTED