[Commerce Class Notes] on Meaning, Nature and Significance of Business Finance Pdf for Exam

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.