Finance implies the provision of money at the time it is needed. All the plans of business may remain a mere dream unless adequate money is available to convert plans to reality.
A business enterprise requires funds at every stage—to start a business, to operate its and to expand it.
In order to survive and grow in a competitive market, every business firm must manage its finances in an efficient manner.
The success of the business depends on adequate finance and its effective management. Finance deals with the arrangement of a sufficient amount of capital to achieve the objectives of the enterprise.
Raising of capital alone is not sufficient, it is equally essential to utilize it in the most economical and profitable manner.
Thus, financing is both an art as well as the science of raising and utilizing money adequately and economically.
Finance is all about managing, ‘Business money’ i.e., the money used economically to generate profit for the business.
In other words, finance is an art as well as the science of using, managing and controlling the business funds.
The ancient business was very small in size, so own funds and loans from friends and relatives were sufficient to carry on business activities. Modern business has assumed a large size. It has become complicated and complex.
Definition of Business Finance:
1. Business finance includes those business activities which are concerned with the acquisition and conservation of capital funds in meeting the financial needs and overall Wheeler objectives of business enterprises.
2. Business finance can broadly be defined as the activity concerned with planning, raising, controlling and administering of funds used in business.
From the above two definitions, business finance implies the planning, acquiring, utilizing, managing, and controlling of funds used in business.
According to the Oxford Dictionary, the word ‘finance’ means management of emphasis on securing money rather than the application of money raised.
Nature or Features of Business Finance:
Following are the features of Business finance:
1. An indispensable organ of business management: Finance is linked to all business activities and plays an important role in the business decision-making process.
2. Continuous process: Finance has its role to play at the initial stage i.e., to start the business and to run the business smoothly. Even in case of winding up or liquidation of it has its ‘own role to play.
3. Wide scope: The function of finance starts from the estimation of capital requirement, finding out of sources of finance, determination of the sources, raising and utilizing of resources and ends with the determination of dividend policy i.e., a decision regarding the distribution of profits.
4. Measurement of performance: The business performance is measured on the basis of financial results.
5. The requirement of finance varies on the basis of the size and nature of the business organization.
6. The requirement of finance is directly related to the economic situation and government taxation policy.
Significance of Business Finance:
All business activities such as planning, organizing, managing, controlling, purchasing, selling, advertising, marketing, etc. cannot take place without finance.
The significance of finance has increased due to the following three reasons:
A) Increase in size and number of the organization.
B) The wide distribution of company ownership i.e., shareholders are scattered in different places.
C) The separation between ownership and management.
Types of Business Finance:
1. Long-term Finances:
These finances are required for investment in fixed assets such as building, machinery, furniture, fitting and financing for extension programs.
The assets are not meant for resale but no use for running or establishing a business organization. Most of the assets are used as a means of production in the business.
The investment for such a purchase is a capital expenditure in nature. As such the business should receive the benefits from such investment for a series of years termed as fixed capital.
2. Medium-Term finances or Intermediate finance:
Medium-term finance is required for investment in fixed or permanent work capital as well as short term fixed capital.
Its purpose is to use the fund for modernization, expansion, diversification or business activities as well as for launching a special advertisement campaign, etc. The benefits derived from such investments are for more than one year.
The expenditure of such finance is also considered as capital expenditure. Generally, such finance covers a period, which varies from one year to ten years.
But in the present scenario of finance, most of the experts are using only two-term— long term finance and short finance only.
3. Short Term Finance:
The short term finance is required for a period not exceeding twelve months. Its purchase is to meet the short term seasonal needs of working capital.
Modern business concerns produce in anticipation of demand and payment has to be made for the purchase of raw materials, the storage of finished and semi-finished goods, the work done by the staff and workers, etc.
This finance is mainly required to meet daily expenditures and expenditures are repetitive in nature. Short term expenditures are considered as revenue expenditure.
The benefits of such expenditure may be received only for twelve months. Such finance is also termed as working capital.
The main sources of such finance are— Trade credits, Bank credits, Instalment credit or hire purchase, customer’s advances, the subsidy provided by the government, etc.
Other Types of Business Finances:
On the basis of ownership the finance is classified:
1. Owner’s funds:
The funds provided by the owner of an enterprise are known as owner’s funds. Such funds not only include capital contributed by the owner but also profits reinvested in the business.
These funds remain invested in the business for a longer period of time and not refunded during the life of the business. For example, equity shares retained earnings, etc.
2. Borrowed Funds:
The funds raised through loans or borrowings are known as borrowed funds. Loans from commercial banks and financial institutions, trade credit, issue of debentures, public deposits, etc are the main sources for raising borrowed funds.
These funds are for a specified period and have to be repaid after the expiry of that period.
Usually, these funds are obtained on the security of some fixed assets and also a fixed rate of interest is to be paid on them.