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Meaning, Nature and Significance of Business Finance

Business is related to production and distribution of goods and services for the fulfillment of requirements of society. For effectively carrying out various activities, business requires funds which is known as business finance. Hence, finance is called the life blood of any business. A business would get stranded unless there is sufficient funds available for utilization. The capital invested by the entrepreneur to set up the business is not sufficient to meet the financial requirements of the business. Hence, a business person has to look for sources to generate funds. A vivid analysis of the financial requirements and sources of funds available has to be done in order to arrive at an effective money management and run the business in a better way. The basic requirements of a business organization would be purchase of a plant or machinery, or it could be purchase of raw materials, expansion of business that leads to more recruitments, payment of salaries etc. The financial needs of a business can be categorised as follows:
  1. Fixed Capital Requirements: In order to set up a business organization ample funds are necessary to purchase like land and building, plant and machinery, and furniture and fixtures etc. This is called as fixed capital requirements of the enterprise. The funds invested in fixed assets remain with the business for a long period of time. Business units with different goals need varying amount of fixed capital based on the nature of business. For instance, a trading concern may require small amount of fixed capital compared to a manufacturing sector.'
  2. Working Capital Requirements: The financial requirements of an enterprise does not conclude with the procurement of fixed assets. Its just a beginning and there is a greater demand for funds to carry out its day to day activities which is called as working capital of an enterprise that varies from one business organization to another. A business organization involved in selling goods on credit, or having a low sales turnover may require more working capital as compared to a concern selling its goods and services on cash basis or having a speedier turnover. The requirement for fixed and working capital increases with the growth and expansion of business. At times additional funds are required for upgrading the technology employed so that the cost of production or operations can be reduced. Similarly, larger funds may be required for building higher inventories for the festive season or to meet current debts or expand the business or to shift to a new location. It is, therefore, important to evaluate the different sources from where funds can be raised.

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