Nature, Scope, Significance of Business Finance

Money required for carrying out business activities is called business finance. Almost all business activities require some finance. Finance is needed to establish a business, to run it to modernize it to expand or diversify it. It is required for buying a variety of assets, which may be tangible like machinery, furniture, factories, buildings, and offices or intangible such as trademarks, patents, technical expertise etc.

Also, finance is central to run a day to day operations of business like buying materials, paying bills, salaries, collecting cash from customers etc needed at every stage in the life of a business entity. Availability of adequate finance is very crucial for survival and growth of a business.

Scope of Business Finance

Scope means the research or study that is covered by a subject. The scope of Business Finance is hence the broad concept. Business finance studies, analyses and examines wide aspects related to the acquisition of funds for business and allocates those funds. There are various fields covered by business finance and some of them are:

Financial planning and control

A business firm must manage and make their financial analysis and planning. To make these planning’s and management, the financial manager should have the knowledge about the financial situation of the firm. On this basis of information, he/she regulates the plans and managing strategies for a future financial situation of the firm within a different economic scenario.

The financial budget serves as the basis of control over financial plans. The firms on the basis of budget find out the deviation between the plan and the performance and try to correct them. Hence, business finance consists of financial planning and control.

Working capital Budget

The financial decision making that relates to current assets or short-term assets is known as working capital management. Short-term survival is a requirement for long-term success and this is the important factor in a business. Therefore, the current assets should be efficiently managed so that the business won’t suffer any inadequate or unnecessary funds locked up in the future. This aspect implies that the individual current assets such as cash, receivables, and inventory should be very efficiently managed.

Financial Statement Analysis

One of the scopes of business finance is to analyze the financial statements. It also analyses the financial situations and problems that arise in the promotion of the business firm. This statement consists of the financial aspect related to the promotion of new business, administrative difficulties in the way of expansion, and necessary adjustments for the rehabilitation of the firm in difficulties.

Nature and Significance of Business Finance

Business is related to production and distribution of goods and services for the fulfillment and requirements of society. For effectively carrying out various activities, business requires finance which is called business finance. Hence, business finance is called the lifeblood of any business a business would get stranded unless there are sufficient funds available for utilization. The capital invested by the entrepreneur to set up a business is not sufficient to meet the financial requirements of a business.

Characteristics:

• Business finance comprises of all types of funds namely short, medium and long term used in business.
• All types of organisations namely small, medium and large enterprises require business finance.
• The volume of business finance required varies from one business enterprise to another depending upon its nature and size. In other words, small and medium enterprises require relatively lower level of business finance than the large scale enterprises.
• The amount of business finance required differs from one period to another. In other words the requirement of business finance is heavy during the peak season while it is at low level during the dull season.
• The amount of business finance determines the scale of operations of business enterprises.

Business enterprise can function effectively and efficiently only with adequate business finance. It cannot expand its business operations without business finance. The success of any business firm depends, to a larger extent, on the manner in which it mobilizes uses and disburses its funds.

The following points highlight the significance of business finance.

• A firm with adequate business finance can easily start any business venture.
• Business finance helps the business organisation to purchase raw materials from the supplier easily to produce goods.
• The business firm can meet financial liabilities like prompt payment of salary and wages, expenses, etc., in time with the help of sound financial support.
• The sound financial support enables the enterprises to meet any unexpected or uncertain risks arising from business environment efficiently. For example economic slowdown, trade cycles, severe competition, shift in consumer preference, etc.
• Sound financial position empowers the enterprise to attract talented man power and introduce latest technology.

Importance of Business Finance

Debt Ratios

Importance’s of business finance are more significance than money in your hand. Many businesses have some level of debt, mostly in the startup stages. Excessively debt contrasted with revenues / profits and assets can leave you into much bigger problems than making your loan repayments.

Vendors and suppliers usually run credit checks and may restrict what you can buy on credit or keep payment that is tight. Debt ratios can affect your capability to attract investors including venture capital firms and to acquire or rent area that is commercial.

Initial Investment / Capital

It really is popularly said that money is needed for earning profits. To begin the activities of the continuing business, capital investment is foremost required and every company knew the significance of business finance. For suggestions to materialize and become products services being/ groundwork for sales, product testing, marketing, etc. seed money is essential. Businesses have a make some hardcore decisions to choice that is determining debt and equity funding.

Asset Creation

In the long-term, finance is required for buying assets like machinery, land, equipment, etc. to expand the production scale. Scaling up production will create assets, help the business grow and penetrate areas that are current.

Managing Operation Expenses

For the short-term, businesses require finance in the type of working capital to meet operational costs such as for instance remunerative payments, raw materials, inventory, interest repayments, etc. An importance of business finance is to make proper short-term financial planning decisions as good finance flow is vital to keep the operations consistently ongoing.

Types:

Equity finance

Equity financing is the process of raising capital by selling the company using its financial tools like shares, bonds, etc. It is also the process of offering a part of a company’s equity or ownership to an external entity for capital requirements. Here are the different types of equity finances designed for different business needs:

• Venture capital
• Crowdfunding
• Family and friends
• Investors

Debt finance

When companies leverage their fixed or other assets to raise capital, it is called Debt financing. Bank loans and bonds are some of the best examples of debt finance. The debt finance’s fundamental framework works on the promise that the company will be repaying the loan amount in a fixed time. Here are some of the types of debt finance:

• Bank loans
• Asset finance
• Trade finance
• Line of credit