Definition of Business Finance? Explain Financial Needs of Business?
Business money refers to money and business credit. The foundation of finance business. It needs to be purchased for resources, commodities, raw materials and other flows of economic activity. Business finance can be defined as "provision of money when required by the business".
Financial Needs of Business
Every business needs capital. Capital is required when starting a business It is also required if the business is running. As an enterprise grows and expands in size, it needs money to establish itself.
- Fixed capital
- Working capital
1. Fixed capital
Adequate amount of capital is required to start every business activity. As the name implies, the amount of capital invested in various fixed or fixed assets required to conduct business activities is known as fixed capital. These fixed assets can be land, building, machinery, equipment etc. The fixed assets usually do not change their form and cannot be withdrawn from the business in a short notice. These, however, can be disposed of. Fixed capitals are funds needed to buy assets that are used repeatedly for a long period of time.
Investing in non-current assets such as solvency, patents, rights, copyrights, long-term acceptance, etc. from a portion of fixed assets. The amount of capital required to invest in fixed assets varies with the size, nature and mode of production of the business. Large scale industries like railways, oil drilling, hydro and thermal power projects need more fixed capital. Fixed capital mobilization consists of fixed assets and other non-current assets.
The importance of fixed capital
The importance of fixed capital can be judged from the fact that no business can be conducted without it. From the very beginning, it means acquiring business ideas, purchasing land, constructing buildings, purchasing equipment, etc. Capital is required. In addition, fixed capital is required for equipment expansion and modernization. So it is essential for an enterprise to have sufficient capital.
2. Working capital
In terms of equilibrium, working capital is the difference between current assets and current liabilities of the business. Current assets refer to assets that are easily converted into cash in a short period of time in the account year. It consists of cash and bank balances in hand, bill receivables, short-term investments and inventories of stocks. On the other hand, current liabilities are those that are intended to be paid out of current assets within a short period of the accounting year. It consists of bill payable, short term loans, bank overdraft, payable dividends, tax payable, etc.
Working capital is also called conventional capital which is the life blood and nerve center of the business. Working capital is mostly used for buying raw materials, paying wages, seasonal urgent business needs, buying more products for sale, meeting advertising costs, providing credit to customers, and so on.
Example; Current Assets - Current Liabilities = Working Capital
10 million - 5 million = 5 million
The difference between current assets and current liabilities is surplus; The business has a positive working capital. If the difference is negative, then the business has a negative or deficit capital.
The importance of working capital
The importance of working capital is discussed as follows: -
Prosperity of business.
It helps in business prosperity. The flow of production is uninterrupted.
Goodwill
Entrepreneurs are able to pay workers and other bills on time. It helps build business goodwill.
Loans on favorable terms
A business with high prosperity and greater goodwill can easily take loans from banks.
Cash discount
A business with adequate working capital can get cash discounts on purchases. This helps reduce costs.
Enables to face crises
Adequate working capital enables a business to cope with the crisis.
Regular payment of dividends
Adequate working capital enables a business to make a profit and pay dividends to investors on time.
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