Business finance is the process of distributing money from investors and savers to entities that need it most. This is usually done through credit. Investors and savers have available cash that can earn interest or dividends when placed to good use. The money is needed most, the bank is contacted, and the commercial line of credit is used to undertake various business transactions.
This article will look at two categories of business finance, namely, fixed capital requirement and variable capital requirement. A business undertaking may have either a fixed capital requirement or an inconsistent capital requirement. For instance, a manufacturing concern that engages in the production of T-bone wire, which is required in the manufacture of aircraft, needs quite a large sum of money for purchasing machinery and tools and financing the operation and growth of the concern. The same T-bone wire, which has become very costly, is manufactured using machinery which costs much less. Hence, there is a relatively low fixed capital requirement, which is recovered over a long period.
On the other hand, a similar case can be made for an agricultural enterprise engaged in producing dairy products, a product that is not bought so quickly and is expensive to buy. Again, the money needed is not very large but will last for the long term. Hence, in this case, the medium-term finance needs to be sizable and should be able to be repaid over a long period. In such a case, business finance with a more extended repayment period usually is preferable. Ideally, the amount of medium-term finance needed would depend on the type of product or service offered, the geographical location of the business concern, and the level of competition in the market.
Another type of business finance involves the conversion of equity into cash flow. Cash flow represents the income that a firm makes against its assets. Thus if the value of equity increases, the cash flow too will automatically increase. In short, the main objective of capital budgeting is to ensure a constant balance between equity and cash flow.
One of the most commonly followed business finance functions is the investment function. In this respect, a company issues shares of stock and creates a cash reserve for its working capital. This cash reserve is used by the business concern only when it needs funds immediately and is not stored in a bank account. Usually, the purpose behind the purchase of shares is to finance growth requirements, which means that the share price should rise in value over some time. However, there are instances where the owner may choose to liquidate his holding because he feels the need to reduce his financial risk through the sale of his shares.
An essential aspect of business finance is the preparation and presentation of the balance sheet. The balance sheet provides information about the assets, liabilities, revenues, and expenses of a business firm. It is a critical report that is prepared monthly, quarterly, or annually and represents the basic information about the organization’s day-to-day operations. The balance sheet provides information on a business’s assets, liabilities, revenues, and expenses, along with the effect of any changes in these items on the entire balance sheet.
A business finance management report also called an income statement, provides detailed information about business operations. It reports the net income from continuing operations minus net income from discontinued operations. The income statement shows the difference between total revenue and total expense. The income statement looks at several indicators to provide information about the profitability and growth of a business firm. The information obtained from the income statement helps to plan and determine the methods of enhancing a firm’s performance.
There are two main functions of business finance management. They are debt financing and equity financing. Debt financing refers to taking a loan against an asset and paying it back within a specified period. Equity finance is the opposite of debt financing. It is defined as buying an investment and holding the policy as a security for the loan.