Businesses need finance to conduct business activity – turn inputs into outputs.
In order to produce goods and provide services for customers, this activity cannot take place without the resources of land, labor, capital and enterprise. These resources, also called factors of production, are surely not for free.
So, finance is needed to purchase these resources that are later used to make various products.
Many business activities require finance
Businesses need finance for many different business activities. Here is the list of main business situations when finance is needed:
- Start-up capital. To establish, register and start up the business.
- Capital Expenditure. To pay for Fixed Assets, long-term assets, that are used for growth of the business.Â
- Revenue Expenditure. To pay for day-to-day costs that allow the business to generate enough revenue to earn a profit.Â
The importance of business finance
Business managers, specifically the finance manager, need to know how much money is necessary for each situation mentioned in the above list. They also need to decide which source of finance is the best in each case. In practice, no one type of finance is likely to be suitable in all cases, and sometimes more than one source of finance can be used.
Before making any decisions regarding finance, managers need to be aware of all of the many sources of finance available to businesses. The choice of finance available these days on the market is extensive. Therefore, it requires knowledge and skills to be able to match accurately the needs of the business for a particular type of finance.
If a finance manager chooses an inappropriate source of finance, it can not only be very expensive for a business (resulting in low profitability), but could also lead to a loss of control by the original owners, or even business failure.
All of this makes business finance serious stuff.
