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Business Finance: Need and Importance

Business finance refers to the money and credit used in business operations. It involves obtaining and using funds so businesses can operate effectively and efficiently. Funds are needed for establishing businesses, purchasing assets, and meeting daily expenses until goods are sold and money is recovered. The amount and types of financing needed varies between industries and businesses depending on their nature, size, and financial needs over different time periods.

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74 views2 pages

Business Finance: Need and Importance

Business finance refers to the money and credit used in business operations. It involves obtaining and using funds so businesses can operate effectively and efficiently. Funds are needed for establishing businesses, purchasing assets, and meeting daily expenses until goods are sold and money is recovered. The amount and types of financing needed varies between industries and businesses depending on their nature, size, and financial needs over different time periods.

Uploaded by

Kris Yifan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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BUSINESS FINANCE

- Business finance refers to money and credit employed in business. It It involves


procurement and utilization of funds so that business firms may be able to carry
out their operations effectively and efficiently. The following characteristics of
business finance will make its meaning more clear—

( i ) Business finance includes all types of funds used in business.

( ii ) Business finance is needed in all types of organizations large or small,


manufacturing or trading.

( iii ) The amount of business finance differs from one business firm to another
depending upon its nature and size. It also varies from time to time.

( iv ) Business finance involves estimation of funds. It is concerned with raising funds


from different sources as well as investments of funds for different purposes.

Need and Importance


Business finance is required for the establishment of every business
organization. With the growth in activities, financial needs also grow. Funds are required
for the purchase of land and building, machinery and other fixed assets. Besides this,
money is also needed to meet day-to-day expenses e.g. purchase of raw material,
payment of wages and salaries, electricity bills, telephone bills etc. You are aware that
production continues in anticipation of demand. Expenses continue to be incurred until
the goods are sold and money is recovered. Money is required to bridge the time gap
between production and sales.

All organizations need different types of finance i.e. long-term, medium-term, and short-
term, but the combination in which these are used differ from one organization to
another. For example, steel industry requires more long-term finance to be invested in
plant and machinery than in the manufacture of leather goods or plastic buckets. On the
other hand, for manufacturing hosiery items, use of short-term finance would be more
than that of long-term finance.
Difference between long-term, medium term and
short-term finance
You have already learnt about long-term, medium-term and short-term financial
needs. You have also learnt that long term finance is generally needed for the purchase
of fixed assets. On the other hand, medium term finance may be required to modernize
machinery and to improve other facilities. Short-term finance is generally required for
meeting expenses on day-to-day operations. The difference between these three types
of finance are:

1.) Basis of difference: Time Period


Long Term-finance: This is required for a long period which is generally 5 years
or more.
Medium Term-finance: This is required for a period exceeding one year but not
exceeding 5 years.

2.)

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