Why Finance is needed for Business?

One of the primary considerations when going into business is money.  Without sufficient funds a company cannot begin operations.  The money needed to start and continue operating a business is known as capital.  As new business needs capital not only for ongoing expenses but also for purchasing necessary assets.  These assets – Inventories, equipments, buildings and other property represent an investment of capital in new business.

How this new company obtains and uses money will, in large measure, determine its success.  The process of managing this acquired capital is known as Financial Management.  In general, finance is securing and utilizing capital to start up, operate, and expand a company.

To startup or begin business, a company needs funds to purchases essential assets, support R&D, and buy production materials.  Capital is also needed for salaries, advertising, insurance, and other day to day operations.  In addition, financing is essential for growth and expansion of a company.  Because of competition in the market, capital needs to be invested in developing new product lines and production techniques and in acquiring assets for future expansion.

In financing business operations and expansion, a business uses both short term and long term capital.. 

A company, much like an individual, utilizes short term capital to pay for items that last a relatively short period of time.  An individual uses credit cards or charge accounts for items such as clothing, food etc while a company seeks short term financing for salaries and office expenses.  On the other hand, an individual uses long term capital such as a bank loan to pay for home or car, which last a long time.  Similarly, a company seeks to pay for new assets that are expected to last for an longer period of time.

Usually, short term finance are considered those where the repayment period is less or equal to one year and more than one year is long term finance.