Need of business finance:
A businessman needs capital to conduct all the business activities effectively and on time.
Following points clarify the need of business finance:
1. For establishing business:
- Several activities need to be done and documents to be prepared and submitted for starting a business.
Expenses are incurred on conducting primary and detailed research, preparing documents like certificate of registration and incorporation, etc.
- The businessman also needs to hire experts of legal procedures, registration procedures, etc. Businessman need to pay fees and charges at several stages of the establishment and also pay fees to these industry experts.
2. For purchasing fixed assets:
- Assets such as land, building, furniture, machinery, etc. which are purchased for long-term business use and are not likely to be converted quickly into cash are called fixed assets.
- One may need huge long term finance in terms of loans to buy these assets.
3. For current assets:
- Once a business is set up it requires working capital i.e. capital to manage daily expenses. These expenses include salaries and wages, various utility bills, purchasing raw material, production and transportation charges, etc.
- Working capital can be either raised by oneself or even borrowed as loan from banks or other sources.
4. For modernization and expansion of business:
Scientific inventions and technology upgradations take place constantly across the world. This leads to faster production of newer products and quality enhancement. A businessman needs to keep pace with these changes so that he can maintain and expand his business. For this, he may have to invest in modern equipment and machineries and production methods.
5. For unforseen situations:
A business may witness many unforseen internal and external factors which may lead to financial crisis. For example, strikes, changes in government policies, changes in trade cycle, natural calamities, etc. are unforseen events that demands capital reserve.
