Importance and Sources of Finance In Business

Importance and Sources of Finance In Business

Finance is a key driving factor in any business. The importance of finance can be briefly described by the statement, €Finance is the Blood of Business€. It can be understood that as the human body cannot function properly without blood in the body, the same way a business cannot function properly without sufficient finance. As like human body would get sick the business would also turn out to be sick due to lack or improper management of finance. The important of finance is largely understood in the business and thus there are special departments generated within the business to look after the proper management of finance. The role of the finance department in the business is to look after the ways to get funds in business and also to constantly look after the proper utilization of existing profits in the business.

It is very important to keep the profit cycle on track for success of business. There should be a proper agenda for business to use its profits for a proper purpose as decided by the company. The company should have a rule that a certain portion of its profit would be ploughed back in business. The profit which is wisely ploughed back in business would be an investment in the company. There are several options for external sources finance, a company has to decide depending on its needs to select a proper source. There are short term and long term capital requirements of the company. A company can explore internal and external sources of finance for its needs. Internal sources of finance include Retaining Profits, Debtor Finance, Sale of existing assets and cutting down on stocks. Another external source of finance for business can be broadly divided in long term, short term and mid-term requirements. A long term financial requirement includes Shares, Debentures, Long term bank loans and Grants. Mid-term financial needs can be satisfied with Leasing, Hire Purchase and Medium term loans. On the other hand Short term financial requirements are met with Bank Overdraft, Bank Loan, Creditors and Debt Financing. A company has to wisely choose from the different sources depending on its requirement and also on its ability to repay it.

Other than the sources of finance a company can take help of trade finance and subsidies that are available to facilitate trade in the business. Fund management and financial management can determine the success and failure of the company. If a firm is wise enough to manage its funds then it can succeed with a small amount of funds and if a firm is does not take care of its finances then it would fail even after having more than sufficient finances.
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